ETF trends to watch

Several trends have emerged in the ETF marketplace that have contributed to the growth of ETFs in Canada.

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In September, Canadian ETF inflows reached $39 billion year to date, with total assets under management (AUM) crossing $296.5 billion. According to David Stephenson, director, ETF strategy and development at CIBC Asset Management, ETF inflows have almost matched last year’s all-time high of $42 billion, “so it looks to be another record year” with two months to go.

While index or passive ETFs continue to be a large component of the market, according to Stephenson, there is strong investor interest in active ETFs, which now account for almost one-quarter of the Canadian market.

“Investors are using ETFs very actively: to take a more tactical approach, or to tailor a specific exposure for a certain period of time, or align their portfolios in a specific way,” Stephenson said.

For example, Stephenson said thematic ETFs are among the fastest growing categories in Canada and assets have more than doubled since March 2020.

A large selection of product choices across the category “make it easier to use ETFs tactically or align portfolios in a specific way,” he said, from genomics and cloud computing to disruptive technology and cybersecurity.

ETFs holding cryptoassets such as Bitcoin and Ether, which launched earlier this year, have now crossed the $5-billion mark in AUM, Stephenson said. “This type of product innovation has helped take the ETF market to new heights, which bodes well for the future.”

He expects the thematic and active trends will continue. With more investors concerned about low yields and high market valuations, Stephenson said he sees active management becoming more popular for fixed income and international equities “with a focus on risk-adjusted returns.”

“A lot of focus is on active fixed income and opportunities for future growth and rightly so,” Stephenson said. “But as Canadians continue to diversify outside Canada, I think active global and international equity ETFs will resonate with investors.”

Stephenson said investors can use active equity ETFs to pursue specific outcomes such as generating income or reducing risk, or to outperform a passive index — particularly in periods of uncertainty, when “managers can take defensive measures aimed at reducing volatility.”

With regards to environmental, social and governance (ESG) ETFs, Stephenson expects to see a narrower focus on the E and S within the ESG category. For example, as the world moves away from fossil fuels to renewable energy, clean energy will become a long-term theme, Stephenson said, led by younger generations positioning their portfolios in anticipation of changes to the global economy.

Stephenson said the best years for ETFs are still ahead. “But it will be interesting to see how investors continue to use ETFs and the implications for product development.”

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.

Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.