Pace of ETF growth likely to persist

The Canadian ETF industry had another record year in 2021, and growth is likely to continue.

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“The ETF industry has grown significantly over the last 10 years,” said David Stephenson, director of ETF strategy and development at CIBC Asset Management, in a recent interview. “But growth has really accelerated over the last four.”

With December inflows of $4.3 billion, net ETF flows for 2021 were $52.5 billion — a 27% year-over-year increase.

According to Stephenson, future growth will be driven by three primary factors. 

The first is product innovation. In Canada there are roughly 1,200 ETFs on the market after more than 200 launches last year, and new themes are still emerging. Crypto ETFs brought in $6 billion, contributing significantly to the record year, Stephenson said. 

Environmental, social and governance ETFs are also becoming more popular, he said, as are thematic and active products. Active ETFs now account for approximately 30% of total ETF assets under management, he said. In addition, as investors look to diversify globally, outcome-oriented ETFs and portfolio solutions will also continue to attract inflows. 

Index ETFs, valued for years by Canadian investors for their low cost, transparency, access and diversification, also show now signs of slowing, he said. 

The second driver is generational and institutional flows, and advisory models. Millennials were a key driver of recent ETF flows and will continue to be going forward, along with Gen Z, Stephenson said. He pointed to the coming generational wealth transfer, which will further empower younger Canadians. 

Institutional ETF usage also accelerated in 2021, a trend Stephenson expects to continue. “This investor base values ETFs as an efficient method of obtaining exposure to various asset classes in both equity and fixed income,” he said. 

On the advisor side, the shift to fee-based advice is still playing out, and Stephenson said ETFs are a natural fit for that business model. 

New distribution channels are the third factor. According to Stephenson, since the pandemic began, more than 2.5 million self-directed brokerage accounts have opened in Canada, which offer “clear opportunities for ETFs to be part of the value proposition to investors.”

In total, Canadian ETF assets at year’s end were $323.1 billion. That’s still only a fraction of the mutual fund market, whose assets finished the year at $2.08 trillion.

After several years of ETF gains, mutual fund sales far exceeded ETFs in 2021, bringing in $112.7 billion.

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.