Experts disagree on health of ETF business

One provider’s first quarter performance suggests ETFs are doing great but another knowledgeable source isn’t so sure leaving advisors to wonder who’s right.

Experts disagree on health of ETF business
One provider’s first quarter performance suggests ETFs are doing great but another knowledgeable source isn’t so sure leaving advisors to wonder who’s right. 

The first quarter numbers for ETFs in Canada are out and a first glance at fund flows indicate advisors are increasingly looking to these products as an alternative to traditional mutual funds.

The net inflows in March were $2.68 billion, 168 per cent higher than a year earlier while net inflows for the entire quarter were $4.6 billion, a very healthy increase over Q1 2014. 

Intrigued by the strong numbers year-to-date in 2015, WP spoke with iShares Canada’s head of product, Pat Chiefalo, to get his take on what’s transpired so far this year in the ETF space and perhaps some insight to the overall health of its business and the industry overall. 

As always, Chiefalo had a lot of interesting things to say.

“I think the Q1 numbers were extremely strong certainly this year relative to last year,” said Chiefalo. “I think last year’s numbers were close to $1 billion for Q1 and right now we’re up to around $4.5 billion. So, I think the numbers are extremely strong. It was an extremely good start to the year in terms of ETF flows.”

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Overall, the numbers point to a great start but there were pockets of strength; investors weren’t buying evenly across all markets. 

“U.S. equities had a big role to play [in the growth] while Canada was a little bit more subdued from an equity standpoint,” said the head of product. “but what you saw was that U.S. was strong, international equity was very strong and in that international equity bucket you saw a lot of flows specifically into Europe as well.”

“Investors definitely looked for broad international exposure which we would generally classify as Europe, Australasia and Far East.”

As things pertain to iShares itself, Chiefalo was quick to point out that investors have responded very positively to its core fund solutions, both those existing prior to 2015, as well as those introduced in the first three months of the year. 

In terms of fund flows, its number one ETF in the first quarter was the iShares Core S&P 500 Index ETF, which interestingly is hedged to the Canadian dollar. 

Why so interesting? 

“When you think about it, as Canadians, we really do have a problem because we are amongst the most home-biased investors you can find,” said ETF Insights managing director Yves Rebetez. “So everybody is exposed to Canada as a core to their portfolio, then everybody is exposed to real estate in Canada, and then everybody in Canada is exposed to the Canadian dollar, which when exhibiting strength you hedge but right now it’s not a strong currency so arguably you say ‘well I don’t need to hedge.’”

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So, with the dollar seemingly stuck at 80 cents, the need to be hedged isn’t a priority for most Canadians at the moment yet investors and advisors alike continue to pile into its hedged version of the S&P 500 index ETF.

As for the state of ETFs in this country, Rebetez was quick to pour some cold water on the victory parade.

“The only thing’s going to change things in a bigger way is with the wealth transfer to the younger generation and with strong advocacy on the part of a variety of different players in the marketplace. In other words, until you really crank up the volume for people to really wake up and realize the demographics are against us.”

He elaborates on this point. 

“The great returns we’ve had from the bottom in 2009 have been had. At some point, things could get very dangerous.”

And ETFs could be at the top of the list because according to Rebetez, only a small number of investors actually know that ETFs exist.

“The game’s working fine for advisors [selling mutual funds].”

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