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A view into the rise of ETFs in Canada

Exchange-Traded Funds (ETFs) continue their ascent

Canadian investors currently have access to close to 600 ETFs from 27 ETF providers. Observers suggest that the Canadian ETF universe could reach CAD 200 billion by the end of 2019, up from CAD 150 billion at the end of 2017.1

What factors explain this growth, and what impact is it having on the larger Canadian investment ecosystem? These questions were the focus of a panel discussion at the RBC Investor and Treasury Services' (RBC I&TS) recent Investor Forum. Panelists included Dani Lipkin, Head of Business Development, ETFs, CEFs & Structured Notes at the Toronto Stock Exchange; Greg Walker, Head of Institutional Sales–ETFs at Vanguard Investments Canada; and Marty Gillespie, Head of ETF & Portfolio Trading, RBC Capital Markets.2

ETFs as "the Uber of financial services"

Panelists noted that the flexibility, transparency and efficiency of ETFs combine to make them a disruptive force in the Canadian investment world as they bring synergy to the marketplace, reduce costs to participate and disrupt the formerly established ways of doing business.

"The "dual nature" of ETFs, means that they are highly regulated as funds that are traded on an exchange, yet "still manage to have a lot of flexibility in the Canadian marketplace and elsewhere," said Walker.

For Gillespie, ETFs are "the Uber of the financial services industry," and whether you are an ETF advocate or not, “you can't avoid the growing impacts of ETFs" on the way the industry operates.

Key insights

  • In Canada, ETF growth encompasses an increase in the number of providers, the number and range of products and the volume of assets
  • While ETFs have conventionally been viewed as providing relatively narrow solutions targeted to passive investors, they are increasingly finding new uses as "just another tool in the toolbox", even for active managers and in active strategies
  • The use of ETFs as portfolio “building blocks" means they are now used in a diverse set of solutions by robo-advisors, in single-solution strategies such as all-in-one funds and in asset allocation funds

Dispelling ETF myths

As ETFs tend to be less well-known than traditional investment products such as mutual funds, panelists noted that ETFs have attracted a variety of “persistent myths" about how they function and how they may affect capital markets. For example, one myth is that ETFs are “going to cause the next big market crash," said Lipkin. On the contrary, noted Walker, "market disruptions provide a way for ETFs to prove their value".

Consider a scenario in which an exchange is closed, Walker commented, or perhaps we are facing a market event such as the 2010 credit crunch or the 2011 earthquake off the coast of Japan. As ETFs trade throughout the day, in contrast to mutual funds, which can only be redeemed at the end of the day, ETFs provide a way for market participants to continue to interact throughout market disruptions.

During the credit crunch, for example, trading in bonds had halted but in contrast bond ETFs were trading “hundreds of millions of dollars per day," said Walker, providing the market with much needed liquidity. He further noted that, while we have not experienced the same kinds of extreme market events in Canada, nevertheless the oil price drop in 2014–2015 produced a shock to bond funds, with bond ETFs similarly able to step in and provide liquidity.

Room for growth

Looking forward, panelists observed that the growth in ETFs is the result of activity by a wide range of market participants, from individual investors to pension funds, roboadvisors and hedge funds.

Due to their flexibility, transparency and efficiency, "the uses for ETFs are almost limitless"

As not all investment strategies work in all environments, there are situations in which ETFs meet client needs, even for those who would traditionally use other strategies, such as futures or options for risk management. “Even the most traditional of stock-pickers can appreciate the liquidity of an ETF," added Gillespie.

Panelists concluded that the rationale for the growth of ETFs in Canada includes the following key factors:

  • cost considerations, as providers use ETFs to quickly and efficiently fill gaps in the product shelf
  • demand from traditional mutual fund providers whose clients want access to ETFs
  • product manufacturers that use ETFs as a format to allow investment advisors to access their products
  • the regulatory regime, which can make launching an ETF attractive compared to launching alternative products such as mutual funds

Given this broad range of factors, ETFs are on track to capture a growing share of the Canadian investment market.

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1. CETFA: Canadian ETF Association, Industry Statistics (December 31, 2017) Canadian ETF Assets as of December 31, 2017

2. RBC Investor & Treasury Services (May 10, 2018) Investor Forum 2018: ETFs