Exchange-traded funds (ETFs) had a banner year in 2020, and that growth trajectory is expected to continue in 2021 with the launch of more products tailored to themes such as bitcoin, technology, clean energy or ethical investing – or for investors searching for a one-ticket solution that matches their personal risk profile.
“[The past year] was an incredible one ... and we saw a lot of trends accelerate, which I anticipate will continue into 2021,” says Daniel Straus, vice-president of ETFs and financial products research at National Bank Financials Inc.
There were record inflows of $41-billion into ETFs in 2020, up from $28-billion in 2019, according to National Bank data. As of year-end, there was a total of $257-billion invested in Canadian-listed ETFs, up from $205-billion in 2019. The trend has continued into 2021 as Canadian-listed ETFs registered $3.5-billion in inflows in January, bringing total ETF assets to $260-billion.
Prerna Chandak, vice-president of ETFs at Mackenzie Investments, says more individual investors turned to ETFs last year as the markets plummeted in March with the onset of the COVID-19 pandemic. Investors who got burned by the stocks they selected sold them in favour of ETFs as a way to reduce risk, limit fees and diversify their portfolios.
“We do expect that trend to continue in 2021 and beyond,” she says, adding that “the volatility we saw this year awakened more investors to the benefits of ETFs.”
During the March selloff, there were also redemptions of mutual funds and that cash was redeployed into ETFs, Mr. Straus says, adding that “at the next selloff, I still think that that’s what will happen.”
There’s no shortage of choice for investors, with 39 asset managers offering more than 1,000 ETFs listed on Canadian exchanges – and always more products in the pipeline, Ms. Chandak says.
Many new ETFs are thematic ones that invest in a particular investment category rather than the broad market and allow investors to choose the areas in which they want to focus their investments, says Ms. Chandak.
“We’re going to continue to see a growth of thematic products; there are so many ways you can dice up companies in our world today,” she says.
Those products will come and go with demand as well, she adds. “The point of a theme is it’s hot in the moment.”
While some themes will have staying power, others will lose favour and disappear, she adds. That ebb and flow is “normal” in a growing market, and the key is for investors and advisors to take the time to know what they’re investing in and ensure it matches their goals.
Mr. Straus expects key themes for 2021 to include environmental, social, and corporate governance (ESG), clean or renewable energy, technology and health care, as well as ETFs that aim to protect investors from geopolitical risk and the potential rise of inflation.
“The conversation really is around using ETFs to find themes that will resonate [with investors],” he adds.
For example, Mr. Straus points to Harvest Portfolios Group, which just launched Harvest Clean Energy ETF HCLN-T and Harvest Travel and Leisure Index ETF TRVL-T. The company is hoping to capitalize on investors who view that clean energy is the way of the future and that travel will roar back once the pandemic subsides.
Horizons ETFs Management (Canada) Inc. continues to launch new thematic ETFs, says Steve Hawkins, president and CEO, particularly since about $3-billion was invested in thematic ETFs last year.
Thematic ETFs attract investors because “it’s what people are hearing about in the news every day,” he says.
The benefit of thematic ETFs is that “you can get in and out of these various themes easily,” Mr. Hawkins says, noting that building wealth is “all about sector rotation,” which thematic ETFs make easier to do without taking on the risk of buying only one stock.
Horizons ETFs recently applied to launch a bitcoin ETF that aims to track CME bitcoin futures contracts. Other potential companies that have applied in the past month to launch a bitcoin ETF include newcomer Arxnovum Investments Inc. and Evolve Funds Group Inc.
Horizons ETFs also just launched Horizons Psychedelic Stock Index ETF PSYK-NE, which is focused on health and life sciences companies that have significant exposure to the psychedelics industry.
“Psychedelics, we believe, are an up and coming burgeoning theme, very much like marijuana was in 2017,” he says, and there are now enough science-based public companies to provide the broad-based access needed for an ETF.
Another trend for 2021 is investors’ desire for easy, low-fee, all-in-one balanced investments, “which are gaining in popularity,” says Vivian Hsu, director of ETFs at Fidelity Investments Canada ULC.
In late January, Fidelity launched two such ETFs – Fidelity All-In-One Balanced ETF FBAL-NE and Fidelity All-In-One Growth ETF FGRO-NE. These ETFs invest in other Fidelity ETFs to create global portfolios of 60-per-cent equity and 40-per-cent fixed-income securities and 85-per-cent equity and 15-per-cent fixed income, respectively.
“These wrap solutions combine all these different stylistic ETFs together to provide clients with a smoother ride and balance out the cyclicality [of the markets],” Ms. Hsu says.
Andrew Clee, vice-president of product at Fidelity Canada, adds that “what we’re trying to do is offer solutions that are less cyclical than investing in an investment style on its own,” such as value, growth, or low volatility.
Another trend that’s expected in Canada’s ETFs industry is “record launches and record closes” of products, Mr. Clee says, as there are so many ETFs to choose from that it’s becoming more difficult for each one to gain the scale needed to remain active.
In addition, he expects some consolidation in the industry, but that it will likely come from mergers instead of acquisitions as buyouts require far more capital.