Canadian ETF Trends In 2018

    Despite a bumpy year in markets, 2018 was a big year for the Canadian ETF industry. The industry attracted $20 billion in net inflows and saw 140 new ETF products (80 actively managed and 60 passive) enter the market place, culminating in a total of 33 Canadian ETF providers. We also saw the last two banks—CIBC and National Bank—jump into the arena.

    Canadian ETF Market

    In Canada, according to National Bank’s ETF and Research Strategy team total assets under management (AUM) finished at $156.6 billion, still considerably lagging the mutual fund industry which sits at $1.4 trillion in AUM. In the U.S., ETFs attracted $312.9 billion in net flows and total AUM currently sits at $3.4 trillion. Growth rates continue to impress, the Canadian ETF market is growing at 12.5% and in the U.S., growing at 9.1% over the past year. Franklin Templeton’s ETF business grew to $723m CAD in AUM and is now the 12th largest ETF provider in Canada.

    Below you can see the growth trend of ETFS within Canada.


    Graph growth of etfs in Canada

    A shift in perspective

    From my travels across the country and my discussions with branch managers, I saw a large number of newer advisors invest in ETFs, which is likely an outcome of many advisors transitioning their practices from transactional to fee-based. We also saw an even larger number of advisors shift their business practices to a discretionary portfolio management model. And let’s not forget about individual investors who continue to drive demand for ETFs due to their lower costs and to the increasing number of product options available to them. All of these factors in tandem have been instrumental in driving the impressive growth we have witnessed in the Canadian ETF space.

    Major theme of 2018

    Advisors who previously shied away from passive ETFs are starting to invest in active ETFs, as they seek specific outcomes through active management but within an ETF wrapper.

    The way markets performed in late 2018 served as the perfect backdrop for the benefits that actively managed or Smart Beta ETFs can offer over their respective benchmarks. Looking at a few of our own Franklin LibertyShares® ETFs, the risk management principles embedded into the Smart Beta factor selection process made a notable difference for investor outcomes. Our active Franklin Liberty Risk Managed Canadian Equity ETF also outperformed its respective benchmark – please take a look below.


    table libertyshares etfs vs respective indexbenchmarks

    The next big thing?

    Speaking of active management, I think actively managed fixed income ETFs will also become increasingly popular with the advisor community in 2019. The uncertainty surrounding interest rates and how fixed income investors may respond, will drive demand for new and innovative fixed income products. Stay tuned for my next blog where I will discuss some of the benefits provided by outcome oriented actively managed fixed income ETFs have over their passive counterparts.

     

    Commissions, management fees and expenses may all be associated with investments in ETFs. Investors should carefully consider an ETF’s investment objectives and strategies, risks, fees and expenses before investing. The prospectus and ETF facts contain this and other information. Please read the prospectus and ETF facts carefully before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors. The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

    Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

    All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.