What another year of growth means for ETF industry

Despite gloomy news and choppy markets, the Canadian ETF industry continued to grow in 2023. While year-end numbers haven’t been published, preliminary reporting by the Canadian ETF Association (CETFA) shows inflows that exceeded mutual funds for another year. Moreover, both hard numbers and anecdotal data point to more advisors and investors using ETFs. As the industry has cemented itself, it has also grown its reach.

Pat Dunwoody, executive director at CETFA, explains why she believes the industry has continued to grow in 2023 despite some of the more challenging trends that have faced the financial services industry overall. She explained what regulatory forces and changes have done to the ETF space and highlighted a few trends that she thinks will impact ETFs in 2024.

“With total cost reporting and CRM2 and all of the regulatory moves towards more transparency of fees, I think advisors are coming around to the impact of those fees in their decision making process,” Dunwoody says. “We don’t want it to be the only factor in the decision making process, but they can see the impact of compounding fees and are now seeking lower cost products, which ETFs fit in really well.”

Dunwoody noted, too, that as populations have aged they have shifted to demand a lower cost investment option. Retirees are facing longer lifespans and have struggled in recent years with poor performance in the bond market. In order to make their money last longer, the lower fee options presented by ETFs have become more attractive.

In terms of the strategies and styles of ETFs on offer, Dunwoody expects there to be some growth and greater popularity in risk mitigation oriented ETFs in the coming months. That reflects both an aging population that has become more risk averse and an increasing need for caution among investors of almost any age as the global economy slows.

Dunwoody admits she is positively surprised by the flows we’ve seen in ETFs so far this year. Given growth rates of over 20% year over year for the ETF industry, she sometimes worries that the other shoe will drop and mutual fund flows will exceed ETFs once again. The fact that didn’t happen in 2023, despite the various market headwinds, validates her thesis that the ETF industry is well established and deeply rooted in the Canadian landscape.

Dunwoody expects growth to continue in 2024, at the very least due to flows into ETFs. Market movements are far less predictable, though some gloomy forecasts for growth imply that we may not see a market-driven surge in ETF assets.

Fixed income may become a driver for asset growth once again. Dunwoody notes that many advisors who spent the past two or three years eschewing fixed income are looking more closely at the asset class again. That same theme of aging populations, combined with the declining yields we can expect from HISA ETFs following a recent regulatory change, may drive flows towards fixed income ETFs.

As the industry has become more established, and more products and strategies have been launched, Dunwoody says that fund manufacturers believe the product shelf may now be quite crowded. There may be greater consolidation of existing products and even trimming of underperforming ETFs in the next year as fund manufacturers look for the next growth opportunities.

Dunwoody believes that whatever the circumstances on the market or the fund manufacturing side may be, advisors need to be considering ETF assets for their clients for the simple fact of survival in a marketplace driven by affordability and consumer choice.

“The message that I continue to give is that if [advisors] haven’t already positioned some of their clients in fee-based accounts with ETFs, they may lose those clients because they are prime targets for other advisors,” Dunwoody says.