Exchange-traded funds (ETF) may currently command a small portion of the Canadian investment industry, but their impact may increase as financial advisors moving toward fee-based compensation models and a greater need for greater diversification in portfolios becomes apparent, according to a panel discussion panel at S&P Dow Jones Indices LLC’s ETF Masterclass event in Toronto on Thursday.

There are approximately $1.2 trillion in mutual fund assets under management (AUM) compared with only $100 billion in ETF AUM, said Pat Chiefalo, a panellist and managing director with Toronto-based BlackRock Canada Asset Management Ltd.

However, the buzz in the industry is that this may increase as more and more advisors turn to fee-based compensation models and consumers become more sensitive to investment costs and performance, according to Chiefalo. The industry is also anticipating the possible effects of the second phase of the client relationship model.

“This is why you’re seeing, this year, a huge explosion in terms of the number of ETF providers coming to the market,” he said. “I still think that because of those drivers that have recently kicked in — and will kick in over the coming years — there’s still a lot of room to grow.”

ETFs are well positioned to respond to these changing conditions in the industry as they are efficient solutions available in a myriad of exposures, said Chiefalo: “There’s not a lot that we can’t offer today in an ETF.”

It’s that vast selection of exposure that advisors should be taking advantage of as Canadians are “massively overweight” in domestic securities, which take up about 65% of the average Canadian portfolio, noted Adam Butler, another panellist and CEO of ReSolve Asset Management Inc. in Toronto.

Compare this with investment giants such as the Canada Pension Plan, whose portfolio includes 4% to 6% in Canadians securities, he said.

“If you’re at 65% and they’re at 5%, what do you know that they don’t? What edge do you have to be so confident in the prospects of the Canadian economy relative to the rest of the world?” he asked the audience of advisors.

Thus, advisors should be looking to ETFs for their clients to provide exposure to asset classes that were more difficult to access in the past, such as emerging market bonds, gold and real estate, Butler noted.

Investment strategies with a global focus are imperative in the current market, agreed Robyn Graham, also a panellist and managing director of wealth management with Toronto-based ETF Capital Management.

“We only run global strategies because, in today’s environment, if you’re going to help clients get to whatever their objective is … hen you’re going to have to avail yourself of every opportunity, every asset class available and actively exploit those opportunities,” she said.

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