ETF Report Q4 2016 Commentary

ETF Report Q4 2016 Commentary

For much of 2016, investment funds faced an inauspicious environment, onethat included socio-political headwinds created by the U.S. presidential election and the aftermath of the U.K.’s ‘Brexit’ decision. Mutual funds consequently experienced their lowest annual flow totalssince 2011 and were affected by both lower gross sales and higher redemptions in 2016 than during previous years.While mutual fund net flows were 48% lower in 2016 when compared to the previous year, Canadian-listed ETF net creations were virtually unchanged from 2015, when they managed to generate $16.4 billion in net creations for the year; this figurefell short of the annual record of $16.5 billion set in 2015 by just under $150 million.

The relatively strongersales also allowed Canadian-listed ETFs to gain market share within the broader investment fund space. As of December 2016, Canadian ETF assetstotalled $113.6 billion, which accounted for 8% of investment fund assets (mutual funds and ETFs, collectively), an increase of two percentage points in market share since December 2013. The $113.6 billion in assets also marked a new high-watermark for the segment as it represented a year-over-year growth of 26.9%. By comparison, mutual fund assets grew 7.7% over the same period. In addition to outpacing mutual funds in asset growth, ETFs accounted for 35% of net flows into investment funds in 2016, their largest share on record.

In terms of retail distribution, during the third quarter of 2016, Canadian-listed ETF holdings within retail brokerage accounts added $1.7 billion in assets. ETF assets grew particularly vigorously in fee-based accounts within the full-service brokeragechannel during the third quarter of 2016, having expanded by 7.6%. Growth in the online/discount brokerage channel was also positive, at 3.2%. This contrasted with the private investment counsel channel, which experienced more substantial growth of 7.6% during the quarter, albeit from a smaller asset base.

In addition to reaching new highs for assets, 2016 welcomed several new entrants into the ETF segment. A total of six firms entered the ETF fray in 2016, each from distinctly different backgrounds ranging fromindependent mutual fund sponsors to a U.S. ETF behemoth and to a large Canadian deposit-taker; all trying to provide value to specific segments of the ETF space that are developing rapidly. Collectively, the six newentrants launched 31 ETFs, nine of which are actively-managed, six that are passively-managed, with the remaining 16 utilizing a strategic beta investment style. In total, the 31 funds launched by the six new ETF sponsors generated over $300 million in net creations in 2016.

Strong saleswere not exclusive to the new sponsors. Sales within the ETF segment werewidespread, with all 18 Canadian ETF sponsors generating positive flows during the year. BMO Asset Management was the best-selling sponsor for both the fourth quarter and for the year overall, accounting for $1.6 billion in Q4 2016 and $8.0 billion in 2016 net creations. Vanguard was the second best-selling sponsor, with $2.6 billion dollars in annual net creations for the year, whileBlackRock rounded out the top three, with $1.9 billion in net creations.

Equity ETFs were the best-selling ETF asset class during 2016, having accounted for $9.8 billion in net creations. U.S. equity ETFs were the best-selling equity sub-asset class, with nearly 40% of the broader equity ETF intake. In contrast to the mutual fund industry, where Canadian equity mutual funds experienced outflows above $4 billion, Canadian equity ETFs generated just under $3 billion in net creations for the year. Sales results within the fixed income ETF asset class, which accounted for $6.2 billion in 2016 net creations, were mixed. Investment-grade bond ETFs accounted for all of the positive flows into fixed income ETFs, while high yield bond ETFs experienced net redemptions of $50 million.

With what can now be considered consistent annual flows (six straight years of at least $5 billion in net creations, and over $10 billion in four of the last five years), ETFs are positioned to grow even further over the next several years. Shifting advisor practices at full-service brokerages and growing awareness by self-directed investors will continue to favour the expansion of ETFs in Canada.

The fast-growing ETF business will continue to attract new entrants in the near future. Both AGF and Redwood Asset Management have filed prospectuses for a suite of ETFs during the second half of 2016, and several other sponsors have expressed interest in joining the segment.

This analysis was developed by Strategic Insight.