Equity ETF inflows were most prominent for the month while fixed income saw rare outflow
March was an agonizing month for both equity and fixed-income markets. The effects of the COVID-19 pandemic on the economy brought about the fastest-ever plunge from bull to bear market in the history of the U.S. stock market. Investors were whiplashed amid volatility that rivaled what was seen on Black Monday in 1987, and the Great Depression in 1929. Credit spreads widened to an unprecedented degree, and an acute liquidity crunch developed across corporate, mortgage, and government bonds.
But amidst all that chaos, the Canadian ETF space has managed to retain at least some of its strength.
According to the latest report on Canadian ETF Flows from National Bank, Canadian ETFs managed to collect an aggregate $2.9 billion last month, with equity ETFs leading the advance.
“Equity ETFs in Canada saw inflows of $4 billion, spread across all regions, perhaps a sign of investors opting for rapid market exposure after liquidating single security positions,” the report said.
The report noted that equity inflows were led by market cap-weighted, thematic, and sector ETFs — specifically, financial and energy ETFs. Flows into those sector ETFs, it said, might have reflected an instance of contrarian ETF buying, as sizable creations in such products were observed just as the oil price crash hammered Canada’s financial and energy sectors.
“ESG thematic ETFs from Desjardins also saw significant creation activity,” National Bank said.
Currency-hedged products dominated inflows into U.S. equity strategies, particularly during the latter half of March as the U.S. dollar premium over the loonie reached new highs.
“Currency non-hedged U.S. Equity ETFs lost assets during that time, perhaps because investors were either profit-taking USD gains, or didn’t believe the greenback rally is sustainable,” the report said.
Meanwhile, fixed-income ETFs saw outflows of $1.3 billion across all categories, except for one institutional subscription in a new high-yield ETF launch. Several bond ETFs reflected apparent NAV discounts as the underlying bond markets went no bid and NAVs posted began to reflect stale or elevated levels.
“This is not the first time fixed income ETFs traded to discounts during crisis scenarios,” National Bank noted, announcing plans to publish a research report on the phenomenon in the near future as more data comes in.
While there have been massive price declines, the report urged investors to avoid panic-selling their fixed-income ETFs while the severe illiquidity in bond markets persists. It noted that building-block ETFs, such as those exposed to aggregate bonds or investment-grade corporate bond products, are best held long-term for their low-cost benefit to compound over time.
“If an investor ultimately decides to sell when underlying market liquidity dries up, ETFs at least provide an avenue to do so at discounted prices, whereas direct securities might not function at all,” National Bank said.
