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ETF flows and launches have reflected numerous trends in 2021, from a fascination with cryptocurrencies and demand for environmental, social and governance (ESG) considerations to the meme stock craze and disruptive innovation. The action helped add to another ongoing trend: continued record growth in the ETF space.

Canadian ETF assets under management (AUM) crossed the $300-billion mark as of July 31, 2021 to hit $314.3 billion, a one-year increase of 36.3%, according to data compiled by the Canadian ETF Association.

“Many trends are dovetailing” in support of ETF growth, observed Daniel Straus, director of ETF research and strategy with National Bank Financial Inc. One trend is the focus on cost. Inexpensive passive ETFs “continue to hoover up assets,” he said, as “more and more investors use them as the bedrock of their portfolios.” Market cap-weighted ETFs occupied slightly less than half of total equity ETF inflows for the year to August 2021. And “cheap” ETFs are a natural fit with the increasingly popular fee-based advisory model, Straus added. (Read this story.)

Investor concerns related to macroeconomic risks — inflation, climate change, volatility — also help to drive ETF AUM growth. “These are the conversation [topics] that come from the headlines and are dominating a lot of client-advisor relationships,” Straus said. “There are ETFs out there — a huge variety of them — that address all of those issues.” These headlines are incorporated into the top ETF trends Straus anticipates will continue:

1. Active management

While providers launched several multi-factor ETFs in recent years, investors have begun moving toward single-factor ETFs. Specifically, billions flowed into value ETFs beginning in the fall of 2020.

“Market moves have been so extreme [during the pandemic] that it seems almost easy to follow the narrative that if there’s a giant bubble in the market and all these valuations have been propped up by central-bank actions, then what we wanted is value,” Straus said.

Another factor — low volatility — has been perennially popular since 2010. After the global financial crisis of 2008-09, scarred investors wanted protection from “stomach-churning” drawdowns, Straus said.

But popularity sometimes needs to be tempered. For example, clients should understand that low-vol ETFs aren’t always outperformers like they have been in recent years.

During the spring of 2020, low-vol ETFs didn’t protect investors from the market drawdown, Straus said. And because the market recovery was largely concentrated in the technology sector, low-vol ETFs subsequently saw a 14-month outflow streak.

As rates remain ultra-low and the pace of inflation uncertain, active portfolio management also will remain popular. In the past few months, Straus said, “We saw huge success [for] certain active managers who launched [fixed income] products and promised a form of unconstrained management — go[ing] around the world for the best opportunities no matter what they are.” That style of portfolio management probably will continue to resonate, he said.

2. ESG

Of 22 ETFs launched in July 2021, 10 were ESG funds. A few more ESG ETFs launched the following month. Clients may be particularly interested in these ETFs as a way to align their values and investments. (Read this story and this story.) “The advisor can help the client find the perfect ETF to do that,” Straus said. “And that’s not trivial.”

That’s because, between Canada and the U.S., ESG ETFs can be counted by the dozens, and they can differ significantly in their portfolio construction. For example, some have large positions in oil companies while others screen them out entirely, Straus noted. The CFA Institute will release global ESG standards in November that focus on voluntary disclosures from fund companies. He speculated that because of investor pressure, ESG considerations could evolve in the long term to underlie decisions about which companies get included in traditional indexes.

3. Themes

Cybersecurity and, in Canada, marijuana ETFs kicked off the thematic trend several years ago, Straus said. Thematic investing has become a major area of growth, allowing investors to express their market views.

During the pandemic, those views included topics related to virology, pharmacology and working from home. The themes that will resonate post-pandemic are those that existed pre-pandemic and were accelerated, Straus said, including cybersecurity and cloud computing.

4. Cryptoassets

Straus stressed that cryptocurrencies are “extremely” speculative. This emerging asset class is “so nascent and so new that the range of outcomes is enormous,” thus defying conventional risk models.

Enter cryptocurrency ETFs. Purpose Investments Inc. issued the world’s first direct custody Bitcoin ETF in 2021, and cryptoasset ETFs are one of the fastest-growing ETF categories in Canada, Straus said. Net flows to August 2021 reached $4.6 billion — more than multi-asset ETFs’ — amid providers offering attractive fees to gain market share.

Some of that popularity probably also was a result of investors switching from closed-end cryptoasset funds — which can be volatile and illiquid — to ETFs, Straus said. Also, “much of the investment community is taking an ETF approach” for greater investor protection, he said, as regulators grapple with this new asset class.