Pace of ETF growth to persist in 2021

Canada’s ETF industry had another record year in 2020, with about $41 billion in net new flows — a 49% increase over 2019. The stellar growth is on track to continue, especially within certain categories of the funds.

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“ETF flows have been accelerating the last few years,” said David Stephenson, director of ETF strategy and development at CIBC Asset Management, in a recent interview.

“The trend is continuing into 2021, with about $13 billion in flows through the third week of March,” he said.

ETF assets have reached about $280 billion so far this year, up from $257 billion at the end of 2020.

Stephenson expects growth to continue in three areas in particular: active; thematic; and environment, social and governance (ESG) ETFs.

Thematic ETFs had their best year of flows last year ($2.1 billion), and their continued growth has been “one of the major stories in 2021,” Stephenson said.

“This should continue as ETFs are becoming the de facto vehicle to tap into long-term changes in various sectors and demographics.”

A popular theme among ETF investors is disruptive technology. Rather than buying a single stock like Cisco Systems to capitalize on cybersecurity, for example, or Oracle Corp. for cloud computing, investors can buy an ETF and hold a diversified basket of securities to invest in the theme, Stephenson said.

“Investors just need to be comfortable with what they own and have proper allocations in their portfolios,” he said.

Last year, most of the assets into thematic ETFs (91%) went to ESG ETFs, according to National Bank Financial. Assets in ESG ETFs have reached about $7 billion in Canada, Stephenson said, and are poised for further growth.

“Government policies around the world will provide a tailwind for future growth, and product innovation will continue,” Stephenson said.

He expects innovation will extend beyond broad-based ETF strategies to narrower exposures, such as a focus on the environment or social impact.

Overall, the ETF industry’s best days still lie ahead, as its growth rate has been upward of 20% compounded over the last decade, Stephenson said — a pace unlikely to relent.

“I don’t see that growth rate slowing down,” he said, which would result in ETF assets reaching more than $500 billion over the next five years.

Innovation may help boost growth, and Canada is one of the most innovative ETF markets globally, Stephenson said. “One only needs to look at launching the first fixed-income ETFs, leading in active ETFs and now even having Bitcoin ETFs,” he said.

Toronto-based Purpose Investments launched the first Bitcoin ETF (to invest directly in the cryptocurrency) in February, attracting an impressive $660 million during the month. Evolve ETFs also launched a Bitcoin ETF in February.

Potential growth in fixed-income ETFs is another trend to watch. Fixed-income ETFs had their second highest year of inflows last year amid market volatility.

This year, fixed-income ETFs may offer opportunities as yields rise.

“It has been a challenging year for bonds,” Stephenson said. “Yields have risen significantly across the yield curves in both Canada and the U.S., as investors price in stronger economic growth” and as expectations for inflation increase.

While bonds should remain core holdings for most investors, most bond exposures have had negative year-to-date performance, with higher duration long-term bonds performing the worst, he said.

ETFs can help meet the challenge. “The product depth in the ETF industry and choice allow investors to easily adjust allocations and take advantage of market opportunities,” Stephenson said.

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