“Breakneck” year so far in Canadian ETFs

Following a record year for both ETFs and mutual fund sales in Canada in 2021, the Canadian ETF industry has experienced an underwhelming year so far. 

“It’s been something of a breakneck year,” said Daniel Straus, director of ETF research and strategy with National Bank Financial, speaking at the ninth annual ETFinsight Conference on Thursday. 

Straus describes what happened in 2021 as a “post-pandemic phenomenon,” where locked-down investors had very little to do with their excess of funds except invest it. “Mutual funds in Canada were the beneficiary of that, as were ETFs,” he said.

Uniquely, this is something that hasn’t happened for mutual funds since 2015. Year to date, however, mutual funds are suffering outflows.

At the end of September, mutual funds had total assets under management of $1.76 trillion, after decreasing $71.9 billion, the Investment Funds Institute of Canada (IFIC) reported.

At ETFinsight, Straus said ETFs have fared much better, but added ETF assets held by Canadian investors were not immune to the investment industry’s slump.

Market headwinds and lackluster sales erased almost a year’s worth of gains, closing out the third quarter with $312.2 billion in assets, representing a decline of 0.2% and 2.3% on a quarterly and annual basis, respectively. Yet even with the market declines, Canadian ETFs have attracted $21 billion in net assets year-to-date. 

In the U.S., it’s a different story, although Straus said it could be “instructive” to what will happen in Canada. 

Regionally, Straus said broad Canadian equity has become more appealing, especially as a hedge against inflation. Conversely, emerging markets are on the “outs,” but that is typical in volatile markets. Emerging markets are the only region with outflows at $352 million year to date.

Sector ETFs stepped out of the spotlight this year, despite the large sector performance dispersion. Dividend and income ETFs, which have been quietly on the sidelines, are very big this year. 

In particular, cash is surging in demand, he said. Cash alternatives gathered $4.8 billion, nearly $1 billion above the inflows accumulated by Canadian aggregate bond ETFs. Categories with higher credit exposure — such as sub-investment grade bonds, preferred share and Canada corporate bonds — suffered outflows.

Fixed-income ETFs registered strong inflows of $6.7 billion year to date, despite 2022 being the worst year for aggregate bonds since the first fixed income ETF was launched in Canada almost 22 years ago. 

The provider landscape in Canada has also changed significantly, he said. 

When Straus started in the industry 12 years ago, there were only four providers in Canada and now there are 42, he said, adding 50% of active ETFs were launched less than five years ago. 

“The majority of products are quite new.”