Over the past 12 months, several trends have emerged in the ETF marketplace that have played a large part in fuelling the huge growth in ETFs in Canada.
Probably the highest-profile trend is the focus on fees. Canadians are becoming increasingly fee conscious, and that’s a big reason why ETFs are seeing such an increase in growth. This is understandable given ETFs’ low management fees. Canadian investors are increasingly aware that ETFs can bring broad diversification to their portfolios at a low cost.
Many investors, however, are not simply interested in buying the cheapest fund: they’re also looking at the kind of exposure that ETFs can add to their portfolio and what that exposure is worth to them. Quite often, investors see the value in paying a higher price for smart beta ETFs, for example, designed to reduce correlation between stocks, and actively managed ETFs, that focus on income, value and low-volatility investing.
While fees for these funds are still typically well below the average mutual fund fees, they’re not as low as traditional index-replicating funds, which require little active management. But investors who understand the added value from these products are willing to pay the higher fee.
Between the many Canadian-listed and foreign-listed ETFs, investors have a wide selection to choose from. In 2020, over 115 new ETFs came onto the market, bringing the total number of available ETFs to 1,010.
There have been a number of new innovative products that focus on specific sectors or themes, such as cryptocurrency. Part of the reason why there’s so much more choice is that the one-size-fits-all approach doesn’t always work: people have different needs, challenges and goals. For some, buying a basic balanced fund may not be appropriate because they need more exposure to income-producing products.
ETFs’ transparency, liquidity and tradability have made it much easier to create personalized portfolios. Investors can quickly adjust how much risk they’re taking on or make asset mix changes, as their personal situation evolves. ETFs make it easy to add or subtract from a portfolio seek to achieve better outcomes.
According to Statista, Canadian robo-advisors (online-only financial platforms that invest on your behalf) held around $11.4 billion Canadian dollars in assets in 2020, and that’s expected to rise to $24 billion by 2024. ETFs make it easy for these platforms to create diversified portfolios according to different tolerances for risk.
Younger investors are driving the demand for digital financial experiences, and financial companies will start offering more online investing options, with many of them making use of ETFs in that process. Online tools are likely to play an increasingly meaningful role in investing in Canada, especially over the next decade as more wealth gets transferred to the next generation. We believe this will in turn bring more investment in ETFs.
Read our ETF Outlook Report for more insights.