How the Canadian ETF landscape could change in 2023

While fund manufacturers might not launch a ton of technology ETFs this year, investors may see greater use of derivatives in the equity portions of balanced funds as well as growth in covered call ETFs, industry experts suggest.

“Unlike previous years, where there was a lot of tech ETFs that got listed — broad-based and also specific sub-sector tech funds — I don’t think you’re going to see a lot of [technology ETF launches] this year,” Raj Lala, president and CEO of Evolve Funds Group Inc., said in a recent interview. “This year is going to be a volatile sideways market.”

Instead, expect growth in fixed-income ETFs generally and in ETFs that write covered call options, he said.

With covered call ETFs, investors have the right to buy a security at a fixed price for a fixed term. The funds do well when “optimism rises, but maybe global macro doesn’t deliver,” Trevor Cummings, vice-president of ETF distribution with TD Asset Management Inc., said during the recent ETFGI Global ETFs Insights Summit Canada.

While a lot of investors may look to broad indexes this year, “if they can get a covered call overlay to generate some yield, then it becomes a little bit more interesting to them,” Lala said.

Within fixed income, Lala said opportunity exists for global managers with no footprint in Canada to take an existing ETF or mutual fund (such as a European-listed ETF or U.S. mutual fund), look for a Canadian partner and then list a Canadian ETF version of the fund. This wouldn’t apply to U.S.-listed ETFs.

Often, “advisors here in Canada will look at the Canadian-listed version and the U.S.-listed version … of the same product and buy [the U.S. version],” with its greater volumes, Lala said.

Ian Tam, director of investment research, Canada, with Morningstar Research, didn’t speculate on how many new ETFs will launch in Canada in 2023, but the industry will probably see “fancier” sleeves, he said, or more exposure to more derivatives, within the equity portions of balanced funds. This would “provide either protected income or show the characteristics of a less volatile sleeve in your portfolio” while still being exposed to equities.

Also this year, investors can “start digging a little deeper into the types of sustainable or responsible ETFs that are out there,” Tam said. In the past, the terms “sustainable” and “responsible” have been “nebulous,” he said. But this year there could be a “shift in demand and different approaches to sustainable investing, impact being one of them.”

Last year the Canadian Investment Funds Standards Committee, of which Tam is a member and former chair, issued a framework to help investors choose funds according to their approaches to ESG.