Pace of ETF Growth to Persist in 2021

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David Stephenson

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David Stephenson, director, ETF strategy and development, CIBC Asset Management.

So, what are some of the ETF trends to watch in 2021?

First of all, 2020 was a record year in the ETF industry with about $41 billion in flows. ETF flows have really been accelerating the last few years, and the trend is continuing into 2021 with about $13 billion in flows through the third week of March.

Overall, ETF assets are now close to $280 billion, up from $257 billion at the end of 2020.

I would say three trends that continue to play out are: number one, the continued growth of active ETFs; two, the rise of thematic ETFs overall; but number three, specifically the interesting growth in ESG ETFs. So, active ETFs, thematic ETFs and ESG.

One of the major stories in 2021 has been the continued growth of thematic ETFs, which had their best year of flows in 2020 and has remained strong into 2021. This should continue as ETFs are becoming the de facto vehicle to tap into long-term changes in various sectors and demographics. Disruptive technologies and ESG are two to highlight.

Rather than buying a single stock like Cisco Systems, for example, to capitalize on cybersecurity, or Oracle for cloud computing, you can buy an ETF instead and hold a diversified basket of securities to invest in that theme. Investors just need to be comfortable with what they own and have proper allocations in their portfolios.

ESG is another area I expect to grow significantly in the years ahead, as investor portfolio allocations increase. ESG has seen massive flows globally and is accelerating here in Canada as ETF assets are now over $7 billion. Government policies around the world will provide a tailwind for future growth, and product innovation will continue — not only in broad-based ETF strategies but narrower exposures for focusing on just the E, or environment, like clean energy, or S, social impact, being examples.

What can investors expect long term? The ETF industry’s best days still lie ahead. The industry has been growing 20%-plus compound over the last 10 years, and I don’t see that growth rate slowing down. In fact, if you just compound that historical rate over the next five years, ETFs would be over $500 billion plus. So clearly lots of growth still lies ahead.

Next, I will discuss ETFs targeting specific themes and sectors. Canada has historically been one of the most innovative ETF markets globally. One only needs to look at launching the first fixed-income ETFs, leading in active ETFs and now even having Bitcoin ETFs as well, which it has been clear that there has been pent-up demand within an ETF structure.

On the fixed-income side, it has been a challenging year for bonds, as yields have risen significantly across the yield curves in both Canada and the U.S. as investors price in stronger economic growth as economies open up and has led to higher inflation expectations.

In Canada, yields have increased across the curve from six basis points in the two-year bond to over 80 basis points in the 30-year government of Canada. As a result, most bond exposures have been negative year-to-date, with higher duration long-term bonds performing the worst. Having said this, bonds should still be core holdings for most investors as they provide ballast to portfolios when equities decline, and diversification.

Although future returns for fixed income will be more challenging, the product depth in the ETF industry and choice allow investors to easily adjust allocations and take advantage of market opportunities, such as floating-rate notes that adjust to higher rates, go-anywhere flexible fixed-income mandates that can move tactically as opportunities present themselves or even corporate bonds for investors looking for higher yields.