Heightened competition, demand for low-cost alpha, and changing market conditions are forecast to play a role
Despite some volatility in the markets, Canada’s ETF industry has reached a fresh peak of $162 billion in assets under management this year as investors poured more than $15.9 billion into the space. That has translated into a 10% year-on-year increase in AUM — less than the 30% seen from 2016 to 2017.
But according to WisdomTree’s latest 2019 ETF Industry and Market Outlook, Canada’s ETF growth story isn’t ending in 2018; it’s only changing. “The Canadian ETF industry continued to attract new entrants,” the firm said, noting the presence of 33 fund providers managing $157 billion as of October. At the end of last year, the industry had 27 firms with $147 billion in AUM.
The year has also seen an ongoing shift of assets from mutual funds to ETFs. The ETF industry stranglehold of the top three providers has also loosened; the next 10 firms have increased their market share to 20.1% of industry-wide AUM as of Q3 2018, a steady increase from 17.4% at the end of 2017 and 14.1% from the year before.
On the equity markets side, 2018 has been marred by severe volatility, resulting in a year-to-date loss of 3.7% through November for the S&P/TSX Composite Index. Stock-market losses have also been surprisingly drastic in the US, and WisdomTree noted that the recent turbulence could mark a change in leadership from growth to value stocks.
Fixed-income ETFs have also seen sizeable inflows through November, though they were on pace to come in below 2017 totals. The firm attributed that deceleration to consecutive rate increases from central banks; more broadly, yields on developed-market fixed-income securities have been on an ascending trajectory, including ones from Canada.
Looking forward to 2019, the firm predicted an accelerated shift from mutual funds to ETFs, with a potential bear market or correction serving as a catalyst for investors to move toward minimizing capital gains. Innovation is also likely to continue, driven by investor demand for low-cost alpha through various products such as thematic funds.
Expecting the Bank of Canada to continue along its rate-normalization path, WisdomTree forecast an increased role of “rising-rate” solutions, notable short-duration strategies, as investors position their portfolios more defensively. It also suggested the “barbell” approach, which combines short-duration instruments with longer-duration ones to balance investors’ rate-protection and income needs.
Other 2019 forecasts from the report were:
- Possible headwinds for Canadian banks, assuming BoC Governor Stephen Poloz goes into next year with a more aggressive tack;
- Modest strength of the Canadian dollar relative to the greenback, as well as potentially considerable appreciation relative to the euro; and
- The firm believes 2019 will be the time for emerging-market equities to shine relative to Canadian stocks, given EM valuation metrics that rival what was witnessed amid the fallout from the Lehman crisis.
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