Is ETF growth here to stay?

Think the ETF market can’t keep soaring? Think again, says one expert in the space

Is ETF growth here to stay?
In 2016, inflows into exchange-traded funds smashed all records, and it seems like every week, another asset management giant either enters the space or launches a new suite of funds. In January, Canadian ETFs had net inflows of $1.7 billion, spread across most asset classes and categories, and the top three providers – iShares, BMO and Vanguard – all had high flows.

On top of that, Toronto-based AGF Investments introduced seven new ETFs under its new QuantShares brand, Dynamic Funds partnered with iShares to enter the ETF space, and most recently, Manulife Investments announced plans to launch a series of multi-factor ETFs in April. It’s fair to say that Canada’s ETF market is booming, but can that level of growth continue?

According to Pat Chiefalo, managing director and head of iShares Canadian product at BlackRock, it absolutely can. Chiefalo believes the underlying trends point to increased growth.

“In other international markets, which are ahead of us in regulatory and retail terms, we’ve seen an acceleration of adoption in ETFs,” he says. “In Canada, with CRM2 coming into play, the potential for trailer fees being impacted and a wealth market where scale is important, the signs also point to increased ETF adoption.”

On the retail side of the industry, ETFs are playing an ever more important role for advisors and individual investors. Even on the institutional side, more investors are shifting capital into ETFs as fees steadily come down.

“As ETFs have become large, liquid products with low transaction costs andmanagement costs, we are seeing a pickup in adoption from institutions,” Chiefalo says. “ETFs are getting increasingly more cost-competitive relative to other vehicles like futures and swaps, which lends itself to further institutional adoption.”

Chiefalo advises Canadian advisors to consider a few factors before placing a client’s money into a specific ETF. If you’re looking for an inexpensive way to access a specific exposure via a plain vanilla market-cap-weighted fund, is that exposure delivering exactly what you need? If a client needs exposure to emerging markets or US stocks, should an advisor seek out an ETF that captures the complete market or just a portion of it?

“There is a good, fertile secondary market and ecosystem around some of these larger liquid ETFs that translates into lower transaction costs for advisors when they’re looking to buy and sell these underlying exposures,” Chiefalo says. “We don’t believe investors should be nitpicky on basis points, but there is a within-reason price for exposure that advisors should consider for every ETF.”