Why did Canadian investors switch from Canadian equity ETFs to ones that deal with US equities?
A BNN video feature has reported that in September, funds were seen leaving Canadian equity ETFs going into bond funds and US equity ETFs. Mark Noble, vice president and head of sales strategy at Horizons ETFs Management Canada, saw this as a simultaneously opportunistic and defensive play by Canadian ETF investors.
“I think what we’re seeing is a lot of profit-taking,” he said, explaining that Canadian equities have experienced an increase of 15% this year, compared to -11% in 2015. “[Investors are doing this] particularly on the gold equities side, which we’ve seen a big pullback in, and are looking to redeploy to more quality assets in the United States.”
Noble clarified, however, that the deployment to US funds is not an indiscriminate exodus. “I think they’re being dragged by their ankles… the flows [are] actually going into quality.” He described investors as being selective in their movement, looking for vehicles that provide upside – if not on the price, which could happen in case stocks are overvalued, then on yield through dividends.
“We’re seeing a really nice kickup on utilities and pipeline stocks… you can get about a 4.2% yield and you’re getting a 30% run-up on the price there. That’s the kind of thing that I think you’re seeing a lot of investors look for.”
Elaborating further on the thinking behind investors’ move to the US, Noble said that they are not looking to capitalize on US dollar appreciation, since many are entering via currency-hedged instruments. “Canadian investors are becoming a lot more wary of the diversification issues in Canada, and I think the US is really where they’re looking to get more diversification.”
On the other hand, Noble also noted increased inflows from high investment-grade fixed-income instruments into fixed-income ETFs. “Fifty per cent of the flows this year, about $12 billion, has gone into fixed income… yields are anemic on investment-grade Canadian bonds.” With ETFs’ lower management fee and diversification, they are more attractive vehicles for fixed-income assets than mutual funds and individual bonds.
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“I think what we’re seeing is a lot of profit-taking,” he said, explaining that Canadian equities have experienced an increase of 15% this year, compared to -11% in 2015. “[Investors are doing this] particularly on the gold equities side, which we’ve seen a big pullback in, and are looking to redeploy to more quality assets in the United States.”
Noble clarified, however, that the deployment to US funds is not an indiscriminate exodus. “I think they’re being dragged by their ankles… the flows [are] actually going into quality.” He described investors as being selective in their movement, looking for vehicles that provide upside – if not on the price, which could happen in case stocks are overvalued, then on yield through dividends.
“We’re seeing a really nice kickup on utilities and pipeline stocks… you can get about a 4.2% yield and you’re getting a 30% run-up on the price there. That’s the kind of thing that I think you’re seeing a lot of investors look for.”
Elaborating further on the thinking behind investors’ move to the US, Noble said that they are not looking to capitalize on US dollar appreciation, since many are entering via currency-hedged instruments. “Canadian investors are becoming a lot more wary of the diversification issues in Canada, and I think the US is really where they’re looking to get more diversification.”
On the other hand, Noble also noted increased inflows from high investment-grade fixed-income instruments into fixed-income ETFs. “Fifty per cent of the flows this year, about $12 billion, has gone into fixed income… yields are anemic on investment-grade Canadian bonds.” With ETFs’ lower management fee and diversification, they are more attractive vehicles for fixed-income assets than mutual funds and individual bonds.
Related Stories:
Survey reveals biggest ETF users
Is there an excess of ETFs on the TSX?
