ETFs in 2020: fixed income and ESG

Against a backdrop of declining bond yields and equity market strength, ETFs had a record year in 2019.

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ETFs brought in almost $28 billion last year, beating the previous high of $25.8 billion in 2017, according to David Stephenson, director ETF strategy and development at CIBC Asset Management. Total industry assets hit $205 billion, he added in a Jan. 7 interview.

“What’s interesting in looking at these flows is how defensive investors were in 2019,” he said. “Fixed income and so-called safety trades dominated flows.”

Fixed income accounted for more than 50% of 2019 flows, and assets now total $66 billion, he said. Those assets have more than doubled over the last three years.

“Looking under the hood a little more, low-cost, broad market Canadian aggregate bonds and high-interest savings account ETFs saw huge investor interest,” Stephenson said.

On the equity side, low-cost U.S. and international ETFs saw growth, as did interest in factor-based ETFs, he added.

Here are the key trends Stephenson predicted would take off in 2020.

• More growth in fixed income

Stephenson expects product innovation and more growth in active fixed-income ETFs. While Canadian aggregate bonds are a core holding for investors, yields are only in the 2% range, with a duration of eight years.

“Looking out over the next three to five years and beyond, this could potentially pose an issue for investors looking for yield,” he said.

There are new ETFs that seek a better balance between interest-rate risk, duration and credit risk to generate better yields, he said. Specifically, he pointed to interest in international fixed-income ETFs that help diversify portfolios.

• Defensive stance from investors

Investors will look for low-risk options, Stephenson said, like low-volatility, and dividend- and outcome-oriented products, like alternatives.

“Solution products, like one-ticket asset allocation ETFs, will continue to attract assets as well,” he said.

• More thematic ETFs

Manufacturers will continue to create products around investing themes, Stephenson said — in particular, environmental, social, and governance (ESG) ETFs.

“There were quite a few launched in 2019, and more to come in 2020, so this will be interesting to watch flows,” he said.

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