The events of last year shook almost all aspects of our lives - and it was no different for the financial industry. The volatility we saw in the market last year became a growth factor for the ETF industry. A number of global markets fell between February and March, only to rise by more than 55% throughout the rest of the year. If you would have asked anyone at the start of the pandemic whether markets would be in the black by December 31, not many would have thought this possible. Between January and November, a record-breaking $41 billion poured into the industry, shattering last year’s record in seven months. As big of a number as that may be, I wasn’t at all surprised to see inflows rise last year. If you look at the history of the ETF industry, periods of increased volatility have accelerated demands because people saw the need and relevance.
What is interesting to note is that ETF inflows did not come at the expense of mutual fund net sales. Rather, people were moving out of individual stock and bond holdings and into ETFs. ETFs were held up in 2020 because they provide liquidity, transparency, and low fees. The strength in ETFs is that their value derives from the underlying assets they hold, and as long as the underlying assets trade on exchanges with reasonable liquidity, ETF trading would is expected to perform with equal efficiency. Although some asset classes did experience liquidity disruptions, such as US Treasuries and investment-grade bonds, the ease of trading and low transaction cost still generated significant trading volume.
The growth is reflective in the numbers. In 2020, we saw more than 115 new ETFs come to market in Canada alone, bringing the total number of available Canadian ETFs to 1,010. Although there are 39 firms now offering ETFs, only 10 issuers account for 93% of AUM which topped $257 billion in 2020, up from $192 billion in 2019. A year to remember on many fronts, but for the ETF industry, it was a positive one.
Stay tuned for Part 2 of this blog series as we uncover learnings from a year in review and unveil ETF trends to consider for the year ahead.
Data source: National Bank (FY 2020)