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This article appears in the 2023 ETF Guide issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Despite all the sophistication of the Canadian ETF market, lately the modest savings account is what investors want most of all.

High-interest savings account (HISA) ETFs, which hold high-interest deposits offered by financial institutions, brought in $8.8 billion last year, more than doubling the category’s assets under management (AUM), according to National Bank Financial Inc. (NBF). The momentum has persisted: the funds have gathered another $4 billion in AUM in the first half of 2023, according to TD Securities Inc.

As with previous ETF trends, the success of cash products has been influenced by the market and the regulatory environment. These ETFs reported steady inflows beginning with the category’s introduction in 2013 until the first half of 2021, NBF reported that year. Then, with interest rates near zero and equities soaring, investors pulled almost $800 million from the cash products by the end of 2021.

But the story changed when markets tanked and central banks tightened aggressively in 2022. Investors returned to cash products in 2022 and this year, with the HISA ETFs yielding more than 5%.

How will regulatory uncertainty affect these funds? The Office of the Superintendent of Financial Institutions is reviewing banks’ liquidity adequacy requirements, with new rules expected by January 2024. Some asset managers have already pivoted in anticipation of the regulatory changes, launching money market and T-bill funds in order to capitalize on the “cash-like” craze.

Are HISA ETFs an enduring part of the product landscape or a momentary phenomenon tied to unique market conditions? A look at previous ETF trends may provide clues.

2011-2022: Smoother ride?

After two years of rebounding from the global financial crisis of 2007-08, markets paused in 2011: in the U.S., the S&P 500 was flat, while the S&P/TSX composite index saw a double-digit drop. The first covered-call ETFs in Canada, launched a year earlier, became “all the rage,” according to NBF’s 2011 year-end report, with two products amassing almost $1 billion between them.

While covered-call ETFs have seen positive flows every year since then, according to NBF, the pace has picked up during volatile markets. Options-based ETFs (of which covered calls make up about 90% of market share) had their best-ever year in 2022, bringing in $4.4 billion. (See “At the half: Breaking down 2023’s top ETF themes”.)

Low-volatility ETFs also reported inflows during previous down markets. NBF’s report noted the category did well after the 2015 oil crisis and attracted $2.5 billion after a sell-off in late 2018. However, following nine years of positive inflows since the first of these funds appeared, the shine came off during the brief Covid-induced bear market of 2020. Low-vol ETFs reported significant redemptions after many funds didn’t perform as expected during the market stress, NBF stated. Outflows have continued since, even though low-vol ETFs outperformed the broad market in 2022.

2017-2018: Buzz kill

The only people more eager for legal cannabis than Marc Emery and Snoop Dogg were ETF investors. The Horizons Marijuana Life Sciences ETF (TSX: HMMJ) launched in April 2017 and was an instant hit. As investors anticipated the legalization of recreational pot in Canada, HMMJ ended 2018 with almost $1 billion in AUM. The buzz soon wore off, though. While still the largest marijuana ETF in Canada, HMMJ’s net assets were around $82 million at the end of July, with a –18% return since inception.

2021: Crypto craze

As risky assets of all kinds soared in 2021, Canada became the first country with physical cryptocurrency ETFs. The Purpose Bitcoin ETF boasted $1 billion in AUM within a month of its February launch. By the end of the year, eight issuers had released 34 cryptoasset ETFs, which held a total of $5.9 billion, according to NBF. But crypto peaked in November 2021. After the dominoes known as Celsius Network LLC, LUNA/Terra and FTX Trading Ltd. tumbled one after another in 2022, cryptoasset ETFs finished the year with $1.7 billion in AUM. Remarkably, only $118 million of that decline was from outflows. As crypto prices rebounded in 2023, crypto ETF assets recovered to $2.7 billion by mid-year, according to NBF. But inflows over that period were tepid, totalling $35 million.

2018-2022: Sustainable inflows?

ESG ETFs aren’t new. But, as a 2019 NBF report stated, those products had been “languishing with near-zero inflows” until 2017, and began to take off only the following year. Since then, the number of ESG ETFs has exploded from a handful to more than 140 at the end of 2022, and annual inflows jumped to more than $3 billion in 2021 from around $200 million in 2019. However, the NBF report noted, institutions have been the funds’ primary buyers (see “At the half: Breaking down 2023’s top ETF themes”), raising questions about whether they’ll catch on with retail advisors and clients.

Where are the AI funds?

This year’s biggest trend — in investing and in the broader world — has been artificial intelligence (AI). There is both excitement and unease about how the technology will reshape our lives. The Nasdaq posted its best first half in 40 years on the backs of chipmaker Nvidia Corp., Microsoft Corp. and other AI leaders.

But while ETF manufacturers were quick to offer products based on bitcoin, the metaverse and other technology in recent years, the only pure-play product in Canada (as of press time) focused on AI is an Emerge Canada Inc. ETF that’s inaccessible due to a cease-trade order. There are, however, several AI-themed ETFs in the U.S. What gives?

Raj Lala, president and CEO of Evolve Funds Group Inc. in Toronto, said there aren’t a lot of publicly traded pure-play AI companies to make up a fund.

“Having an AI fund would basically just be duplicative of what you already own, because you probably already have Nvidia or Microsoft or Meta [Platforms Inc.],” he said.

When more privately owned AI leaders do go public, Lala said, the eligible investment universe could become big enough for a dedicated fund.

In the meantime, many big tech or innovation-themed products in Canada offer AI exposure, even if they aren’t labelled as such. Andres Rincon, director and head of ETF sales and strategy with TD Securities Inc., suggested providers might undertake some rebranding to play up the popular theme.