Daniel Straus, managing director, ETF research and strategy with National Bank Capital Markets (NBCN), has been studying the ETF market for roughly 15 years. Over that period, he’s witnessed explosive growth in the industry.
“When I joined the Canadian ETF industry, it was $40 billion in AUM, and I thought that was plenty big at the time,” said Straus, who’s based in Toronto. “And it’s been an enormous growth rate [since].”
Canada’s pioneering ETF industry, which is credited with introducing the popular investment vehicle to the world in 1990, hit $1 trillion in gross assets under management (AUM) on June 18, TD Securities Inc. reported.
And with its current rate of growth, industry experts say it won’t be long before it achieves another major milestone: $1 trillion in net AUM. The industry surpassed $880 billion in net assets by the end of June, according to recent reports from the Securities and Investment Management Association and NBCM.
“It’s a very exciting milestone for the industry at large,” said Valerie Grimba, director, global ETF sales and strategy with RBC Capital Markets in Toronto.
“And I think it’s kudos to a lot of players in the Canadian industry that have been driving forward innovation and really bringing unique investment strategies to the masses.”
What’s driving the growth?
There are several major trends “all dovetailing to put wind in the sails of this adoption,” Straus said.
He noted that two of those trends have converged, especially recently: asset management companies have been keen to launch ETFs because they have “relatively low fixed costs to launch and can kind of scale infinitely,” while investors have greater awareness of how ETFs work and are demanding them for their ease of access, intraday liquidity and low fees, among other factors. In other words, there’s been both “top down and bottom up” interest in ETFs.
The Covid-19 pandemic accelerated the industry’s growth.
With Canadians largely stuck at home during the pandemic and incurring fewer expenses as a result, there was an uptick in self-directed investing through DIY investment platforms, “and ETFs [were] very central to that” due to their diversified portfolios and ease of trading, Straus said.
Casey Yang, director, ETF sales and strategy with TD Securities in Toronto, also cited the pandemic as a key moment for ETF adoption, as people realized they could invest in the vehicles on their own, without having to meet with a financial advisor. “And that growth has only been more and more significant since then,” she said.
That said, Yang said advisors have also increased their adoption of ETFs, as have institutional investors, driving up the ETF AUM in Canada.
A major recent catalyst for the “mind-blowing growth” has been the ongoing trade war, which caused “a huge amount of volatility” last spring and led people to “try to position for this very unpredictable market,” Straus said.
“And it’s much easier … to do that with ETFs than with individual companies,” he added.
There’s also been a “strong bull market, so that gets people interested in investing and putting more capital to work,” Grimba said.
Product optionality is another growth factor. The industry currently offers some 2,000 ETFs and counting.
“With interest in ETFs growing, managers are responding by coming to market with new, innovative ideas more quickly than they have in the past,” such as with newly launched ETFs that provide exposure to SpaceX’s nascent IPO, said Eli Yufest, executive director of the Canadian ETF Association (CETFA) in Toronto. “There’s really no shortage of asset classes or types of ETFs investors can invest in.”
Grimba similarly highlighted the vast range of products available today, which span passive, active, asset-allocation, covered-call, crypto-asset and thematic strategies.
While the first iteration of the ETF was based around passive investing, active strategies are growing in popularity. According to recent Morningstar research, active ETFs have grown to account for 35.7% of total Canadian ETF assets, compared with 2.9% in 2010.
“No longer are ETFs just a passive vehicle or index exposure,” Grimba said. The growing optionality is “really allowing investors to get quite targeted exposures with an ETF, where previously they might have had to just buy the underlying stock itself.”
Further, Yufest pointed out that young investors are leading the adoption of ETFs. And with the intergenerational wealth transfer underway, he expects to see more dollars shift from mutual funds, which tend to be preferred by older generations of investors, to ETFs.
“As younger Canadians continue in their investing journey, there’s no reason to believe that they’re not going to stick with ETFs as they continue to get older,” he said.
More runway ahead
Industry experts say there’s more room for growth.
“This is the early innings, and there’s still a lot of runway ahead,” Grimba said. “We’re seeing ETF issuers and asset managers continue to push boundaries in what they’re able to deliver to the end investor within an ETF. … And that means more choices, and more choices are better for the end investor.”
In fact, Canada’s ETF industry not only introduced the first ETF in the world, but also the world’s first fixed-income and spot bitcoin ETFs.
Grimba added that she expects to see product launches and trading volumes continue to increase.
Yang also sees Canada’s ETF industry expanding due to the abundance of innovation and growth drivers in the space.
Asked whether ETFs will surpass mutual funds in net assets, Yang said it’s possible. She noted that since 2016, Canadian ETF net assets have grown by roughly 24% per year, while mutual fund net assets, which are currently sitting at $2.7 trillion, have grown at a rate of 8% per year.
If these growth rates continue, she projected that ETFs could surpass mutual funds in net assets around 2035. But Yang said the exact timing will be dependent on market performance, investor preference and regulator developments.
Straus, meanwhile, said it’s hard to say when this crossover may happen because “the lines between ETFs and mutual funds are blurry” as more actively managed ETFs launch, bringing them in line with mutual funds with similar strategies, and more ETF series of mutual funds hit the market.
He said he expects there to be some kind of equilibrium point between ETFs, mutual funds and other investment vehicles in the future.
“Once [ETFs] get big enough, there’ll be like a two-way flow that matches people coming in and out of other vehicles, and it’ll equilibrate,” Straus said.
Yufest, of CETFA, said “there’s a lot of things that we need to fix structurally” from both a tax and regulatory perspective, to ensure that Canada’s ETF industry continues its momentum, especially since an influx of U.S.-listed ETFs is expected now that Vanguard’s long-held patent on the ETF share class structure in the U.S. has expired. To level the playing field between Canadian and U.S. ETF providers, his association is calling for the removal of sales tax on ETF management fees and for the allocation-to-redeemers tax framework introduced in the 2019 budget to be revised, among other reforms.
“Those could be the headwinds that could derail a lot of the momentum that we have here in the marketplace,” he said.
For now, Yufest said it’s “just a matter of time” until the booming domestic industry hits the $1-trillion net asset milestone.
“The ETF industry has everything going for it right now.”