Each month it seems the number of exchange-traded funds ticks a little bit higher as asset-hungry fund providers put out more products. Some are new, innovative funds launched with great fanfare, while others are quieter copies of market leaders.
Every so often, some of these ETFs fail, but experts believe Canada has yet to reach ‘peak ETF’ – and it’s not just because providers keep pumping out more.
“It’s a very, very competitive marketplace,” says ETF analyst Daniel Straus, with funds being launched from every corner of the industry, including big banks and insurance companies, to asset managers and boutique investment firms.
And, in many cases, they’re not just launching one or two funds at a time, Mr. Straus says, “some are coming out with a dozen.”
When Mr. Straus started covering Canadian ETFs 11 years ago there were four providers with 140 products valued at about $30-billion.
“I looked at all the asset classes that were represented and I said, `Wow, this is more than enough to build a complete portfolio. We certainly don’t need more ETFs than there are now,’ ” recalls Mr. Straus, director of ETFs and financial products research with National Bank of Canada Financial Markets into Toronto.
Clearly, investors wanted more, and providers obliged. As of late June, there were 1,118 ETFs in Canada valued at $286-billion, according to National Bank data, with no sign of slowing growth.
“There are still gaps in the marketplace and new ETFs coming up all the time and many are in response to client-directed questions,” Mr. Straus says.
He cites the example of Horizons ETFs Management (Canada) Inc., which launched three themed funds (hydrogen, lithium and semiconductor) last month, describing each as a “first in Canada.”
“It does surprise me every day, even after 11 years, just how many new ideas can be packaged into a new ETF and launched,” Mr. Straus says.
Another factor driving new ETF creation (and likely keeping some small, low-asset funds chugging along) is the flood of investor capital into the ETF space.
In the first six months of this year, Canadian ETFs attracted $29.7-billion in new assets, a record amount for any half-year period and 35-per-cent higher than the prior year’s record inflow total, according to National Bank.
That huge inflow of investment is not being spread evenly, as less than 5 per cent of the funds suck up the vast majority of new money.
The top 50 ETFs accounted for $26-billion of the nearly $30-billion in new ETF inflows, says Mark Noble, Toronto-based executive vice-president of ETF Strategy at Horizons, citing National Bank Financial data.
“That tells you right there that you have a very narrow breadth of leadership in terms of what products are successful and raise money relative to what product is out there,” he says.
Money is not just flowing in from homebound Canadians who are embracing online investing like never before, but also financial institutions, Mr. Noble says, adding that the number of ETF fund companies has swelled to about 40 today.
Based on his own research, Mr. Noble estimates that 30 per cent to 55 per cent of capital invested in ETFs comes from mutual funds operated by parent companies.
“It’s non-organic asset growth because it’s not new money entering the ETF space as much as it is mutual funds buying the ETFs,” he explains. Mutual funds are buying into ETFs “for their beta exposure. It’s liquid; it’s easy to do.”
Mr. Noble also says the past 18 months “have been a benchmark for brand new investors coming into the Canadian market.” In 2020, a total of 2.3 million new self-directed investor accounts were created, “which is an astounding number,” he says.
He points to younger retail investors, forced to save money owing to the pandemic’s lifestyle restrictions, who have been investing in mutual funds through financial institutions. A significant chunk of those investments, he says, are filtering into ETFs controlled by the institutions.
Mr. Noble isn’t calling a top for providers or fund totals this year, but he does expect a day of reckoning at some point for funds that haven’t achieved critical mass.
He estimates that a typical ETF needs to attract $30-million in assets to achieve profitability and that companies are willing to run three years or so to hit that target. Currently, 485 Canadian ETFs are below that $30-million threshold.
“So you really have 40 per cent of the Canadian ETF market well below profitability. At some point, these become losses for the providers, so you probably see some attrition in the next two to three years.”
Yves Rebetez, an ETF analyst and partner of Credo Consulting in Oakville, Ont., expects more ETF providers to emerge given the flood of capital and investor demand for new funds, with the industry leaders continuing to dominate.
“You are in an industry of scale and feast, or lack of scale and maybe famine,” he says. “Unless you are a somewhat successful niche boutique that’s defying the odds … capitalizing on a trend or a theme that’s very much in vogue with advisers.”