Canadian ETF industry flows are expected to strengthen given a continued shift of assets into these products from traditional mutual funds, according to WisdomTree Asset Management Canada’s second annual ETF Industry & Market Outlook, which examines the challenges and opportunities for exchange-traded funds (ETFs) in Canada and identifies key trends the firm sees playing out in the year ahead.
WisdomTree says 2019 investment trends include potential opportunities in emerging markets equities as well as increased innovation and demand for Modern AlphaTM ETFs, while company predicts the immense growth of the Canadian ETF industry, as well as the entry of new players, will continue to benefit the end investor.
This past year, the Canadian ETF industry reached a new record high of CAD162 billion in assets under management, as 2018 is set to close with more than CAD15.9 billion in inflows, a year-over-year increase of approximately 10 per cent. Overall, WisdomTree Canada foresees continued strong asset growth in 2019, expecting a further shift out of mutual funds into ETFs – a trend that will likely continue as the benefits of ETFs become more widely known among investors.
“This year we’ve seen the continued evolution of the ETF industry, and what stands out the most is the steady erosion of the oligopolistic power among the major providers in Canada,” says Jeff Weniger, WisdomTree Asset Allocation Strategist.
The outlook identifies the following key trends that dominated the Canadian ETF industry in 2018 –
Increased options and entrants for Canadian investors: 2018 continued to see a significant increase in the number of providers entering the ETF market in Canada, especially as the year saw the late entrant large Canadian banks launching products. There were 33 firms managing CAD157 billion through October, up from 27 firms with CAD147 billion at the end of last year. For perspective, only 18 firms were managing Canadian ETFs when WisdomTree Canada entered the market in 2016.
From oligopolistic power to small players: Newer entrants to the ETF market have rapidly cut into the market share of the major providers. While only 11% of industry market share was controlled outside of the three largest providers in 2014, the count doubled to about 22% by late 2018. This reflects increasing awareness of the different kinds of ETFs that are available in the market and wider brand recognition among the boutique providers.
Rate hikes and high risk: 2018 has seen three interest rate hikes from the Bank of Canada, which has slowed down investor willingness to engage with fixed income products. The bond market, therefore, has become unfavourable to traditional investors. With more investors looking for ways to mitigate risk, investment grade fixed income may stand to benefit more than high yield alternatives.
“The pace of fixed income ETF inflows slowed slightly in 2018, likely a result of this year’s multiple interest rate increases announced by the Bank of Canada,” says Kevin Flanagan, WisdomTree Senior Fixed Income Strategist. “In broader terms, developed market yields have been on an ascending trajectory, with Canada as no exception. It will be interesting to see where 2019 nets out as investors continue to search for solutions to mitigate potential rate risk.”
With more competition than ever in the Canadian ETF market, increased demand for solutions that provide low-cost alpha will fuel WisdomTree’s differentiated approach – Modern AlphaTM – which combines the outperformance potential of active management with the benefits of the ETF structure. Similarly, other firms competing in the market will continue to develop thematic ETFs to reflect investment trends, much as they did with the cannabis craze in 2018. If those actions are any indication, the exchange-traded structure will be the vehicle of choice for product innovation for the foreseeable future.
The expectation of potentially higher rates in 2019 will most likely keep bond investors defensive. As a result, rising rate solutions should be at the forefront of the portfolio decision-making process.
WisdomTree foresees 2019 to be the year that emerging market equities outperform Canadian stocks. WisdomTree’s Emerging Markets Dividend Index CAD, which is priced at a forward P/E ratio of 9.1 with a dividend yield just short of 5%, is just one of the many examples of the deep value now available in many foreign markets.
On the subject of ETF choices, Weniger adds: “Most of today’s Canadian ETF providers had not even entered the market as recently as 2014, leaving investors with a profound lack of product options. The ETF industry’s immense growth, as well as the entry of new and independent players, has benefited investors considerably by creating a more diversified investing environment for both private and institutional investors.”