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Canadian investors continued to move away from traditional mutual funds last year, pouring more money into exchange-traded funds for a third consecutive year.

With $41.5-billion in net sales in 2020, ETFs outsold mutual funds, which brought in $31-billion in sales, according to the latest data from the Investment Funds Institute of Canada.

Despite the pandemic and the related market crash in the first quarter of the year, 2020 saw the highest mutual fund sales of the past three years, bringing their asset total to $1.7-trillion in Canada. But that’s still well below the peak of $57-billion in sales seen in 2014 and 2015.

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The shift for both investors and financial advisers began in 2018 when ETF sales surpassed mutual fund sales for the first time in a decade, and that growth has continued for three consecutive years. In 2019, ETF sales reached $28.8-billion, while mutual fund sales managed to bring in just $16.9-billion. By the end of 2020, ETF sales were the highest on record, bringing their asset total in Canada to $257-billion.

“Individual investors are more interested in ETFs than ever before,” said Dan Hallett, vice-president and principal of Highview Financial Group and an investment expert who has covered the industry for decades.

“This is fuelled by disappointing returns with other products – primarily mutual funds – low fees and intriguing strategies. Advisers like ETFs for some of the same reasons, but their low fees make total portfolio costs more competitive for clients in fee-based advisory account structures.”

While 2020 saw markets plunge more than 30 per cent because of COVID-19, mutual funds were able to rebound quickly. They saw more than $14-billion in net redemptions in March, 2020, but bounced back to positive sales of $1.25-billion in April.

“While assets fell steeply and dramatically in the market crash, falling by 12.7 per cent, this does not compare to the 27.7 per cent drop in assets experienced in the 2008 Financial Crisis,” the IFIC said.

Canadian ETFs remained steady in March last year, with investors purchasing about $3-billion in new holdings despite the crash.

Canadian mutual fund managers continued to be plagued by consolidation owing to fee pressures, rising compliance costs and a desire to add scale. In 2020, the number of investment companies in Canada offering mutual funds dropped to 112 from 117 the prior year.

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Consolidation also led to the total number of funds available falling by 37, to 3,459.

In its annual report, the IFIC stated that while the decline was “largely” the result of consolidation, it is also “an indication of strong competition within a mature industry.”

In comparison, the asset management industry now has 39 investment companies offering ETFs – more than three times the number five years ago, according to the IFIC. (The majority of these companies offer both ETFs and mutual funds.) And these companies collectively added 107 ETFs, bringing the total number available to 853.

“This growth is emblematic of an industry that is in a strong growth phase,” the IFIC said in its report.

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