Canada's ETF Industry Sees Record Growth

March 24, 2021

[This article appears in our April 2021 issue of ETF Report.]


Exchange-traded funds continue to gain ground in Canada, with a record number of ETFs launched, and flows into the vehicles at new highs even after one of the most volatile market years in history.

Canada ETFs had a record $257.3 billion (Canadian dollars) in net assets at the end of 2020, which was growth of 25.6% versus 2019, according to the Canadian ETF Association (CETFA).

Graham MacKenzie, head of exchange-traded products at the Toronto Stock Exchange, notes Canada’s markets also saw a sharp swoon in the first quarter because of the coronavirus’ impact, but then prices rebounded as investors returned to the market. TSX saw a record 126 new ETFs list on the exchange in 2020, and there was a 59% increase in ETF trading volumes on TSX.

CETFA noted that issuers launched a record 138 ETFs in all of last year. 2020 was the best-selling year for ETFs by any standard, CETFA explained in a fourth-quarter market roundup, noting that ETFs generated $42.2 billion in net creations, with the first quarter bringing the majority of those sales, at $15.8 billion.

Huge Growth & Resiliency
Prerna Chandak, vice president of ETFs at Mackenzie Investments, points out the strong flows in 2020 into ETFs showed that investors feel comfortable using these vehicles in all market conditions: “ETFs, once again, proved their resiliency in market volatility as price discovery vehicles.”

She says that 2020’s growth came across all investing channels: institutional, advisor and direct investors. Investor demand was across products: mutual funds, ETFs, and core and satellite holdings. “We’ve never seen anything like it,” she said.

Chandak points out that the market volatility likely brought new investors to ETFs, moving away from single-stock holdings, as they “likely realized too much stock concentration is what hurt them, and that diversification has a place in a portfolio.”

Ahmed Farooq, vice president of ETF business development at Franklin Templeton Canada, notes the concerns about fixed income ETFs not being able to handle volatility were also unfounded during the first quarter market rout. Market post-mortems showed fixed income ETFs provided market participants with liquidity.

“Yes, the spreads widened out, but it gave investors the ability to chart their exit plans,” he said. “Volumes were so high. That showed you that people were trading and expressing their views either by buying or selling during that time.”

Most Canada ETFs Actively Managed
Chandak notes that 90% of Canada’s investment assets are actively managed, for both mutual funds and ETFs. Historically there weren’t a lot of indexed mutual fund options for investors, and the industry was dominated by Canada’s big banks. Investors who wanted indexed ETFs had to go to the U.S., and it’s only been in the past decade or so that indexing has been considered.

Farooq concurs, noting that with the traditional mutual fund providers entering the ETF market, they’re mostly launching active ETFs, rather than indexed ETFs.

Unlike in the U.S., where actively managed ETFs are more the exception rather than the rule, Canada’s regulatory frameworks govern mutual funds and ETFs similarly, Chandak notes.

“Our regulators have been quite comfortable with how much disclosure active managers need to provide to liquidity providers and market makers to ensure ETFs are priced appropriately and offered on screen,” she said.

Not having to disclose holdings daily has helped the active ETF market take off in a meaningful way, Chandak explains.



ETFs Pulling In More Assets
Actively traded mutual funds have long dominated Canada’s market, and total assets under management in these vehicles stand at $1.3 trillion-plus, she says, but ETFs now grab 40 to 50 cents of every dollar invested.

Farooq notes that active ETFs are cheaper than mutual funds, which has helped to encourage adoption. Active mutual fund fees are falling as a result.

There’s a question, though, if Canada’s investors are being served by active ETFs. Active management had a chance to shine in 2020 given the hefty volatility, but a research note from S&P Dow Jones Indices said 88% of Canada’s equity funds underperformed their benchmarks over the 12 months ended June 30, 2020, and 90% did so over the past decade. “On an asset-weighted basis, Canadian equity funds returned a dismal 7.9% below the S&P/TSX Composite over the past year,” the report stated.

CETFA says there are high barriers to entry in launching new index products in Canada because of product proliferation and low pricing, which explains why active ETF strategies are the most viable option for sponsors seeking to expand their ETF offerings. Of the 138 new ETF launches in 2020, 87 were active and 51 were passive, and new ETF firms all offered active ETFs.

As of 2020, there are now 1,010 ETFs listed in Canada, compared to just 110 products in 2009, Chandak says, a 20% compounded growth rate of the industry. Additionally, there were 39 ETF providers at the end of 2020, versus only four in 2009.

Farooq explains that equity strategies still remain the most popular, and as in the U.S., environmental, social and governance ETFs are seeing great demand, while thematics and factor investing are still strong. The question now, he says, is how investors work them into their portfolios.

Innovation Continues

Although Canada’s ETF market is much smaller compared to the U.S., it’s one of the most innovative industries globally. Aside from launching the first equity ETF and the first fixed income ETF, it also launched the first cannabis ETF in 2017, the Horizons Marijuana Life Sciences Index ETF (HMMJ).

Horizons also launched the first psychedelics ETF in January 2021, the Horizons Psychedelic Stock Index ETF (PSYK). Two Canada firms received approval for two separate bitcoin ETFs. Purpose Investments’ Purpose Bitcoin ETF (BTCC) and the Evolve Bitcoin ETF (EBIT) both started trading in February.

Greg Taylor, chief investment officer of Purpose Investments, suggests that Canada’s regulators traditionally are more open to bringing different strategies to retail investors.

“I think this is really the message for a lot of these products, trying to make it easier for investors to get access to the different solutions which were traditionally more focused for institutional investors,” he said.

Purpose Investments started in 2013, and has launched more than 50 different ETFs, almost all active. The firm originally filed to launch a bitcoin ETF in 2017, but regulators weren’t comfortable with it at the time.

Since then, trading in cryptocurrencies has grown, and investors were getting exposure to alternative currencies through closed-end funds, derivatives or other ways, so an ETF was the next evolution as a way to bring it to average investors, Taylor suggests.

“This also fits more into the regulators’ oversight, and an area that the average person can get in and out of in a much more efficient way,” he explained.

Chandak believes Canada’s regulators may be open to greater innovation to keep more Canadian investors interested in the country’s products, rather than going to the U.S. to invest. She points out that, historically, cross-border shopping for investment products was common by institutions and advisors who wanted exposure to bigger ETFs with more assets under management.

“I think that’s part of the narrative here, with a regulator that wants to encourage investors to look to the Canadian market for those solutions, and that it’s in our best interest to be collaborative and be part of that process to bring those solutions to markets,” Chandak said.

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