Canadian ETFs set first-half inflow record of $22.4 billion

Mid-year review highlights victories across fixed-income, equity, smart-beta, and ESG categories

Canadian ETFs set first-half inflow record of $22.4 billion

In the midst of the financial-market turbulence stirred up by the COVID-19 pandemic, Canada’s ETF industry set a new record in inflows as it proved its strength on multiple fronts.

In its ETF Mid-Year Market Review and Outlook, BMO Global Asset Management (BMO GAM) reported that net flows into Canada-listed ETFs had reached $22.4 billion as of June 30, a record for the first six months of the year.

“Investors used ETFs to navigate market turmoil and volatility, to rotate into and out of exposures, to find liquidity, and to manage portfolios efficiently,” the report said.

On the fixed-income side, it noted how the market became one-directional in March, with the vast majority of investors trying to sell their holdings in order to raise capital and rebalance in the face of steep declines in equities. That resulted in wide price dislocations between fixed-income ETFs’ market prices and their net asset values – a phenomenon critics said proved bond ETFs’ weakness, but was later attributed to the ETFs’ superior ability to effect price discovery among market participants as liquidity in the underlying bond market dried up.

“[W]e saw flows move from aggregate exposures to segmented ETFs as investors looked to capitalize on specific dislocations across credit and term,” BMO GAM said. Some of the action also reflected investors rotating into more defensive fixed income in a bid to offset heightened equity risk.

Equity ETFs emerged as a distinct winner, with net inflows exceeding $15 billion this year as of June 30. That was driven to a large degree by investors seeking broad-market exposure as they sensed opportunity from attractive valuations and prospective growth during the recovery from the COVID-19 selloff.

“Gold was a huge winner to start the year, in terms of asset gathering and performance,” the report said, noting how investors shaken by worsening economic data, inflation expectations, and second-wave fears looked for a safe-haven asset class. Gold prices ended the second quarter at more than $1,800 per ounce, and gold equity issuers have been among the few sectors to post strong positive earnings.

BMO GAM also reported increasing investor traction for factor exposures. Low-volatility strategies offered a measure of downside protection, but were not able to bounce back as strong as the broader market. The quality factor has outperformed as companies with low debt, stable cash flows, and high returns on equity demonstrated their resilience against market stress.

“The value trade has been long out-of-favour, but we have seen value start to emerge at the end of Q2 2020, perhaps signaling the factor may rebound,” the report said.

It also highlighted how during the market collapse, investors turned to quality companies with prudent management and strong governance as the ones that could best navigate the market correction.

“Investors are becoming more aware of the impact on which strong corporate governance has on a company’s resilience under stress,” the report said. “Therefore, we expect that ESG will continue to provide performance opportunities for investors in the future.”


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