ETF growth set to accelerate - study

Canada's ETFs market has expanded 6% in 2003 and growth is set to further accelerate, a new report suggests.

Exchange traded funds (ETFs) have expanded 6% in 2003 and growth is set to further accelerate, a new report suggests.

According to the Canadian ETF Outlook Update 2013 issued today by BMO Global Asset Management (BMO GAM), the Canadian ETF (ETF) industry will continue to maintain a strong position as investors seek out investment options to help them effectively manage ongoing market volatility.

The Canadian ETF industry currently stands at $60 billion in assets under management (AUM) - an increase of 6% since December 2012. Inflows this year have exceeded $4.1 billion. The report said that fixed-income ETFs represent approximately 55% of year-to-date inflows in Canada, at $2.3 billion.

BMO predicts that growth throughout the remainder of 2013 will be driven, in part, by increased competition, innovative products, diversified exposure, and continued low cost.

"Market uncertainty was exacerbated this year when the U.S. Fed hinted that it might taper its bond-buying program and then delayed its implementation," said Rajiv Silgardo, co-chief executive BMO GAM. "The seemingly inevitable result of instability and uncertainty is that investors have rapidly responded by adjusting their portfolios, with ETFs proving to be an important tool to adapt to changing needs and market environments efficiently."

Silgardo said that BMO GAM's own ETF business has grown strongly since being launched in 2009, having recently surpassed $11.8 billion in AUM. Since the beginning of 2013, the business' AUM has increased 30%.

According to the bank’s report, several trends are contributing to the Canadian ETF industry's growth this year. First, equity ETFs have received nearly 40% of year-to-date inflows at close to $1.7 billion. There is greater interest in U.S. ETFs, reflecting investor confidence in growth south of the border. There has been strong competition among smaller players in Canada, who have increased their market share from 26.1% at the end of 2012 to 32.3% at the end of September.

In the U.S., which often sets the trend for Canada, ETFs surged up to a third of total trading dollar volume after the U.S. Fed's initial tapering announcement in June.

Looking ahead, BMO identifies the key drivers that will fuel asset growth in the Canadian ETF industry for the remainder of this year and into next year: new alternative beta strategies and rules-based strategies, positioning for defensive growth, diversified exposure and low cost.

The low cost of ETFs remains critical to their appeal as buy and hold investments. This is especially evident in an environment of lower market return expectations, BMO said.

"Looking forward, ETF providers need to continue to recognize the importance of diversified, liquid and tradable underlying investments, and ensure sufficient liquidity exists to support demand fluctuations," Silgardo said.