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Canadian ETF industry to grow faster than the rest of the world, predicts Bank of Montreal


The global ETF industry is projected to double to more than USD10 trillion over the next five years, but the Canadian industry is expected to grow at a faster rate to CAD400 billion by 2024. 

That’s according to the Bank of Montreal (BMO) Global Asset Management’s annual ETF Outlook Report, looking at the ETF industry as it stands and highlighting trends which the firm expects to drive the year ahead. 

The global ETF market hit a record high of USD4.7 trillion assets under management (AUM) at the end of the year. There were 6,483 ETFs globally, up almost 12 per cent from the previous year. 

The Canadian ETF market grew to CAD156 billion AUM with inflows of CAD20 billion. The Canadian equity ETF with the most inflows last year was BMO S&P/TSX Capped Composite Index ETF, with more than CAD1 billion in net flows.  

The bank writes that investors continued to show support to broad Canadian equity exposure – especially to financials and energy – seeing value as Canada has underperformed leading global markets.

“Investors look to ETFs as an effective, transparent, low cost asset allocation tool,” says Kevin Gopaul, Global Head of ETFs, BMO GAM. “The diversification and trading efficiency that ETFs offer has become more important than ever as volatility has returned to global markets. The value of positioning with traditional passive ETFs and new active ETFs was evident during the market corrections in the fourth quarter.”

Today, BMO GAM offers 77 mandates and has a market share of 31 per cent in Canada, according to Bloomberg data.

Key Trends from 2018 into 2019 included the introduction of asset allocation ETFs, the industry’s answer to portfolios traditionally offered by mutual funds. Similar to the success of traditional ETFs, these ETFs are showing signs of disrupting the industry by challenging fund construction and entrenched products, the bank writes.

Volatility has also been a key driver with global monetary tightening, rocky geopolitics, and lower earnings from leading stocks leading to increased market volatility. As a result of their trading efficiency, where a diversified exposure can be placed with one intra-day trade, investors have turned to ETFs to navigate the resurgence in volatility. 

Active ETFs are another new theme. The bank writes that strategies that truly differentiate from the market have grown in popularity as market volatility has increased. Just like mutual funds, active ETFs will need to prove their value by delivering outperformance and differentiating exposures.

Passive ETFs: Traditional ETFs with their diversification, low cost, trading efficiency and transparency – are as relevant as ever – and the addition of active ETFs is complementary, BMO says.

Fixed Income also features in the new trends’ spread. The bank writes that there has been a trend toward short-dated fixed income ETFs. Tactical trading and repositioning within fixed income using ETFs has become a popular strategy.

While ETFs are now a mainstream option, they still only represent 10 per cent of the AUM of the mutual fund industry in Canada. As the number of ETF providers and the sheer number of ETFs offered increases, the report notes that it is more important than ever to work with an established provider that is focused on education and support.

“The increased availability of industry tools and databases, along with the rise in the number of ETF analysts, have helped investors research and improve their portfolios,” says Gopaul. “As investors look to ETFs, there is a greater need for clarity between choices.”

Looking ahead, BMO writes that while ETFs are now a mainstream option and have surpassed the hedge fund industry, they still lag behind other investment products at near 10 per cent of the assets under management of the mutual fund industry in Canada.

“The opportunity for growth remains significant as the efficiency, low cost and tradability of ETFs resonates with investors as they adopt ETFs into their portfolios. The number of providers in Canada has climbed to 33 and the number of ETFs is now over 6501. The number of ETFs has become more difficult for investors to navigate, highlighting the increasing importance of working with an established provider that is focused on education and support.

“The need for investor tools is apparent and is a key theme for 2019 – the rise of ETF analysts and industry tools and databases are working together to help investors research and improve portfolios. As Canadian investors look to ETFs to provide value across global equity markets and segments of the fixed income universe, there is a greater need for clarity between ETFs.”

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