Canada is riding a surging international wave of investor appetite for ETFs more than three decades after the products debuted on the Toronto Stock Exchange.
The Canadian Exchange Traded Funds Association (CETFA) recently spoke with Deborah Fuhr, the founder, owner and managing partner of ETFGI, an independent London-based firm that analyzes ETF and exchange traded product (ETP) trends.
We asked Fuhr about international ETF developments and how Canada compares to other markets. What follows are some of the key insights she shared with additional observations and data contributed by CETFA.
Proven stability in the midst of uncertainty
Regulators around the world closely monitored ETFs during the early days of Covid-19, anxious about how they would affect capital markets.
However, ETFs — in defiance of stale myths — emerged from the financial uncertainties created by the pandemic with strong performance, demonstrating their resilience and potential for growth. The struggle for advisors to provide alpha and the ability of ETFs to deliver liquidity and respond nimbly to redemption requests during the start of Covid-19 also reinforced confidence in ETFs.
The pandemic was therefore an important “moment” of validation, but it was hardly a unique situation from the perspective of CETFA. ETFs also proved themselves in the wake of the great financial crisis of 2008-09, the dot-com bubble and other economic upheavals.
The durability of bond ETFs was evident in how they performed in March 2020 when a “no-bid” bond market prevailed. Despite extraordinarily challenging market conditions, bond ETFs continued to trade (albeit at a discount to NAV), providing investors with welcomed liquidity.
While certain extreme niche ETFs are prone to illiquidity based on the behaviour of their underlying assets, ETF liquidity in general has held up consistently even when markets have gone haywire.
Canadian ETF industry continues to innovate
After inventing ETFs as a unique category of investment products, Canada continues to lead the world in developing and introducing innovative, thematic niche offerings.
These include the first cryptocurrency, cannabis and psychedelic ETFs, as well as preferred share ETFs and robo-solutions that rely on ETFs. However, the categories that dominate internationally also prevail domestically — i.e., equities, fixed-income and commodities funds.
On the world stage, the Canadian ETF industry benefits from being comparatively small but nimble. The Canadian marketplace is more like Australia’s than any other, given the dominance of our five big banks, which influence the products that come to market and are ultimately successful. In other jurisdictions, the banks are not as involved in ETFs.
The Canadian ETF market is aided by a sound regulatory structure, low fees and marketplace participant co-operation within a cohesive, mutually supportive industry, Fuhr observed. By comparison, the European ETF market is highly fragmented by language and jurisdiction. In Asia, the industry is more siloed, and in the U.S., it’s more intensely competitive.
Other innate factors that are global drivers of ETF sales — that ETFs are simple, transparent, tax efficient, liquid and innovative, etc. — also bode well for the future growth potential of Canadian ETFs.
CETFA data for June 30 confirms the current healthy state of the industry: $307.8 billion in AUM (up by 41.3% over June 2020) and 901 funds (up by 93 since June 2020).
These increases are consistent with the global picture. As of April 30, ETFGI reported that there were 8,937 ETFs/ETPs worldwide from 545 providers listed on 77 exchanges in 62 countries, with 17,894 listings in total and assets of US$ 8.96 trillion. April 2021 was the 23rd month of positive inflows around the world. The growth in AUM year over year was 53.25% and the 10-year compound asset growth rate to April 2021 was 18.4%.
Also noteworthy in the most recent ETFGI data, the worldwide AUM of ETFs/ETPs has consistently surpassed that of hedge funds since 2013. The number of hedge funds (9,137) only exceeds the number of ETFs/ETPs by 260 and is levelling off, while the number of ETFs/ETPs is poised to continue to grow. (Canadian data is unavailable but is believed to be consistent with worldwide trends.)
Robo-advisors reduce barriers
Throughout the world, robo-advisors are helping investors better understand their finances by overcoming the “taboo” subject of money, Fuhr remarked. They provide an impartial means of showing the implications of different investing scenarios and the benefits of ETF investing specifically.
Young investors — in Canada and elsewhere — who are technologically savvy have been introducing their parents to the platforms and this knowledge transfer is increasing the uptake of ETFs. The adoption process was also advanced by the pandemic, which made in-person advisor meetings impossible or unappealing. A work-from-home scenario for many people in many countries and the active promotion of robo-advisors and ETFs through social media channels have also stimulated interest.
Europe remains the global ESG leader
Although the European market represents only 16% of overall ETF AUM worldwide, it is the global hotspot for ESG ETFs, with 290 products and $US154 billion in AUM.
This product leadership has been driven by the European Union’s Sustainable Finance Taxonomy (an initiative of the UN Principles for Responsible Investment), which came into force in July 2020, and the EU’s Sustainable Finance Disclosure Regulation, which took effect on March 10 for all EU financial market participants.
The ESG theme — like robo-advisors — resonates most among younger investors and women, regardless of geography. The intergenerational transfer of wealth should benefit this category generally, but more specifically, will provide a lift for ESG ETFs with focused, thematic exposure (e.g., solar energy-focused ETFs), Fuhr said. She noted that the U.K. CFA Society is now offering ESG investing certification to sustain and build momentum in the space.
In Canada, ESG funds are still a relatively small portion of the overall ETF marketplace, but ETFGI reported that there were 58 products with $US2.5 billion in AUM as of April 30 (the U.S. had 143 products and $US93 billion in AUM).
The future of Canadian ETFs
From an international perspective, the Canadian ETF marketplace is still at an early stage, Fuhr said. But, choosing a good Canadian metaphor, she added that the Canadian market has the potential to grow significantly, with an upward arc resembling a hockey stick.