Mackenzie Investments’ mid-year ETF report finds Canadian industry flourishing

Michael Cooke, Mackenzie Investments

Canada’s Mackenzie Investments, with CAD197.3 billion in assets under management, has published its 2021 Mid-Year ETF Report, which finds that CAD25 billion flowed into the Canadian ETF market in first five months of 2021, putting it on the path to beat 2020’s record-breaking CAD41 billion year. The six months also saw a record-breaking CAD billion in inflows to Canadian-listed ESG-focused ETFs between January and March.

Canadian-listed ETFs are also fuelling momentum and providing investors with more options the firm says. There are now more than 900 Canadian-listed ETFs – and this number is expected to grow throughout the second half of the year. Mackenzie Investments writes that in addition to providing potential tax advantages, it’s easier for the average investor to buy and sell Canadian-listed ETFs, and they don’t have to worry about currency fluctuations if they hold currency hedged ETFs.

Michael Cooke (pictured), Mackenzie’s Head of ETFs, says: “From a Canadian perspective as the ETF market continues to mature with more seasoned products, including more Canadian-listed products, Canadian investors are increasingly seeing the value and benefit of using Canadian listed products designed for Canadians by Canadians.”

Canada lays claim to launching the first ETF in 1990. “We can claim a number of firsts in this industry as we have embraced innovation,” Cooke says. The crypto ETF, so elusive in the US, has been very successful in Canada. “What has happened in Canada has accelerated the process and will fast track the approval of crypto ETFs in the US and other markets,” he says.

Growing ETF inflows in Canada are largely being driven by investors’ focus on equity markets, with approximately 64 per cent of inflows as of May 31 going into Canadian, US and international stock funds, the report finds.

“As has been the case in many geographies, 2020 was a record year for ETFs despite the impact of Covid on the economy and capital markets,” Cooke says. “2021 is on a similar trajectory for record breaking flows in ETFs and mutual funds. The ETF industry continues to grow and as it expands more retail and institutional participants are seeing the utility of the ETF, but it’s not necessarily at the expense of mutual funds.

“There is an interesting narrative that the expansion of usage is not coming at the expense of other types of investment vehicles,” Cooke says. “More investors are making larger investments and that is what is behind the accelerating figures. It’s a reflection of changing investor preferences such as among the retirees and pre-retirees who are more goal oriented with their investments – they are looking for outcomes.”

A consequence of that has been a rise in inflows to asset classes that help protect portfolios against inflation, such as broad commodities, gold, floating rate securities, TIPS and short duration fixed income. By the end of May, CAD458 million flowed into short maturity ETFs, second only to the CAD946 million that went into broad based and mixed ETFs.

Canadian investors were also searching for yield, with Canadian interest rates expected to continue to be low until at least 2023. The report notes that investors are increasingly turning to ETFs to create a globally diversified fixed income portfolio to help reduce risk and

generate yield. They are also sourcing yield from equities in dividend, REIT and infrastructure ETFs, the study found.

“Asset allocation has become more important,” Cooke says, “with older investors more outcome orientated, ETFs can give precise efficient and tailored asset allocation for institutional and retail investors and as the market continues to mature and products continue to scale ETFs become more relevant to a broader range of investors – it’s a perfect storm.”

While trading volumes have picked up across North America, Cooke says that some of that can be ascribed to meme stock trading frenzies, however, he feels that if the ETF industry continues to innovate and offer dynamic exposures, such as cryptocurrencies, it will bring in new types of customer.

Counter-cyclically, when equity markets are down, as in the period of market turmoil in early 2020, there were record flows in Canada into equity ETFs.

“A low correlation between performance and flows shows that there are more strategic investors who are in for the long term,” Cooke says.

The pandemic has resulted in a renewed interest in ESG ETFs, according to the survey, with between January and March, a record-breaking CAD3 billion flowing into Canadian-listed ESG-focused ETFs, up from about CAD1.8 billion in all of 2020.

“As we know socially responsible investing has been around for a long time,” Cooke says, “but it has taken on more urgency against a Covid backdrop.”

The marketplace has responded in Canada, with more choice, ranging from more traditional ESG screens, to variations of plain vanilla equity portfolios overlaid with carbon offsets to neutralise the estimated carbon emissions of the underlying companies.

“Innovation is reflected in ETF design, with progressive minded regulators in Canada that have approved a number of these products,” Cooke says.

Looking forward, Cooke comments on the headline information based on musings from central banks that they may be reversing their accommodative quantitative easing programmes around the world. “It doesn’t look like any near-term concern that there will be a tightening of monetary policy,” he says.

“We might have to take a little more risk or look further afield to get the return we have become used to but the indications now are of a strong economy and one that came out of this crisis with very healthy balance sheets.”

Heightened volatility will require investors to adjust their portfolio and ETFs have so much strength in that regard, he comments.

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