ETFs dominate fund sales

Are you wondering where all those redemptions from long-term mutual funds have gone? It appears a large swath have ended up in ETFs, if sales figures reported by ETF providers are any indication.

Barclays Global Investors Canada’s iShares, Canada’s largest ETF fund provider, had a sales year that was nothing short of phenomenal.

The firm was number one in net new long-term assets in 2008, surpassing all leading mutual fund providers that reported to the Investment Funds Institute of Canada (IFIC). IFIC doesn’t report ETF sales; if it had, it would find $4.4 billion was invested into iShares; the next highest sales total for the year was $2.4 billion invested into Dynamic Funds. iShares ranked number two in overall net new assets, second only to RBC Asset Management.

iShares was not alone in finding success listed on the stock exchange. Horizons BetaPro saw assets in its line of ETFs grow by more than 200%.

“Last year, we grew over 200% to just about $2 billion in assets under management. In terms of net sales — sales minus redemptions — we brought in a little over $1.5 billion. Based on the year, 100% of our growth was net sales,” says Howard Atkinson, president of BetaPro management. “I think it’s great to see ETF providers near the top of the pile when it comes to net sales.”

Research firm Investor Economics highlights that total assets in Canadian-listed ETFs grew 8% in 2008 to over $19 billion. That’s a staggering feat considering the majority of market indexes plummeted more than 30%.

Sales growth actually increased at a greater rate when the market started to really go sour in the fall. Investor Economics says total assets grew 11% in the fourth quarter of 2008 and are currently near their peak asset value, reached at the end of the second quarter of 2008.

Some of the biggest fans of ETFs are advisors, says Earl Bederman, president of Investor Economics.

“The rapid growth in assets reflects a confluence of factors that have captured the attention of investors and portfolio managers across the Canadian investment landscape,” he says. “Along with individual investors, what we’re seeing is mounting evidence that a growing segment of advisors and wealth managers have embraced the appeal of ETFs by utilizing them as building blocks of investment solutions offered to clients.”

The ETF success story may have broader implications for the psychology of investors. Canadian investors are not as fearful of the markets as it would appear. The mutual fund data released by IFIC last week told a story of outflows going from equity funds into money market and conservative fixed-income funds, as investors try to stem the tide of losses.

ETFs are by and large equity vehicles. Heather Pelant, head of iShares Canada, suspects investors are sending the message that they are not afraid of the markets as much as they are of paying more for performance that deviates from the market.

Pelant makes the argument investors are concerned with three facets of investing: risk, return and cost. This market downturn has obliterated returns, and the only asset category to post non-correlated market returns has really been government bonds. This means investors are concerned about risk and cost, and ETFs provide a transparent and cheaper way to get market exposure.

“People get that if they’re in the market and it goes down — that’s okay. What they don’t want is something that has a return that is different than what they were expecting,” she says. “The promise that active mutual fund managers make is ‘we’ll protect you in a down market.’ That promise fell apart. If you look at their Sharpe ratios, they start looking like the benchmarks. The question is why am I paying you active management fees if you’re delivering index-like performance or worse?”

In fact, the outlook of ETF investors is surprisingly bullish, Atkinson says. The majority of sales of his leveraged ETF mandates are in their “bull” products, which offer investors two-times performance if the index it tracks goes up.

“Through most of 2007 and 2008, until the last couple of months, if you look at our assets, about two-thirds were bear ETFs,” he says. “We’ve seen the money shift decidedly to the bull side. If I look at our HXU and HXD products, two-thirds of sales are bull products. We’re probably 75% bull assets versus bear right now.”

Atkinson notes, most bullish calls are held for a longer period of time, meaning the assets are likely to stick for the foreseeable future. The same goes for iShares; the company is seeing sales in products that typically require longer holding periods.

iShares Fixed Income Funds experienced $2.5 billion in sales this year, an increase of 47.7% over 2007.

“Twenty-two of our 28 funds had net [in]flows this year. There is not one particular sector that investors are choosing,” she says. “There is a groundswell shift happening in Canadian investment decisions.”

(01/19/09)