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As ETF interest and selections continue to rise, advisors have to navigate what helps clients keep to their plan.

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Canadian investors love their exchange-traded funds (ETFs). As their uptake continues to increase, where can financial advisors expect ETFs go into 2020? And how can they meet the needs of ETF investors in a changing market?

Total ETF assets under management have risen to $188-billion as of Sept. 30, according to recent data from the Canadian ETF Association (CETFA), and ETFs are on pace to outsell mutual funds for the second year in a row. Today, ETFs account for more than 10 per cent of total investment fund assets in Canada – more than three times their share in 2008. Yet Pat Dunwoody, executive director of CETFA, says there’s still plenty of room to grow.

“We did some investor research last year and found that ETF penetration was still only 7 to 8 per cent of the Canadian population,” she says. “We expect that as more people learn about the product, there will be more and more investors buying ETFs.”

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Ms. Dunwoody anticipates more products like the recent crop of actively managed ETFs launched by traditional mutual-fund companies – either as standalones or as a series within their existing offerings.

Fixed-income ETFs are also taking off, particularly those that are actively managed, says Tim Huver, head of intermediary sales at Vanguard Investments Canada Inc.

According to National Bank of Canada’s monthly Canadian ETF Flows report, $1.3-billion of new money flowed into fixed-income ETFs in September alone. By comparison, equity ETFs lost $1.1-billion in assets that month.

“In these volatile markets, investors are looking for more balance and sound asset-allocation in a portfolio that encompasses both equities and fixed-income,” Mr. Huver says. “Packaging fixed-income assets within a single ETF gives investors access to thousands and thousands of bonds that would otherwise be very difficult to trade.”

Examples of these new products include the suite of actively managed fixed-income ETFs – along with their mutual-fund versions – that Fidelity Investments Canada ULC launched in late September. The suite features a diverse range of funds, from global and Canadian corporate bonds to U.S. securities.

For advisors, the choices will help them appeal to what today’s investors are increasingly seeking.

Compared with passive ETFs in fixed-income portfolios, actively managed fixed-income ETFs offer the advantage of fund managers’ oversight. That guards against interest-rate risk. It also exploits market conditions by adjusting for factors such as the length of time certain securities are held in the fund. Fund managers also look for undervalued bonds or so-called “fallen angel” bonds, which have been downgraded by a credit-rating agency but are likely to get upgraded in the future.

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“The growth of fixed-income ETFs comes from both the institutional and retail investor wanting fixed-income securities without having to choose and buy individual bonds,” Ms. Dunwoody says. “It’s just more cost-effective to invest in bonds within an ETF portfolio.”

In previous years, there were a proliferation of niche, thematic ETFs launched that focused on a specific sector of strategy. With a market correction expected, investors and the industry seem to be hunkering down.

Several boutique ETF providers left the market this past year. Mr. Huver says advisors are likely to see the exit of certain esoteric products and also a bit of a shakeup among ETF sponsors in the near future.

“It’s inevitable that we will see consolidation for these ETFs that have failed to gather assets,” Mr. Huver says. “But, in general, we expect product proliferation will continue in the marketplace.”

The growing choices and the flexibility of ETFs are appealing, but they also challenge advisors to keep their clients focused on their financial plan.

“Because of the ease of getting in and out of these investments, the biggest risk to investors is deviation from their long-term plan,” says Greg Moore, vice president at family office Richter LLP. “So, keep using ETFs, but don’t be tempted by the liquidity provision to make changes for short-term emotional responses.”

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With about 750 ETFs from 35 sponsors in Canada, even sophisticated investors might feel a bit overwhelmed by the abundance of choices. That makes it even more important for advisors to guide their clients through the still-growing field of ETFs.

Ms. Dunwoody understands how challenging that can be. CETFA is now working on an ETF screener, scheduled for launch by the end of this year or early 2020, which will allow advisors to research funds by category, based on their clients’ investment criteria and risk profile.

“This will help advisors create shortlists of products to recommend to their clients, and they’ll become more educated on ETFs in the process,” Ms. Dunwoody says.

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