The Canadian exchange-traded fund industry will continue to maintain a strong position as investors seek out investment options to help them effectively manage ongoing market volatility.
That is according to the Canadian ETF Outlook Update 2013 issued by BMO Global Asset Management (BMO GAM).
The Canadian ETF industry currently stands at CAD60bn in assets under management (AUM) – an increase of six per cent since December 2012. Inflows this year have exceeded CAD4.1bn. The report notes that fixed income ETFs represent approximately 55 per cent of year-to-date inflows in Canada, at CAD2.3bn.
The report predicts that growth throughout the remainder of 2013 will be driven, in part, by increased competition, innovative products, diversified exposure, and continued low cost.
“Market uncertainty was exacerbated this year when the US Fed hinted that it might taper its bond-buying programme and then delayed its implementation,” says Rajiv Silgardo, co-chief executive, BMO Global Asset Management. “The seemingly inevitable result of instability and uncertainty is that investors have rapidly responded by adjusting their portfolios, with ETFs proving to be an important tool to adapt to changing needs and market environments efficiently.”
Silgardo notes that BMO GAM’s ETF business has grown dramatically since being launched in 2009, having recently surpassed CSD11.8bn in AUM. Since the beginning of 2013 alone, the business’ AUM has increased 30 per cent.
According to the BMO Canadian ETF Outlook Update 2013, several notable trends are contributing to BMO’s (and the entire Canadian ETF industry’s) growth this year:
• Equity ETFs have received nearly 40 per cent of year-to-date inflows at close to CAD1.7bn. There is greater interest in US ETFs, reflecting investor confidence in growth south of the border.
• There has been strong competition among smaller players in Canada, who have increased their market share from 26.1 per cent at the end of 2012 to 32.3 per cent at the end of September.
• In the US – which often sets the trend for Canada – ETFs surged up to a third of total trading dollar volume after the US Federal Reserve’s initial tapering announcement in June.
Looking ahead, the report identifies the key drivers that will fuel asset growth in the Canadian ETF industry for the remainder of this year and into next year:
Alternative strategies: new alternative beta strategies and rules-based strategies have surfaced largely as a result of less opportunity in replicating existing, traditional exposures. There is a growing ideology that supports these innovative approaches.
Positioning for defensive growth: with income generation remaining critical for investors, there is a growing demand for innovative ETFs that deliver diversified exposures with an income focus while mitigating some of the risks of rising rates.
Diversified exposure: as holdings within other investment vehicles, ETFs offer a multitude of benefits: tactical allocations; exposure to more difficult to access asset classes; as core portfolio building blocks; and for diversified exposure to satellite investments.
Low cost: the low cost of ETFs remains critical to their appeal as buy and hold investments. This is especially evident in an environment of lower market return expectations.
“Looking forward, ETF providers need to continue to recognise the importance of diversified, liquid and tradable underlying investments, and ensure sufficient liquidity exists to support demand fluctuations,” says Silgardo.
