Warren Collier, Head of iShares in Canada, looks at how ETFs fared in 2015 and what may drive them forward in the year ahead.
The commodity shock, which has sent oil prices down to their lowest level in over 10 years, had a resounding negative impact on Canada’s economy, currency and equity markets in 2015, resulting in one of the most challenging years for investors since the financial crisis.
But amidst the turmoil, exchange traded funds (ETFs) in Canada finished the year off strong, crossing $90 million in assets under management (AUM), and finishing the year with all-time net inflows1.
To put it simply, as more investors embrace ETFs, recognizing the versatility, cost efficiency and transparency they provide, we anticipate that the Canadian ETF industry will continue its momentum, surpassing $100-billion in AUM by the end of 2016 and reaching $300-billion five years from now.
So, what’s driving this growth?
While ETFs across asset classes continue to demonstrate their worth, fixed income is one area that I believe will help further propel this growth. With the added layer of liquidity they can provide, to the transparency and cost efficiency of accessing fixed income exposures through ETFs, I see fixed income as a driving force in ETF growth. As we saw with the sell-off in high yield bond markets in December, ETFs can provide investors with an added layer of liquidity, not available with individual bonds. I expect they will continue to play a big role in providing better liquidity to investors in the coming months.
As investors sharpen their focus on returns and fees, Smart Beta ETFs will prove they are not just a passing fad, as investors look for cost effective ways of seeking persistent market returns.
But that doesn’t tell the full story of why we believe investors will continue to flock towards ETFs. In Canada, regulatory reform across the industry is likely to play a huge role in the expanding footprint of ETFs and 2016 could be a watershed year on that front.
As part of the regulatory initiative known as the Client Relationship Model, Phase 2 (CRM2), investment brokers and dealers in Canada will soon be required to provide greater disclosure around fees and performance. This shift towards greater transparency is likely to have a transformative impact on the investment industry. As transparent and cost effective investment vehicles, I believe increased ETF adoption will result, particularly as individual investors realize the potential advantages of ETFs over similarly categorized actively-managed mutual funds.
The tailwinds favoring ETFs don’t stop there, either. As an industry, the number of ETF providers in the country are expected to grow, as another one of Canada’s big banks and a few of the country’s largest mutual fund companies get ready to enter the space in pursuit of its growth potential.
Of course, that doesn’t mean there won’t be challenges in 2016, particularly as Canada’s economy and its financial markets remain on precarious ground, but ETFs have tremendous momentum and plenty of juice to keep the needle moving in the right direction over the next twelve months.
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1Source: National Bank, December and Full Year 2015 ETF Flows Report.