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Investors injected billions of dollars of their pandemic savings into conventional mutual funds in 2021 as sales far outstripped new investments in exchange-traded funds for the first time in four years.

Mutual funds surged in 2021, surpassing the $2-trillion mark in total assets, assisted by record net sales of more than $111.8-billion, as of Nov. 30.

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 the year was almost five times what the industry sold for the same period in 2020 – which totalled $23.6-billion, according to data released from the Investment Funds Institute of Canada.

“There has been a pandemic phenomenon with investors realizing there was a strong market recovery in effect after the bottom of the market in March 2020 and very few people have wanted to miss out on that over the last 18 months,” Daniel Straus, director of ETFs and financial products research at National Bank Financial, said in an interview. “As a result, we are seeing double the records in mutual fund sales that were set in 2014 and 2015.”

The re-emergence of mutual funds in 2021 follows years of net redemptions at many of the country’s largest fund companies as investors pivoted toward lower cost options, such as ETFs, which had outsold mutual funds from 2018 to 2020.

Canadians had a total of $323.1-billion invested in ETFs at the end of 2021, up from $257-billion in 2020, according to data provided by National Bank Financial.

Despite sales dropping behind mutual funds in 2021, ETFs still saw record inflows for the year with about $53-billion in net sales, up from $41.5-billion in 2020

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Much of the boom in mutual fund investing has to do with the unprecedented household savings rate, said Carlos Cardone, senior managing director at Investor Economics, a unit of ISS Market Intelligence.

“Household savings have gone through the roof – well beyond anything we have previously seen before,” Mr. Cardone said in an interview.

Typically, Mr. Cardone says, annual household savings are between $140-billion to $160-billion. But in 2021, that spiked to north of $300-billion.

In 2020, when pandemic savings were first beginning to surge, Canadians began to shift money toward deposit accounts at the banks, particularly into high interest savings accounts. Low interest rates steered investors clear of products that could lock them in long term, such as guaranteed investment certificates.

In 2021, investors began seeking market investments, with mutual funds becoming the main recipient of new money, particularly at branches of Canada’s six major banks, where a majority of branch-based financial advisers are not licensed to sell ETFs.

“There is simply more money than ever before being saved and seeking market exposure,” said Mr. Cardone. “Approximately 80 per cent of investments in Canada are in distribution channels where some level of advice is provided.”

Mr. Straus says he first noticed the massive fund flows around the 2021 RRSP season as deposits at the banks were being invested by Canadians who still had leftover contribution room in their retirement savings accounts.

“While the pandemic has been very hard for many people, there is no denying there is a stratum within the Canadian investor community for whom working from home may have been onerous in one sense or the other – but in terms of interrupting their income, it didn’t really happen,” Mr. Straus added.

“There was nowhere discretionary to go with their money – no theatres, no restaurants, no travel … so they had to put their money somewhere.”

Mutual fund investors predominately flooded money into balanced funds, which invest in both stocks and bonds, with approximately $61.4-billion being deposited within the first 11 months of 2021. That compared with net redemptions of $2.1-billion in 2020.

ETF investors continued to veer more toward equity funds, with about $31-billion in equity sales during the first 11 months of 2021, compared with $21-billion in 2020.

“In almost every channel – whether it’s ETFs, mutual funds, do-it-yourself investors, those using financial advisers or at the insurance companies – we are seeing new records broken across the board,” Mr. Cardone said.

As to whether savings will continue to drive fund sales, Mr. Cardone anticipates interest rates will increase in 2022, bumping up the cost of borrowing as a result, and people will shift more of their money toward paying down debt.

“Money will start to find different destinations – most likely in the middle of 2022 when interest rates will impact the cost of borrowing,” he said. “And we may begin to see some normalization around supply chains and consumption – but that will take a bit longer – more likely closer to the end of the year.”

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