Q1 2018 CETFA Commentary
Canadian-listed ETF assets continued to exhibit steady growth over the first quarter of 2018 and rose by 3.2% to end March at a new high-water mark of $151.8 billion.With the first three months of 2018 experiencing a return of volatility to global markets and a corresponding slump in asset prices, growth was driven by robust sales activity.Over the first quarter, Canadian-listed ETFsgenerated$8.2 billion in net creations,but assets increased by just $4.7 billiondue to negative market effect.
The net creations generated over the first quarter of 2018 marked the best-selling Q1 on record and represented the second-highest sales total for any quarter overall, conceding only to the $8.8 billion registered in Q2 2017.After accounting for 37.0% of total investment fund net flows over 2017, ETFstook just 31.1% of total investment fund net flows over the first two months of 2018. Nevertheless, ETFs continued to punch considerably above their weight: as of February 2018,the product structure accounted for 9.2% of total investment fund assets.
After finishing 2017 as the year’s best-selling ETF sponsor, BMO Asset Management held its ground atop the rankings over the first quarter of 2018, generating three-month net creations of $3.2 billion, or 38.3%, of total ETF inflows for the period. Vanguard finished the quarter in second place in the sales rankings, with net creations totalling $1.7 billion, while Mackenzieproduced $714 million in Q1 2018 net creations.
The equity asset class finished the quarter accounting for 85.6%, or $7.0 billion, of total ETF net creations; this representeda significantincrease from the 65.3% share this classgenerated over 2017. Mirroring the previous 12 months, Canadian and international mandatesfinished Q1 2018 as the best-selling and second best-selling sub-asset classes within equity, with three-month net creations totalling $1.8 billion and $1.2 billion, respectively. European mandates rounded out the top three best-selling sub-asset classes, generating Q1 2018 net creations of $1.0 billion after generating just $160 million for the entirety of 2017.
Fixed income mandates generated $1.0 billion over the first three months of 2018, withinvestment-grade bondETFs accounting for 82.9% ofthe total. Within the investment-grade bond ETF category, mixed bonds generated $880 million in three-month net creations, while the remaining categoriescombined to finish the quarter in net redemptions.
The first quarter of 2018 saw substantial action on the product development front, as a total of 45 ETFs began trading over the three-month period, the greatest number of launches for a quarter on record. Actively-managed ETFs accounted for 22 of the 45 fund launches over the first quarter, while just 18 employed a purely passive strategy. The emergence of thematic ETFs intensified over the first quarter,as investors have increasingly pursued exposure to emerging macroeconomic trends. Three ETFs were launched over the periodin each of the marijuana and blockchain technology sectors, while another two launches fell within the realm of socially responsible investing.
The ETF landscape welcomed one new firm over the first quarter of 2018, as Bristol Gate Capital Partners launchedtwo actively-managed funds in February, bringing the total number of Canadian ETF sponsors up to 27 at the end of March. At their heels, Brompton Funds entered the segment in April 2018 through the conversion of two closed-end funds into actively-managed,exchange-traded offerings. The ETF marketplace is poised for further expansion, as Scotia Global Asset Management filed a preliminary prospectus for four exchange traded funds of funds in Q1 2018, becoming the latest of the Big Six banks to enter the space. Each fund intends to wrap one or more underlying ETFs, and Blackrock Canada has been retained to act as sub-advisor to the funds.
In terms of distribution, Canadian- and U.S.-listed ETF assets held by Canadian investors totalled $178.9 billionat year-end. Overall retail ETF ownership grew by 7.1% over Q4 2017 to end the year with assets totalling $119.6 billion. The full-service brokerage (FSB) channel continued to dominate retail ETF distribution at year-end, accounting for 59.2%of total retail assets. The shift toward fee-based accounts continued within the FSB channel, as fee-based assets grew their market share in the FSB channel by 1.2% over Q4 2017. The online/discount brokerage (ODB) channel, meanwhile, accounted for 33.7%, or $40.2 billion, of retail assets as of December 2017. Despite robo-advice accounting for the smallest share of ETF assets held by Canadian retail investors, at 1.6%, the channel experienced the highest growth over Q4 2017, with assets increasing by 25.4% over the three-month period.
This analysis was developed by Strategic Insight.