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The Canadian exchange-traded fund (ETF) industry sits at CAD70.1 billion in assets under management (AUM) at the end of H1 2014, up 11.1 per cent from year end 2013, according to BMO Global Asset Management (GAM).
BMO GAM’s Canadian ETF Outlook Update 2014 reveals that, so far this year, equity ETFs have had CAD529 million in inflows and fixed income ETFs saw impressive inflows of more than CAD2.5 billion.
BMO GAM's ETF business recently surpassed CAD15 billion in AUM and currently consists of 58 funds.
"Capital markets are continuing to perform well and this has been reflected in the continued growth of the ETF industry in Canada," says Rajiv Silgardo, co-CEO, BMO Global Asset Management. "Investors look to ETFs as portfolio construction tools used to access growth across sectors and geographies."
The report identified three key factors which have played a significant role in the ETF industry so far this year:
1.Competition and growth: Continued growth results in more products being offered, and more competition. However, new strategies increase different forms of access to various asset classes. Additionally, the reduction of ETF management fees across major investment categories presents an opportunity for Canadians to invest very effectively in core broad market mandates.
2.International efficiency: The use of Canadian ETFs for exposure to international markets will continue to gain popularity because of low fees and tax efficiencies compared to international products.
3.Smart beta: Smart beta products which leverage alternative-weighting strategies, offer exposure based on various factors such as low volatility, momentum and quality. These products, targeting specific factors that provide specific investment outcomes over the long term, will continue to be successful.
Silgardo says providers have been focused on low volatility funds, which take advantage of rising markets while offering downside protection. Dividend-based products also offer some downside protection, while delivering higher and more tax efficient income from mature, stable companies.
According to the report, the substantial growth of ETF-based portfolios will continue, as these funds combine the efficiency, diversification and tradability of ETFs with professional active management.
As investors seek out income in the current low interest rate environment, option-based strategies that add income will expand globally and across sectors. Additionally, specialty solution ETFs will be in the spotlight as providers innovate to create products that will cater to specific investor needs.
ETFs have captured the attention of the market generally, but have been particularly significant for fixed income. Investors are reacting to market changes - specifically the ongoing American economic recovery – and are looking to position their bond portfolios in response to them. This could expand beyond Canadian bonds to US and global fixed income ETFs.
"We expect the momentum into ETFs to continue at a rapid pace, as more investors use more ETFs to build better portfolios. This will result in more competition, innovation and benefits to users," says Silgardo.
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