3 Canadian ETF Trends to Watch in 2022

These types of funds caught the attention of retail investors and broke records last year, National Bank research finds.

Andrew Willis 24 January, 2022 | 3:17AM
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Road Sign

It’s good to get some clarity on a year that saw changing tides in the Canadian equity market, with ETF performance suggesting renewed strength in the energy and financial sectors. But that’s only part of the picture, and not necessarily where the money is going.

Asset flows, or what Canadian investors have actually been buying, paint a bigger picture. New research from National Bank of Canada shows that investors are flocking towards certain types of funds. We can glean some valuable information from this. For example, what Morningstar Investment Specialist Ian Tam describes as a “small explosion” of all-in-one, or asset allocation ETFs, tells us the balanced approach is still alive and well, and its component funds still in demand. The research also found that less-active, index-based products still reign supreme in terms of sales - although they’re starting to look a little different now.

All in all, Canadians are still largely trusting of broad markets, and continue to be cost-focused when it comes to their ETFs, the National Bank report found, but they’re picking active options more than ever. “Heading into 2022, active ETFs represent over 40% of the total number of ETFs, and by assets, are one-quarter of the marketplace,” the report found. Flows into asset-allocation ETFs, in particular, were among the most popular categories in the active space.

All-in-Ones on a Streak

The report also noted that asset allocation ETFs haven’t suffered a single month of net outflows since 2018. Are DIY investors steadily, and increasingly, seeking the help of skilled management in volatile times? Or is this an ongoing migration into the self-directed accounts of traditional mutual fund investors? “These products offer a new spin on a classic mutual fund product – balanced funds,” says Tam. “The difference is in the way they are marketed, how they are traded and their underlying composition.”

“Marketing aside,” continues Tam, “all-in-one ETFs offer the liquidity advantages of a stock, while maintaining positions in low-cost indexed components, together creating a formidable product that make effective diversification across asset classes and securities more accessible than ever before for the DIY investor in Canada.”

Classic ‘Passive’ Still King

But as much as buyers of ETFs might be handing off the helm to active strategies in these tough markets, they appear to recognize the difficulty in achieving alpha. “Despite the shocks and surprises of 2021, low cost, market-cap weighted ETFs for broad exposure still dominate the leaderboard,” notes the report.

Tam understands that preference among Canadian ETF investors right now: “One of the great arguments for investing passively is that the market is generally efficient. That is, information is disseminated widely and any new information on companies is quickly priced into the price of a stock or bond. Hence, it is very difficult for a fund manager to beat the index in these markets and investing in the index itself may yield you better results, especially after the consideration of management fees (which are higher for active management).”

Ideas Making Popular Investments

Not all popular Canadian ETFs came with ultra-low fees, however, as the report found that thematic equity ETFs had a year of “gangbuster flows” and entire categories opened up. The “Crypto-Asset” category, which kicked off in February last year, grew from zero to $5.9 billion in assets across more than 30 different products in under a year, the report noted.

The growth aligns with research performed at Morningstar to find out who’s biting on bitcoin and why. We found “a tremendously large portion of the public investing in an asset that no one really knew about a decade ago,” says Steve Wendel, head of behavioural science for Morningstar.  

But for all the excitement, thematic ETFs, excluding ESG ETFs, still remain a “small sliver of the Canadian ETF landscape,” said the report. Accordingly, with their risk profile and narrow exposure, investors may be choosing to use these thematic funds as a complementary, rather than a core holding.

Lastly, Canadian ETF flows last year help us understand that thematic funds may not be necessarily stuck on the sidelines. The ‘theme’ of ESG, for example, seems to have graduated into a key investment factor. The report found ESG ETFs now take up 2.8% of total Canadian ETF assets, along with a “blossoming” product type variety: “We are seeing quant scoring methodologies take root, in addition to niche environmental (e.g., green energy) themes, index-tracking ETFs, actively managed ESG mandates as well as carbon offset products all falling under this broad umbrella.” And the numbers are up, “over the 2021 calendar year, assets in sustainable funds and ETFs from Canadian-domiciled providers doubled, further highlighting investor interest in this area,” adds Tam, “The increasing popularity/need for sustainable fund choices has clearly exhibited itself in Canada.”


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About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar.ca. Follow him on Twitter @AndrewWillisCDN.


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