What does the future hold for Canada’s ETF market?

For Canada’s ETF market, 2018 was a momentous year as ETFs outsold mutual funds for the first time since 2009. ETF sales grew to about $20 billion while mutual fund sales shrank to around $8 billion.

Daniel Straus, Vice President, ETFs & Financial Products Research, National Bank of Canada Financial Markets, thinks that ETFs will continue to outsell mutual funds for quite some time. Underpinning that belief is the fact that ETFs still have a relatively low market share ($160 billion to $170 billion) compared to mutual funds ($1.6 trillion), hovering around 10%. The other reason is that ETFs are naturally better suited to the new world of cost-conscious investing.

“There may be a lot of assets that are trapped in mutual funds that are just waiting for market sell-offs in the future for people to take stock of their portfolios, their positions, their asset allocations, and then redeploy when they’re feeling less fearful,” Straus predicts.

In the long term, Straus does believe that there will be a saturation point and that mutual funds and ETFs will reach parity.

“Where that equilibrium point exactly is, I’m not exactly sure – it would make sense if it would be 50-50 or something like that,” he explains.

Although ETFs have gained traction among institutional clients, the reality is that ETF investing in Canada is still retail-dominated. According to data from Strategic Insight, 60% of ETF assets in the country are held by retail investors (either full-service brokers or self-directed investors) while only 40% are held by institutions. However, Straus does expect to see a greater proportion of institutional participation within the fixed-income space.

“Between institutional and retail investors alike, the natural advantage posed by fixed-income ETFs relative to directly investing in the cash bond market [is] the fact that you get very transparent posting, instantaneous liquidity and even diversification – those elements, I believe, will still make fixed income a very popular asset class in both bull and bear markets going forward,” he said.

 “Actively managed fixed-income ETFs can make sense as a component of a portfolio because they’ll be managed by experienced bond traders and managers who are making it their job to analyze the bond market on a daily basis, analyze the path of rates, the yield curve, comments from central bankers, in addition to trading on inventory and using all the means of sophisticated bond tests to execute on behalf of clients very effectively, whereas doing these as a do-it-yourself investor can be quite challenging.”