Canada’s ETF industry can claim another “first” in what is now a long line of them, after attracting more than $3 billion* in new money for the second straight month in June, according to BlackRock’s Follow the Flow data for the industry.
Following on the heels of May’s record-equaling flow count of $3.8 billion, inflows reached $3.1 billion last month, bringing the total of net new business (NNB) to $15.3 billion so far this year. At this rate, ETF flows could potentially surpass last year’s total NNB figure of $16.6 billion and end the year somewhere close to $30 billion – a figure that, if reached, could signal a new phase for the industry whereby broader adoption of ETFs is leading to an even more accelerated pace of growth.
Whether this becomes true or not, only time will tell, but it does seem clear that certain trends are having a big impact on the development of the industry as it continues to mature. Here are five such trends that we believe have kept ETF growth in Canada on record pace.
1. Core exposures
Core ETFs have long been a major component of the ETF growth story, but recent flows suggest the popularity of these generally low cost funds offering broad-based exposure to specific markets and sectors may be stronger than ever with investors, including institutions who may increasingly be using them as an alternative to more expensive futures contracts. As Warren Collier, head of iShares Canada, noted in a recent blog, 48% of total Canadian ETF flows has gone into core funds since the iShares Core series of ETFs were introduced to Canada in March 2014, even though 90% of new funds launched in that same time frame have been ETFs with non-core exposures.
2. International diversification
Canada’s stock market has underperformed many of its developed and emerging market counterparts this year after doing just the opposite in 2016. Not surprisingly, international equity has been one of the more popular ETF categories over the first six months as some investors sought potential opportunities in funds like iShares Core MSCI EAFE IMI Index ETF (XEF), which attracted inflows of $72.9 million this year through June, according to BlackRock’s Follow the Flow data. While Canadian stocks could potentially rebound in the second half, BlackRock Investment Institute currently favours Eurozone, Japanese and emerging market equities given still strong economic data, relatively more accommodative monetary policy and cheaper valuations.
3. Fixed income
Bond ETFs attracted more new money than any other asset class or category of exchange traded fund in Canada during the first half of the year. This may be a sign that fixed income investors have grown more comfortable using ETFs to execute their investment views because of the potential benefits they offer, including low cost, more immediate market exposure, greater access to niche markets and potentially enhanced liquidity compared to individual bonds. To this end, iShares Canada has seen the dollar amount of custom creations – a process by which institutional investors convert their individual bond holdings into units of ETFs – double in the past year to over $1 billion through June, according to BlackRock data.
4. ETF options
The trading of ETF options has more than doubled since 2014 based on a daily average volume of better than 45,000 contracts so far this year and last. The tremendous growth is being fuelled by increased liquidity across the ETF universe that, in turn, has made ETF options a more viable strategy for both institutional and retail advisors who want exposure to a particular market or sector without owning it directly.
5. “Active” providers
This year has been another busy one for new entrants to Canada’s ETF market. There are now 23 providers in the country, up from 18 at the end of 2016 and 12 at the end of 2015. What’s perhaps most notable about this steady increase is the number of active managers entering the fray with an ETF strategy alongside their existing mutual fund businesses. For example, Dynamic Funds and BlackRock Asset Management Canada Limited have joined forces to bring together the strength of both firms’ capabilities and deliver five new active ETFs earlier this year, including the Dynamic iShares Active Preferred Shares ETF (DXP), which has attracted over $150 million in assets under management through June of this year, according to BlackRock’s Follow the Flow data.
*All amounts referenced throughout this article are in Canadian dollars unless otherwise noted.