Photo of bear and bitcoin coin and red graph presenting sell signal on market

In a year characterized by inflation, rising interest rates and significant investment losses across assets, ETFs stayed on the winning side of fund flows, while mutual fund flows succumbed to defeat.

As of the end of November, Canadian mutual funds had outflows of $35.6 billion in 2022, or 2% of 2021 year-end assets, National Bank Financial (NBF) said in a report on Thursday. (Full-year mutual fund data is yet to come.)

“Only money market mutual funds recorded inflows, an indication of the capital-preservation mode that informed many investor decisions this year,” it said.

During 2021’s rising markets, mutual fund sales soared to a dramatic record-breaking $112 billion, outselling ETFs for the first time since 2018.

Canadian ETF inflows in 2022 landed back on top, with a “whopping” $35.5 billion in net flows in 2022, or 10% or of 2021 year-end assets, the report said.

In total, 152 ETFs were launched in Canada last year, and 33 were de-listed. As a result, 1,299 ETFs are available from 42 providers.

ETFs ended 2022 with $314 billion in assets under management, compared to $1.87 trillion for mutual funds (the latter figure from the Investment Funds Institute of Canada).

NBF’s analysis of ETF assets and flow distribution by cost (i.e., management expense ratio) revealed the overall investing approach in 2022: “Investors are adopting a ‘barbell approach’ to investing whereby they dedicate a large segment of their portfolios to low-cost passive products, with the balance allocated to higher risk and higher cost ETFs,” such as covered-call, dividend and ESG funds.

ETF trends

Amid 2022’s market turbulence, 54% ($19 billion) of ETF net flows went to fixed-income funds. It was the category’s best year of inflows, despite global bond indexes recording their worst year of performance, the report said.

NBF suggested that fixed-income demand was likely attributable to tax-loss selling and rising yields, which offered a more attractive entry point into aggregate bond index ETFs. Tactical shifts reflecting different durations and regions were also observed.

As part of tactical positioning, cash-alternative ETFs were a “major story” of 2022, the report said, describing them as “an inflow darling” since the first such fund was launched in 2013. In 2022, the funds more than doubled in assets to $15 billion amid the year’s bond selloff. CI High Interest Savings ETF was the fund with the most inflow ($3.2 billion) for the year.

Equity ETFs scored $13 billion in 2022, or about 37% of ETF net flows. Passive ETFs accounted for 50% of the equity flows, but NBF said their share had declined slightly over the past couple years, providing evidence of the barbell approach.

ESG funds were a strong presence among thematics, accounting for $8 billion of the roughly $12 billion of thematic ETF assets.

Multi-asset ETF inflows were $1.9 billion and reflected demand for alternatives and their uncorrelated mandates.

“In a year when both stocks and bonds suffered their worst combined year ever, hedge fund–like strategies that offered a semblance of protection had a chance to shine,” the report said.

Option-based ETFs, most of which use a covered-call strategy, had inflows of $4.4 billion, their highest since first launching in 2010.

“Investors who seek income, safety and more precision in outcome may find option-based ETFs appealing,” the report said. “Nonetheless, we emphasize that investors exploring this category should learn about the possibility of reduced upside participation, higher costs and the complexity that comes from active option management.”

Commodity ETFs had outflows of $279 million, despite their status as an inflation hedge; gold bullion ETFs led the exodus with their flat returns. Commodity ETFs had total assets of $1.6 billion.

Cryptoasset ETFs ended 2022 with assets of $1.7 billion, from a peak of $7.5 billion in November 2021 (the funds’ inaugural year). Redemptions weren’t the cause of much of that bleeding.

“Only $118 million flowed out from crypto-asset ETFs in 2022, and the rest of the asset declines came from the re-emergence of a new ‘crypto winter’ after the fall of FTX and other crypto-businesses like Celsius, Luna/Terra and Three Arrows Capital,” the NBF report said.

Three crypto-asset ETFs were launched in 2022, compared to 34 in 2021.