ETF Trends to Watch

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David Stephenson

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David Stephenson, Director, ETF Strategy and Development, CIBC Asset Management.

What ETF trends are we seeing in 2021?

First of all, 2021 continues to be a very strong year for ETF flows. And as of mid-October, we’ve essentially matched last year’s all time high of $42 billion. So it looks to be another record year with 2.5 months to go. ETF issuers are offering increasingly sophisticated strategies within the ETF wrapper attracting all investor types who value liquidity in ease of use. Although index or passive ETFs are rooted in the origin of the ETF industry and will always be a large component of the market, there continues to be strong investor interest in active ETFs, which accounts for almost 25% of the Canadian market. So the ETF market is broadened out in terms of management style but the other trend that is really accelerated is how investors use ETFs. Investors are using ETFs very actively, for example, 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.

A good example of this has been in the thematic ETFs, one of the fastest growing categories in Canada. An investor can supplement their core portfolio with, say, a biotechnology ETF, and express a tactical view over the short term to capitalize on anticipated opportunities or complement a more diversified healthcare ETF. There is a lot of product choice across the thematic category such as genomics, cloud computing, disruptive technology, cybersecurity, to name some, that make it easier to use ETFs tactically or align portfolios in a specific way. I think that trend will continue.

What other ETF trends am I seeing? To expand some more on active management, investors are concerned about low yields and in some cases, current market valuations. As such, I think active management will continue to be popular in both fixed income equities, whether it is an unconstrained fixed income and finding the best opportunities globally, or an actively managed concentrated approach to global or 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, but as Canadians continue to diversify outside Canada, I think active global and international equity ETFs will resonate with investors.

Active equity ETF uses range from long term strategic core holdings to complement reallocations to passive, to shorter term tactical allocations. Investors might use them to pursue specific outcomes such as outperforming a passive index, generating income or reducing risk. Finally, active ETFs bring flexibility to index-centric portfolios. In periods of uncertainty, for example, managers can take defensive measures aimed at reducing volatility.

In the ESG category the number of new products in AUM has grown significantly as investors look to grow their wealth with their personal values. Sustainable business practices are here for the long term. And along with broad ESG mandates, I expect to see a narrower focus on the E for example, or S within ESG. For example, clean energy is a long term theme as the world moves away from fossil fuels to renewable energy. Younger generations and millennials are focused on sustainability and are looking to position their portfolio for coming changes in the global economy.

There is a new era of growth and secular drivers and regulatory tailwinds in place as the world transitions to clean energy. Finally, on the ETF front, it is worth mentioning that thematic ETFs have more than doubled since March 2020 in Canada. And of course, crypto assets like Bitcoin and Ether were launched earlier this year and now have over $5 billion in AUM. This type of product innovation has helped take the ETF market to new heights, which bodes well for the future. In short, continued ETF AUM and flows are a given and the best years are still ahead, but it will be interesting to see how investors continue to use ETFs and the implications for product development.