Investors are turning to bonds and non-Canadian equity ETFs for investment opportunity, with a strong showing in currency hedged ETFs that track the S&P 500.
Currency-hedged exchange-traded funds saw an uptick in popularity after the Canadian dollar dropped to near 75 cents (U.S.) last month, a sign that investors could be increasing bets that the loonie will reverse some of its recent losses.
Despite Canadian ETF assets slightly dropping to $84-billion from $85.5-billion in July, investors are still pouring money into the market. Canadian ETFs reported net inflows of almost $1.2-billion for the month of August, up from $440-million in July, according to a report from National Bank Financial. Investors are turning to bonds and non-Canadian equity ETFs for investment opportunity, with a strong showing in currency hedged ETFs that track the S&P 500.
"As the Canadian dollar fell below 75 cents, investors are possibly locking in currency gains or anticipating a reversal," says Daniel Straus, a research analyst with National Bank. "In the past, we have seen a strong preference for the U.S. dollar, and just recently – as the Canadian dollar has been testing these important psychological support levels – there has been some question as to whether the U.S. dollar will continue that bull run and there could be some investors who are expecting the Canadian dollar to turn around."
Investor demand for U.S. equity was focused on two key funds: BMO S&P 500 Hedged to CAD Index ETF (ZUE) and iShares Core S&P 500 (CAD-Hedged) (XSP).
ZUE saw the largest inflows last month with $232.8-million being invested – which accounts for 33 per cent of the fund's total assets under management.
"We have seen more and more trades where investors are now considering the hedged option," says Chris McHaney, vice-president and portfolio manager at BMO ETFs, BMO Global Asset Management. "Given the move of the U.S. dollar – particularly this calendar year – it has been very strong and investors are bringing up the question more and more about whether they go hedged or unhedged. We haven't necessarily seen one dominate the other, but we have certainly seen an increase in hedged products again."
XSP saw $61.1-million in August inflows, adding to a strong year-to-date total of $329-million. In comparison, the unhedged version iShares Core S&P 500 Index ETF (XUS) has seen $130-million inflows year to date.
"This is a trend that has been continuing all year – investors looking for U.S. equity exposure and favouring a hedged version – and we did see that accelerate in August," says Pat Chiefalo, head of iShares product, BlackRock Canada.
"With the market volatility we saw in August, there are certainly some market views that the [odds of the] U.S. Fed raising rates in September has likely declined. However, if they are not going to raise rates in the near term, there is more reason to believe the (Canadian) dollar may decline further."
Clare O’Hara