2017 was a record breaking year for the Canadian ETF marketplace. It was a massive twelve months both in terms of new issuers entering the market and product launches, with over 170 new ETFs hitting the market. But is there any way that level of growth can be sustained this year?
For Lindsay Patrick, Director, Global ETF Strategy at RBC Capital Markets, the answer is a resounding “yes”.
“The level of asset growth is absolutely sustainable,” Patrick told WP
at the Inside ETFs in Florida this week. “ETFs in Canada represent only 10% of the mutual fund market, so there is a lot of potential for growth. I think this year is going to be the year when we start to get broader adoption and bigger inflows.”
Canada is rightly seen as a hotbed for ETF innovation and Patrick attributes that to two key factors: Canadians’ proclivity for fixed income assets - and the ETFs that have been created to answer that demand - and the growth in the Canadian active management ETF space.
“A lot of markets look to Canada for innovation,” Patrick said. “Canada is the beta test for active management in ETFs. Down in the US, the words ‘passive’ and ‘ETF’ are synonymous but in Canada that is not the case. The rest of world is watching us to see if active management can work in an ETF construct. I’m quite happy about that because I think it can.”
Patrick believes the rise of covered call ETFs to have been the most significant innovation in the Canadian marketplace. “We have the largest covered call ETF market in the world, and those funds are actively managed and require portfolio managers to not only choose the stocks but also which call options, when to sell them and how to sell them,” she said. “That has been a tremendous innovation success story for Canada.”
Although Patrick expects inflows into ETFs to increase, she does not expect the launch of new products or new issuers to match 2017’s numbers.
“I think the issuers who do come to market will be smaller, more niche providers that aren’t aiming to get 30% of the market, but are looking to leverage the core competencies they already have in an ETF format,” Patrick said.
“Smaller providers can co-exist with the large asset managers. Most have got a proven strategy with a recognized portfolio manager. In many cases, when they hold very liquid large cap equity securities, perhaps Canadian or globally, an ETF format for their fund makes a lot of sense.”
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