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Investors injected more than $35.5-billion into Canadian ETFs in 2022 while pulling $35-billion out of mutual funds during the first 11 months of the year, marking the first major decline for the mutual fund industry since the global financial crisis in 2008.

Canadian ETFs had a total value of $314-billion in investments at the end of 2022, according to data provided by National Bank Financial. While this was down from the total assets of $323.1-billion at the end of 2021, the $35-billion in new sales helped offset the declining value brought on by falling stock and bond markets.

“Canadian ETF inflows and launches held up well during 2022 – a year that will go down in history as one of the worst for both risk and safety assets,” Tiffany Zhang, research analyst at National Bank Financial wrote in a report released Thursday.

Despite the drop in assets under management, the sale of ETFs compared with mutual funds in 2022 is a significant reversal from 2021, when pandemic savings largely went into conventional mutual funds. In 2021, $112.6-billion went into mutual funds, compared with $53-billion in ETF sales.

Mutual fund sales figures for the full year will not be reported until later this month, but the pace of sales for the first 11 months of 2022 showed net redemptions of $35.3-billion, which means investors pulled money out of funds, according to data released from the Investment Funds Institute of Canada.

In contrast, ETF investors flocked to safer grounds with fixed income ETFs, including high-interest-savings ETFs, also known as cash ETFs. Overall, fixed income ETFs accounted for $20.2-billion in flows for the year, according to a report by TD Securities Inc. – more than half of the overall ETF sales in 2022.

Cash ETFs, which mainly invest in pools of banks’ high-interest savings accounts and deposits, brought in almost $9-billion in assets last year. The funds currently offer investors a yield of 4.75 per cent, and remain attractive for investors looking for lower-risk options that offer liquidity. Despite being blocked by several of Canada’s largest banks, which do not allow the sale of third-party cash ETFs because they compete with the banks’ own lucrative deposit accounts, the funds exploded in popularity last year, seeing positive sales in every month in 2022.

“Cash management ETFs were incredibly popular among investors given their very low (almost zero) risk and promising yields,” TD’s director, head of ETF sales and strategy, Andres Rincon, wrote in a research note this week.

With interest rates remaining at high levels in the near future, fixed income and cash ETFs are expected to continue to gain traction in 2023, Mr. Rincon added.

“Fixed income ETFs, especially those investing in investment grade bonds, gained popularity among investors amid recession fear,” he said. “If the aggressive rate-hiking strategy continues, more investors might adapt a more defensive approach by allocating more to lower risk assets, such as cash and investment grade bonds.”

Another reversal in 2022 was the boom in sales of cryptocurrency asset ETFs, which saw a frenzy of inaugural product launches and investor interest in 2021. The funds, which include bitcoin and Ethereum funds, lost more than $6-billion in assets in 2022, dropping to $1.7-billion in total AUM. That is down from $7.5-billion in 2021, according to data provided by National Bank Financial. The decline is predominantly from market movements, with only $118-million taken out by investors.

“This suggests that crypto-asset ETF users are sticking to their allocations, possibly hoping for the market to recoup these losses in the long term – or they are treating this latest drawdown as an effective write-off,” Ms. Zhang wrote. “Majority of the asset decline came from the re-emergence of a new crypto-winter after the fall of FTX and other crypto-businesses like Celsius, Luna/Terra and Three Arrows Capital.”

Even as investors battled weaker markets in 2022, equity ETFs still brought in $13-billion – mostly from the first three months of the year – half of which was allocated to market-cap weighted ETFs. While much lower than pandemic sales in 2021 and 2020, last year’s equity ETF sales fell back in line with pre-pandemic averages.

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