After almost two decades in the Canadian ETF industry, what’s next?

Bobby Eng CIMA®

Bobby Eng CIMA®
Senior Vice President,
Head of Platform and Institutional ETF Distribution

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The growth of ETFs has been one of the key developments in the investment industry over the past few decades. That’s the case worldwide, but also here in Canada, the birthplace of the ETF.

In 1990, the TSX launched the Toronto 35 Index Participation Units (TIPs for short), which was the world’s first exchange-traded fund. TIPs was soon followed by a second ETF, the TSE 100 Index Participation Fund (HIPs for short) that tracked the broader TSE 100 Index, and both these products were originally targeted for institutional investors.

Although ETFs have been around for over 30 years now, when I first started promoting these products back in 2003, they were still considered relatively new. Back then, there were only two ETF providers in Canada and just a handful of products available, compared to today where there are 40 ETF providers and over 1000 products.  As one of the first ETF professionals in Canada, I spent the first five years speaking to individual investors and investment advisors and educating them on what ETFs were.  In many cases, people confused ETFs with EFTs (electronic fund transfers).  At first, ETFs were used mainly as a substitute for index-based mutual funds, but now they are used widely in lieu of mutual funds, individual stocks, and derivatives by both retail and institutional investors. And although ETFs are still dwarfed by the mutual fund industry, the growth and adoption of ETFs has been remarkable over the past 20 years.

Today, global ETF assets exceed US$9 trillion.1 According to data from the Canadian ETF Association (CETFA), Canadian ETFs account for $326.1 billion in assets, which is an increase of 37.7% year-over-year.2 To put this in perspective, at the end of 2013, ETFs represented 5.9% of total investment fund assets in Canada and today that number stands at 13.8%.2 It’s a significant increase in just under eight years, but with plenty of room still to grow, which is why I’m so excited with my new position at Franklin Templeton as Head of Platform and Institutional ETF Distribution.  

Franklin Templeton is a significant global asset manager with strong brand recognition and exceptional capabilities. In many of my conversations since joining three months ago, I found that most institutional clients were unaware that FT was even a player in the ETF space, and that’s despite having almost 100 global ETF products and US$16 billion in ETF assets. So my goal in the coming years is to build the Franklin Templeton name as a legitimate ETF provider in the institutional marketplace and building out our market presence.

Although retail investors have embraced ETFs in a big way over the past decade, it was in the institutional space that exchange-traded funds first rose to prominence.  Now institutional investors use ETFs as portfolio construction tools for liquidity management, cash equitization, transition management, strategic and tactical calls, rebalancing tools and even as a replacement for derivatives. Generally, institutional investors tend to use passive broad market beta ETFs with large AUMs and have high secondary market liquidity. However, with newer lower cost products available, ETFs with lower assets under management but with lower fees are being used more.  Retail investors certainly use the same passive ETFs strategically, but tend to be much more open to the vast variety of other ETF available, such as actively managed ETFs, factor-based ETFs, thematic ETFs, etc.

The COVID-19 crisis has not slowed the growth of ETFs down one bit; in fact, ETF assets in Canada stood at $257.3 billion in December of 2020 and have since risen to new record high of $326.1 billion as of August 31, 2021. If anything, I think this growth will accelerate. Looking at the industry as whole, I think we’ll definitely see an increase in ETF entrants over the coming years, but at the same time, there will be consolidation and some players will exit the market. I fully expect assets into ETFs to continue to break records and surpass mutual fund flows from year to year with unique products being launched. Usage of ETFs will also rise amongst new users in the institutional marketplace which will further fuel the ETF fire.  So after almost two decades in the Canadian ETF industry, I’m even more optimistic about the next two decades!

1. Source: Morningstar, as of July 31, 2021
2. Source: CETFA, as of August 31, 2021

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What Are the Risks?

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.