Rotation of annual flows into fixed income ETfs comes as industry shows signs of consolidation
The Canadian ETF space grew by 11% to end 2023 with $38.4 billion in assets, but that headline figure obscures record consolidation in the sector, according to a new report from National Bank.
According to the report, the Canadian ETF space saw a record number of 122 ETFs delisted in 2023. That came as some providers decided to prune their shelves, including a systematic review by CI and Invesco’s move to cull almost a third of their ETFs early in the year.
Several small ETF issuers also exited the space, including NCM, SmartBe, Evermore, and Emerge. With the entry of two new issuers including Forstrong Global Asset Management, that brought the number of Canadian ETF providers down to 40 from 42 at the start of the year.
Read more: Emerge Canada urges investors to speak with FAs amid ETF terminations
ETFs also outsold mutual funds for the second year in a row. While mutual funds shed $52 billion for the year until November, with redemptions concentrated in equity and balanced funds, ETFs took in $34 billion over the same period.
Equity ETFs absorbed $13 billion last year, slightly less than in 2022. US equity ETF flows were notably muted last year, the report said, pulling in $641 million – the smallest annual figure in 10 years.
Meanwhile, 2023 was a record year for fixed income ETFs: the category took in $21.4 billion, making it the best year of inflows in history. National Bank noted a distinct “barbell-shaped” pattern in flows, with 44% going to money-market ETFs and 40% to broad-based bond ETFs. Long-term ETFs, which suffered the most from 2022’s bond drawdowns, took in the largest portion of the rest of fixed-income flows (17%).
Target maturity bond ETFs emerged as rising stars, National Bank said, as advisors showed an increasing preference for the category, particularly those maturing within three years. Canada’s fixed-income ETF space also became a touch more vibrant with the introduction of fixed income covered call ETFs for the first time: the category, which includes six ETFs so far, ended the year with $320 million.
More broadly, Canada-listed option-based ETFs have grown to $19.8 billion in AUM across 166 products, with $4 billion in new creations in 2023 – the highest-ever inflows in a single calendar year. Close to 80% the market is held in covered-call ETFs, easily making that the dominant mandate.
Read more: PM predicts disappointment from covered call bond ETFs
Asset-allocation ETFs have seen inflows year after year since Vanguard entered the Canadian space in 2017; 2023 was no exception as the group saw another $3 billion flow in.
“Canadian ESG ETF inflow held steady with $4.6 billion created in 2023,” National Bank said. “Product launches in the ESG space slowed down dramatically, as both providers and investors took a pause to digest the proliferation of products that quickly entered the scene over the past three years.”
