ETF market takes a step backward in October

It was a bad news, good news kind of month for Canadian ETFs.

First the bad news.

The iShares S&P/TSX 60 Index ETF, otherwise known as the XIU, experienced outflows of $1.8 billion in October as institutional investors pulled a large amount of assets from Canada’s largest ETF. Thanks to these defections Canadian ETFs saw an outflow of $48 million.

The good news?

Excluding the XIU, which faces obvious institutional headwinds as the largest ETF in the country, there was $1.78 billion in net creations in October suggesting the rest of the industry had a reasonably good month.

To interpret the numbers WP spoke to Yves Rebetez, managing director of ETF Insights, a leading publication when it comes to exchange-traded funds. His comments were sobering.

Rebetez points out that the difference between ETFs and mutual funds in Canada in terms of assets under management is huge – $73 billion in ETFs versus $1.1 trillion for mutual funds – rendering the low-cost advantage of ETFs somewhat moot.

How so?

Mutual fund assets in the U.S. total $15 trillion compared to $1.8 trillion for ETFs. In Canada the difference is far more pronounced putting much less pressure on mutual fund companies to lower fees in order to meet the competitive threat of ETFs.

Furthermore, with the average Canadian woefully unaware of ETFs, in part because the distribution of investment products in Canada is tied up by the big banks and mutual fund companies, there really isn’t the same kind of demand from consumers to own these products as there is in the U.S.

Ultimately, as Rebetez suggests, the Canadian ETF market faces a number of structural issues that prevent these products from truly taking flight.