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The popularity of ETFs in Canada is growing at an amazing speed

The popularity of exchange-traded funds continues to accelerate in Canada at a record-breaking rate.

Last year, more than $26-billion flowed into ETFs, up 56 per cent from the previous annual record set in 2016. Meanwhile, a record number of new entrants joined the market with 11 new providers launching a combined 60 new funds for investors.

"Economic expansion across the globe laid the groundwork for record-breaking asset flows and benchmark returns," Daniel Straus, research analyst for National Bank Financial, said in a research note. "A global stock market rally combined with low volatility offered a tailwind for investors who flocked to ETFs to access different corners in the market."

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The surge in sales brought the final total of Canadian ETF assets last year to $147-billion, up from $113.7-billion in 2016. In addition, the industry saw a record number of ETFs hit the shelf with, including the new entrants, 169 product launches from 24 providers – a 70-per-cent jump in new ETF launches compared with 2016.

New ETFs accounted for 22 per cent of annual asset flows, while existing product made up the remaining 78 per cent, according to data by National Bank Financial.

Passively managed ETFs continue to dominate the market. In 2017, 72 per cent of flows went into cap-weighted index-tracking ETFs, speaking to their importance as fundamental portfolio building blocks, Mr. Straus says.

"A deepening attitude of cost consciousness is driving these passive flows, as we see some evidence of rotations from cheap ETFs to even cheaper providing very similar exposure," he adds.

Mr. Straus points out the shift from funds such as the prominent iShares S&P/TSX 60 Index Fund – better known as XIU – into cheaper options such as iShares Core S&P/TSX Capped Composite Index Fund (XIC), Horizons S&P/TSX 60 Index ETF (HXT) and Vanguard FTSE Canada All Cap Index ETF (VCN).

Another prime example is the nearly $1-billion in flows into XUUiShares Core S&P U.S. Total market Index ETF – a new broad/multi-cap U.S. equity ETF that charges only 0.07 per cent.

The top 20 ETFs in terms of net new assets saw several new names on the list compared with 2016, when the rankings were dominated by iShares – BlackRock Asset Management Canada Ltd.'s ETF division – with 11 funds and Bank of Montreal with the remaining nine. In 2017, BMO held the most funds in the top 20 with eight, while iShares had only three. Other ETF providers making the cut included Vanguard Investments Canada Inc, Royal Bank of Canada, Horizons ETFs Management (Canada) Inc. and Dynamic Funds.

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Nine of the top 10 inflows in 2017 went to either passive equity indexes for various regions, or to passive fixed income index ETFs.

While passive strategies continue to dominate, active ETFs renewed activity from investors – specifically within fixed income ETFs. Major contributors were new active bonds from Pimco, and active preferred share ETFs from RBC, Horizons and Dynamic/iShares.

"The increasing popularity of this category speaks to the conviction shared by Canadian investors that there might be a place for active management among opaque and difficult-to-access asset classes," Mr. Straus says.

Top ETF inflows in 2017

RankExchange-Traded Fund TickerFlow ($Mil)
1BMO S&P/TSX Capped Composite Index ETFZCN-T1,295
2BMO Aggregate Bond Index ETFZAG-T1,216
3iShares Core S&P/TSX Capped CompositeXIC-T1,207
4BMO High Yield U.S. Corporate BondZJK-T1,159
5iShares Core S&P U.S. Total Market Index ETFXUU-T964
6iShares Core MSCI EAFE IMI Index ETFXEF-T702
7BMO MSCI EAFE Index ETFZEA-T699
8BMO S&P 500 Index ETFZSP-T676
9Horizon S&P/TSX 60 Index ETFHXT-T632
10BMO Europe High Dividend Covered Call CAD-HZWE-T569

Source: National Bank Financial, Bloomberg

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