Canadian asset manager Mackenzie Investments, with CAD186.6 billion under management, has published its annual Mackenzie Investments Year-End ETF Report.
The report studies the evolution of the ETF industry in Canada in 2022 and identifies the key trends that could impact the space in 2023 and beyond, finding that in 2022 Canadian ETF inflows topped CAD35 billion, while assets under management reached CAD314 billion, exceeding the CAD300-billion mark for the second time in history.
“The Canadian ETF industry had another strong year in 2022, and despite nearly unprecedented market conditions, experienced robust net inflows,” says Michael Cooke, Head of ETFs, Mackenzie Investments.
“Generally speaking, periods of economic uncertainty and volatility tend to lead to increased ETF adoption as investors seek the benefits that ETFs can provide, such as liquidity, transparency, ease of use and product choice.”
The report identifies the top short- and long-term trends that will impact the growth of the ETF sector in the months and years ahead, including outflows in cryptocurrency ETFs in 2022 as investors began to re-evaluate the risky assets, while previously unpopular sectors are making a comeback, such as infrastructure.
Amid rocky equity markets, investors also increased allocations to low-cost, market-cap weighted equity ETFs with almost CAD9 billion in net flows.
Bonds ETFs have boomed despite rising rates, the report finds, commenting that as rising bond yields offer more attractive entry points for investors, inflows into fixed-income ETFs, which took in CAD19 billion in 2022, will remain robust as the possibility of a slowing economy looms and investors embrace core asset classes for their portfolios.
Solutions will take centre stage, the firm says. More solutions-oriented ETFs may come to market as companies begin to offer an expanded range of all-in-one or objective-oriented ETFs, giving investors access to an array of investments in a single product.
The digital economy is driving interest, with the demand for thematic funds, particularly those that deal in exponential technologies, growing as emerging sectors such as the digital economy continue to develop and increase their global impact.
The report notes that the adoption rate of ETF products is accelerating in the Canadian marketplace, and Mackenzie Investments holds the view that the ETF industry will continue to see inflows and assets expand in the coming years.
“With the depth and breadth of product options available, investors can work backwards from their desired investment outcomes and then make choices on which ETFs best suit their portfolios. If Canadians still haven’t incorporated an ETF strategy into their portfolio, now is the time,” Cooke says.
“It’s a great example of the resilience of the ETF industry and globally it was the second-best year on record in terms of net flows against a backdrop of challenging macroeconomic conditions but, undeterred, investors continued to allocate capital to ETFs”
In Canada, it was the third best year for ETFs, but in Cooke’s view, it was more remarkable for the net flows delta between ETFs and mutual funds in the face of negative market returns. “Markets were down 5 to 15 per cent in equities or 11 per cent in Canadian fixed income, but both stock and bond ETFs saw steady flows despite performance headwinds,” Cooke says. “There was a bit of a retreat from the risk-on sentiment seen during the pandemic with investors more inclined to make good asset allocation decisions to reduce risk and seek better diversification.”
Cooke observes that ETFs are displacing flows from other investment vehicles such as individual equities and bonds as well as derivatives such as futures..
The Canadian mutual fund industry reported net redemptions of CAD44.1 billion in 2022 while ETFs garnered CAD35.5 billion in net inflows including CAD7.5 billion in December.
Institutions are looking increasingly at the benefit of ETFs in lieu of other types of investment products, Cooke says. “Futures, options or individual stocks or bonds are being displaced in part because of the flexibility, tradability, embedded leverage and other factors within ETFs.
“Globally, as the market begins to mature and there are more product choices, more ETFs at scale, improving liquidity, it becomes a positive feedback loop,” he says. “Investors say: ‘I won’t swamp that ETF – I can trade with minimal market impact’ and that is garnering more institutional flow.”
While ETF assets in Canada were modestly down in 2022, largely reflecting market movements, Cooke says, the ETF ecosystem continued to grow meaning a larger number of market participants and more investors making larger allocations.
“One of the inherent and overlooked benefits of ETFs is the network effect – the more users you have, the more utility it confers to investors in terms of liquidity and total cost of ownership” Cooke says.
He notes that there are always new investment themes emerging but 2022 was a bit more of a risk-off market. “As the markets stabilise people will look at thematic or different market sectors but there will be a continuing allocation to core equity and fixed income as they are the building blocks.”
Cooke has observed that despite the downturn in cryptocurrency prices and impact on cryptocurrency values, lots of investors remain undeterred and loyal to the ‘cause’ with muted outflows from crypto-asset ETFs in 2022.
“There are going to be all sorts of investment opportunities in digital infrastructure such as cloud computing and blockchain,” he says. “The applications are vast – well beyond what we have seen, and it is an exciting space.”