Global ETF Industry Set to Double in Next Five Years; Canadian Industry to See Even Faster Growth
TORONTO: BMO Global Asset Management (BMO GAM) released its annual ETF Outlook Report, which examines the Exchange Traded Fund (ETF) industry and highlights the trends expected to drive the year ahead.
Looking Back at 2018
The global ETF market hit a record high of US$4.7 trillion assets under management (AUM) at the end of the year. There were 6,483 ETFs globally, up almost 12 per cent from the previous year.
The Canadian ETF market grew to C$156 billion AUM with inflows of C$20 billion.
The Canadian equity ETF with the most inflows last year was BMO S&P/TSX Capped Composite Index ETF (ticker: ZCN), with more than C$1 billion in net flows.
Investors continued to show support to broad Canadian equity exposure - especially to financials and energy - seeing value as Canada has underperformed leading global markets.
Investors look to ETFs as an effective, transparent, low cost asset allocation tool, said Kevin Gopaul, Global Head of ETFs, BMO GAM. The diversification and trading efficiency that ETFs offer has become more important than ever as volatility has returned to global markets. The value of positioning with traditional passive ETFs and new active ETFs was evident during the market corrections in the fourth quarter.
Today, BMO GAM offers 77 mandates and has a market share of 31 per cent in Canada, according to Bloomberg data.
Key Trends from 2018 into 2019
The report also looks at themes affecting the ETF industry.
Asset Allocation Investing: 2018 saw the introduction of asset allocation ETFs, the industry's answer to portfolios traditionally offered by mutual funds. Similar to the success of traditional ETFs, these ETFs are showing signs of disrupting the industry by challenging fund construction and entrenched products.
Volatility: Global monetary tightening, rocky geopolitics, and lower earnings from leading stocks led to increased market volatility. As a result of their trading efficiency, where a diversified exposure can be placed with one intra-day trade, investors have turned to ETFs to navigate the resurgence in volatility.
Active ETFs: Strategies that truly differentiate from the market have grown in popularity as market volatility has increased. Just like mutual funds, active ETFs will need to prove their value by delivering outperformance and differentiating exposures.
Passive ETFs: Traditional ETFs with their diversification, low cost, trading efficiency and transparency - are as relevant as ever - and the addition of active ETFs is complementary.
Fixed Income: There has been a trend toward short-dated fixed income ETFs. Tactical trading and repositioning within fixed income using ETFs has become a popular strategy.
While ETFs are now a mainstream option, they still only represent 10 per cent of the AUM of the mutual fund industry in Canada. As the number of ETF providers and the sheer number of ETFs offered increases, the report notes that it is more important than ever to work with an established provider that is focused on education and support.
The increased availability of industry tools and databases, along with the rise in the number of ETF analysts, have helped investors research and improve their portfolios, said Mr. Gopaul. As investors look to ETFs, there is a greater need for clarity between choices.