ETFGI founder discusses the ways Canada is a leader in ETF products and utilization
Assets invested in the ETFs industry in Canada reached a new record of $438 billion at the end of February. During the month, the ETFs listed in Canada gathered net inflows of $6.87 billion during bringing year-to-date net inflows to $11.49 billion, according to ETFGI's February 2024 Canadian ETFs and ETPs industry landscape insights report. This marks the 20th month of consecutive net inflows.
2024 marks Canada’s 34th year in the ETF industry. On March 9, 1990, the first ETF was listed in Canada on the Toronto Stock Exchange: the TIPs (Toronto 35 Index Participation Fund) tracking the TSX 35 index. The TIPS ETF listed nearly three years before the first ETF the SPDR S&P 500 ETF (SPY) was listed in the US on January 29, 1993.
The ETFs industry in Canada had 1,128 products, with 1,409 listings, assets of $438.22 billion, from 40 providers listed on two exchanges at the end of February.
During February, ETFs gathered net inflows of $6.89 billion. Equity ETFs reported net inflows of $4.07 billion, bringing YTD net inflows to $6.91 billion, higher than the $215.29 million in net YTD in 2023. Fixed income ETFs gathered net inflows of $610.33 million during February, bringing YTD net inflows to $689.30 million, lower than the $928.43 million in net inflows YTD in 2023. Active ETFs attracted net inflows of $2.17 billion during the month, gathering YTD net inflows of $4.25 billion, higher than the $3.82 million in net inflows YTD in 2023. Crypto ETFs reported net outflows of $88.22 million during February, bringing YTD net outflows to $539.84 million, more than the $35.04 million in YTD net inflows in 2023.
Substantial inflows can be attributed to the top 20 ETFs by net new assets, which collectively gathered $4.37 billion during February. Scotia US Equity Index Tracker ETF (SITU CN) gathered $675.34 million, the largest individual net inflow.
ETF assets reaches new record
“As of the end of February, the ETF industry in Canada has reached a new record of $438 billion; that's a new record,” says Fuhr. “We have also seen 20 months of consecutive net inflows. That's a good thing when you think about the mutual funds have had outflows in the past years. Canada has benefited historically and currently by the fact that ETFs are regulated like mutual funds. Canada has allowed non-transparent active for a long time and active ETFs in Canada are a much larger proportion of the ETF industry than anywhere else in the world.
“Canadian banks have also embraced using ETFs in a very significant way. That's partially because the banks also have their own asset management arm. Canada was also first in being able to do Bitcoin and Ethereum products because they basically took a similar approach to the UK where they convinced the regulator to allow cryptocurrency ETFs. Canada has been first in many other types of products around ETFs.
“High yield products have been very popular, and other markets have been looking at that as an opportunity. Canada has been very innovative in offering and creating ETFs on indices, on active, and other structured products or structured payouts. Covered calls are also big in Canada and are becoming more popular in other places.”
“Additionally, Canada is the only geography that I'm aware of that has a an ETF association – the Canadian ETF Association (CEFTA). There have been attempts to create such an organization in many geographies, but it hasn't really worked. Although there are ETF working groups or the European Fund and Asset Management Association (EFAMA) or the Investment Association in the UK, it's not the same as an organization coming together and creating its own entity.”
Women holding more roles in ETF industry
Fuhr is also impressed with the roles women are holding in the ETF industry. “In Canada and elsewhere, the roles that women have within the ETF industry are quite significant. It’s a nice thing to see. Whereas traditional asset management has been historically male dominated, we've seen women take on increasingly senior roles within the ETF organizations.”
As for institutional investors, ETFs are a tool that they are increasingly adding to their portfolios. “The uptake and use of ETFs by institutional investors in Canada used to be significantly higher some time ago than it is today, partially because there used to be a restriction on the amount Canadian investors could invest outside of Canada,” says Fuhr. “So, there was significant use of ETF to get around those limits. There used to be check fees for things like emerging market exposure. At times, one of the biggest challenges if you wanted to invest in a country or region or theme, was to find a good active fund that was consistently delivering alpha. That's aways been a challenge for investors. So often, they will use ETFs as a tool to get exposure.
“ESG is also a reason to use ETFs. Having a sleeve that has ETFs in it gives pension funds the flexibility of being able to invest a little bit more, take some money out, redeploy it somewhere else. Unlike when they invest in actual stocks, bonds, and commodities, they can find that implementing an adjustment can be challenging. As well, pension funds can use ETFs as a hedge, which they can't do with mutual funds.
“Using ETFs for fixed income exposure has been something that's been quite powerful. Some of the Canadian pension funds did conversions from owning and managing a portfolio of bonds to transitioning that into an ETF so that they would actually get a much better, cost-efficient way to supplement that exposure. They did not have to have a team worrying about managing duration or credit or quality.
“Once people have used ETFs once, when an investment opportunity or question comes up, they will think about whether an ETF could be used to fill that gap. Getting investors to try ETFs once is always a challenge. But, once they try ETFs, they tend to use them more and use them in different ways.”
