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Canadian ETF market saw significant growth in 2014, says BMO GAM

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The Canadian ETF industry experienced significant growth in 2014, with more than CAD10.3 billion in inflows – double the flows seen in 2013, according to BMO Global Asset Management (BMO GAM).

The latest edition of the BMO 2015 ETF Outlook Report, reveals that Equity ETFs alone experienced CAD5.8 billion in inflows in 2014 and fixed income ETFs had impressive inflows of more than CAD4.3 billion. The report noted that this is because of the efficiency and liquidity benefits of offering fixed income on an exchange, bundling bonds in a basket instead of holding individual positions.

At the end of 2014, the Canadian ETF industry’s assets under management (AUM) stood at CAD76.8 billion, up 21.7 per cent over year-end 2013. There are now 360 ETFs listed in Canada, compared to just over 100 ETFs five years ago. The US ETF market achieved a significant milestone last year, with just over USD2 trillion in AUM at year-end – 17.8 per cent higher than the previous year. More generally, the global ETF industry reached a record AUM of USD2.7 trillion invested in over 5,000 ETFs across 49 countries.

“2014 was another strong year, not only for the global ETF industry but domestically as well, with significant asset growth and an expanding user base,” says Rajiv Silgardo, Co-CEO, BMO Global Asset Management. “It’s clear that a growing number of investors understand the value that ETFs can bring to a portfolio, including transparency, increased liquidity, trading efficiency and access to markets.”

According to Bloomberg data, BMO’s ETF business led the Canadian ETF industry in new assets for the fourth year in a row. As at October 31, 2014, its AUM stood at CAD17.8 billion with 24.3 per cent share of the market. In 2014, BMO S&P 500 Index ETF (Ticker: ZSP) experienced the largest equity inflows, signifying investors are looking to capitalise on the strong US market. Two credit products, BMO High Yield Bond US Corporate Bond Hedged to CAD Index ETF (Ticker: ZHY) and BMO Short-Term US IG Corporate Bond Hedged to CAD Index ETF (Ticker: ZSU), had the largest fixed income inflows last year.

The report identified the following opportunities for the ETF industry in the year ahead:

Increased Investor Use: Because of the effective asset allocation ETFs can provide, the use of ETFs by those who have normally traded singular stocks will continue to drive growth.

Expanded Advisor Use: More advisors will look to use ETFs because of the role ETFs can play in portfolio construction. The global reach offered by ETFs, coupled with an advisor’s local market savviness, creates an ideal combination. Additionally, the low cost of ETFs supports international discussions on embedded trailer fees, advisor compensation and CRM2 fee disclosure rules in Canada.

Continued Emergence of Smart Beta: The trend of smart beta ETFs will continue, as investors seek alternatives to traditional market capitalisation weighting with ETFs that use factors that have enhanced risk adjusted returns over the long term.

Attractiveness of Low Volatility Products: As markets continue to move upwards, investors will seek products and strategies that can take advantage of this growth, while protecting past gains.

Potential Challenges in 2015

The report also noted that the growth and popularity of ETFs will bring more competition through both new providers and existing providers launching new products. With greater competition, a challenge that investors will face is determining the right product for them and the right provider to access those products.

Further, the expansion of ETFs into more asset classes has placed further emphasis on liquidity and has reinforced the need for experienced professional management.

The report identified three key benefits to working with an established provider when choosing an ETF:

• They have mature ETFs in their line-up.

• They are more likely to have financial strength and staying power.

• They are more likely to offer access to additional support.

Finally, the global ETF industry has experienced different growth trends varying by region, with the US leading the way in developing a more mature industry. Opportunities exist in other countries to replicate this success, where ETF adoption has been slower. For example, while the user base in Canada has diversified, the overall adoption rate is still behind that of the US More generally, across Europe and the Asia Pacific, higher retail and advisor acceptance will spur industry growth.

“ETFs have become a mainstream investment type for all kinds of investors and have come a long way since the first ETF was launched in Canada in 1990,” says Silgardo. “As more investors and advisors leverage ETFs in new and different ways, we expect that over the next five years, the Canadian ETF industry will experience a faster growth rate than the global average and will reach CAD200 billion in assets under management.”

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