The Canadian exchange-traded fund industry experienced impressive growth in 2013, according to a report from BMO Global Asset Management.
The report says the industry’s ongoing success will be determined by how well providers respond to key investor needs such as more fixed income alternatives, increased exposure to income producing equity holdings and a growing demand for innovative exposures.
The growth of the Canadian ETF industry continued unabated in 2013 and currently stands at USD63.1bn in assets under management (AUM), up USD5bn over last year and an increase of 11.9 per cent over year-end 2012. Equity ETFs experienced USD2.7bn in inflows in 2013, while fixed income inflows slowed slightly but still reached USD2.3bn.
“The domestic ETF industry enjoyed another stellar year in 2013 with a variety of new and innovative portfolios contributing to its growth,” says Rajiv Silgardo, co-CEO, BMO Global Asset Management. “Investors concerned about the impact of monetary policy on financial markets and the sustainability of global growth prospects continued to invest in ETFs, largely because of the flexibility they offer and their cost-effectiveness.”
BMO GAM’s ETF business led the Canadian ETF industry in new assets for the third consecutive year in 2013, bringing their market share to 20 per cent of industry AUM. Moreover, BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) was the top selling individual ETF in Canada, attracting investors who were seeking diversified yield sources and lower interest rate sensitivity relative to fixed income.
“Canadian investors are benefitting from increasing competition in our industry,” says Silgardo. “ETF providers are focusing more on product innovation than ever before and we’re all being compelled to develop stronger product suites and to find ways to differentiate ourselves.”
According to the report, the following trends will impact the Canadian ETF industry in 2014:
More fixed income alternatives: In late 2013, investors shied away from fixed income purchases and avoided longer-term exposure. This has highlighted a need for alternative ways to generate yield to make up for a lack of income. Alternative fixed income options include preferred shares and credit-focused fixed income such as floating rate securities, high yield debt and investment grade corporate bonds.
Equity income: More defensive fixed income holdings means a need for more income from equity holdings. Equity exposures combining both growth potential and income will be highly favoured in 2014.
Smart beta: Market capitalisation weighting continues to be a key strategy to achieve market exposure. However, investors are also exploring alternative-weighting strategies, known as smart beta. Products that offer exposure based on various factors such as low volatility, momentum and quality are growing in popularity.
Currency hedging: Traditional international ETFs based in Canada hedged the foreign currency exposure. However, the recent decline of the Canadian dollar has heightened interest in unhedged products, which provide a way for investors to take advantage of foreign currency gains. Also, the increased volatility in currencies has compelled investors to use technical trading signals, and have been switching between hedged and unhedged ETFs based on short-term currency movement.