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Canadian-listed exchange-traded funds (ETFs) recently crossed the $200-billion asset mark and record inflows are expected in 2019, amid an increase in purchases of conservative fixed-income funds from retail investors seeking more safety.

The year’s inflows to the end of November amounted to $23.5-billion, on pace with the record $26-billion flow for all of 2017, according to data from the National Bank Financial Inc. (NBF) ETF research and strategy group.

ETFs crossed the $200-billion mark on the last day of November and the month’s inflow of $4.5-billion was the highest of the year and one of the highest ever, says Daniel Straus, vice-president of ETFs and financial products research at NBF.

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“It’s been a big year and it may be another record year,” says Mr. Straus, while noting that ETFs crossed the $100-billion milestone just three-and-a-half years ago, in April 2016. ETFs have been growing at a rate of 21 per cent annually since then, with investors especially attracted by their low fees and transparency, compared with mutual funds.

“It’s really an astonishing rate of adoption,” Mr. Straus says.

Fixed-income ETFs remain the “clear champion” in 2019 and a “huge driver” of ETF growth, accounting for more than half of the assets invested in the products this year, Mr. Straus says.

Investors flocked to Canadian aggregate bond ETFs and foreign bond funds as well as "cash-alternative" ETFs. The move to these high-interest savings ETFs, in particular, represents a “flight to safety,” Mr. Straus says, as investors look to protect their capital amid fears of a global recession and to avoid more complex and potentially lower-yield bonds in today's uncertain interest-rate environment.

Mark Noble, senior vice-president of ETF strategy at Horizons ETFs Management (Canada) Inc., says that Canada has the highest proportion of fixed-income ETF ownership in the world, given its “risk-off nature” and fears of trade wars hitting the economy.

“It’s been the biggest fixed-income year that I can remember in the ETF market,” Mr. Noble says. Meanwhile, he believes Canadians are losing out on the booming equity markets by investing in “very low-risk” investments such as cash-based ETFs.

“These are one step away from sticking money into your mattress,” Mr. Noble says, noting that ETF choices in Canada are driven by financial advisers and direct investors with a “fearful mindset,” spooked by worries of an economic downturn.

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“Any new capital is being deployed very conservatively,” he says, even in equities where investors this year are into low-volatility products.

Dan Bortolotti, a portfolio manager at PWL Capital Inc. in Toronto, which employs ETFs in its client portfolios, isn’t surprised to see the continued growth of “incredibly useful” one-fund balanced portfolios offered by the major providers. These funds include a mix of stocks and bonds, according to the investor’s risk profile, at a low cost.

“The decisions are all made for you and the decisions are good,” says Mr. Bortolotti, who considers the all-in-one ETFs to be the best new products to come around in the last five years.

“It’s a great way to build a diversified portfolio with one product rather than having many small holdings," he says. "We now have way better options than we did, but we need to convince people to use them.”

Looking ahead to 2020, Mr. Bortolotti feels that the market is saturated with funds and there is less appetite for unusual strategies in ETFs. Indeed, his company prefers “plain-vanilla” ETFs that offer a broad exposure to the market from established providers with “rock-bottom” prices.

“The more exotic an ETF, the more likely it will eventually be shut down,” he says, although smaller and newer providers look to innovate in order to compete. “The pessimist in me sees more and more fringe products that we don’t need.”

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There were 882 ETFs listed in Canada with about $200-billion in assets under management (AUM) as of Nov. 29, according to NBF. That’s up from 774 ETFs with $157-billion in AUM at the end of 2018 and 648 ETFs with $147-billion in AUM a year earlier.

Mr. Noble thinks the number of ETFs has reached its peak, believing there’s “too much product and too many providers for the size of the market in Canada.”

At the same time, ETFs are the only area of growth for asset managers and in 2018 they began to outsell mutual funds. According to the Investment Funds Institute of Canada, between January 1 and October 31 this year, mutual fund net sales totalled $11.8-billion, while net sales of ETFs totalled $19.3-billion.

Mr. Noble says that this means asset managers have to keep up strong ETF business for future growth.

“It’s a matter of survival,” Mr. Noble says, which leads to a proliferation of products.

He expects to see a decline in the number of providers in the future through consolidations similar to Royal Bank of Canada and BlackRock Asset Management Canada Ltd. teaming up to create RBC iShares and CI Financial Corp.’s purchase of the Canadian arm of WisdomTree Investments Inc.

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“It’s very likely that more of that will occur,” he says.

A lot of the growth in assets is not organic but internal, Mr. Noble notes, stemming from the “double-counting” of assets, where money moves from products such as mutual funds to ETFs.

He expects to see more investors opting for actively managed fixed-income ETFs as well as greater competition among all-in-one providers and fewer niche ETFs and thematic strategies, which are more attractive when there is a greater appetite for risk.

Investors will likely opt for equity ETFs in the first few months of 2020, Mr. Noble predicts, if they feel they’ve been missing out on the rising markets. “Retail investors, sometimes their timing can be a little off,” he says.

Unlike Mr. Noble, NBF’s Mr. Straus thinks the number of ETFs listed in Canada will continue to rise and could surpass 1,000 in early 2020. “This is just indicative of a healthy marketplace. It’s booming, and everyone wants a piece of the action,” Mr. Straus says.

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