The numbers are in. The Canadian ETF market eclipsed the $200 billion mark in November. We added on in December with positive fund flows and market gains. From National Bank’s annual report we can see that investors grow more cautious. Bonds and cash were the leading stories in the Canadian ETF report for 2019.
Here’s the top line / headline courtesy of that National Bank Canadian ETF report.
Low fee index investing and ETFs is certainly one of the big stories of the decade.
ETF flows (new purchases) in 2019 broke the previous record set in 2017.
This chart shows the growth trajectory.
For the decade assets grew from $32 billion to that $205 billion figure.
A sea-change seems to have occurred in Canadian investor preferences because even though ETFs have a comparatively small market share relative to the juggernaut that is the Canadian mutual fund industry, they outsold mutual funds for the second year in a row. Specifically, ETF assets are just 11% of the $1.9 trillion still held within Canadian mutual funds, but they outsold their traditional counterparts by approximately $10 billion as of November 2019National Bank Report
High fee mutual funds are history.
Certainly the bulk of investments remain in mutual funds. And that’s sticky money. For too many Canadians those monies are likely staying put. Hey we can’t save everyone. But it is certainly incredible that with the massive mutual fund sales force they are losing ground. The business model moving forward is drying up.
For 2018 plus 2019 net sales.
- ETFs – $43.2 billion
- MFs – $13.9 billion
Yup, high fee mutual funds is dead investment style walking. OK, limping. It’s all over but for the timing. And certainly the mutual fund providers and sales force could save themselves. But they likely won’t. They need to slash fees in a meaningful way. They are not. That’s a big business-killing mistake long term. It looks like they simply want to bleed investors from that current $1.9 trillion. Hey, it’s hard to walk away from some $40 billion in annual fee revenues. I get that.
Timing the high fee exit.
But of course the mutual fund industry knows what’s going on. They write about it constantly in their MFDA (Mutual Fund Dealer Association) member reports. We see many of them hedging their bets, getting ready. The 2018 and 2019 numbers should shock anyone looking to make a living off of selling high fee mutual funds in the future.
If you wait too long you will get left behind. That goes for mutual fund providers and advisors and planners.
The Canadian ETF report suggests that moving forward most investors will likely embrace ETFs and lower fee investments. The mutual fund industry will pick up the pace on those fee reductions. They have to. And it’s a positive feedback loop. The more that investors embrace ETFs, the quicker they have to adjust.
Yes, 2019 was a wonderful year for investors. Here are the returns for the simple core portfolios on this site. But as the National Bank report notes Canadian investors were looking to de-risk. No problem there I say. Investors are known for investing outside of their risk tolerance level. The most important aspect will be that you can stay the course. Embrace the portfolio that your risk tolerance level and time horizon permits.
Canadian ETF investors collectively are in that area of a Balanced Growth model. Of course individual investors will diverge all across the range of stock to bond and risk ratios. But from what I’ve seen, the majority are in that Balanced to Balanced Growth range.
From the report …
Fixed Income ETF assets grew at an annual rate of 27% over the past 10 years, faster than Equity and Canadian ETFs … Canadian corporate, government and aggregate bond ETFs all happened to deliver 4% annually … the S&P/TSX Composite Index’s annual return in the past decade was only marginally better at approximately 6% … Fixed Income ETFs currently account for 34% of Canadian ETF assets, but they took up 52% of the $28 billion ETF flow in 2019, surpassing Equity’s take by $4 billion.
Invest within your risk tolerance level.
That is very telling that the Canadian investor chose to or was advised to invest in a near even split. More attention is being paid to risk tolerance levels. Most investors do not have the risk tolerance to watch their portfolio decline by 50% or 40% or even 30%. There is nothing more important than investing within your risk tolerance level.
While cash and bonds were popular so were low volatility funds. Perhaps thanks to my look at BMO’s low volatility ETF and funds. 🙂 Just kidding of course. Cut The Crap Investing does not affect any fund flows to any noticeable degree.
Core passive index funds still drive the bus, but smart beta and factor based funds (and active) are gaining in popularity.
One ticket asset allocation portfolio ‘mania’.
As a few of us had described in the MoneySense Best ETFs in Canada for 2019, these one ticket options are game changers. They’re now gathering assets at a clip of $100 million per month – sweet!
Why not? Comprehensive low-fee diversified portfolios with total fees in the range of .20% to .25%. What’s not to love. Compare that to high fee mutual funds and well, there’s no comparison.
The Robo effect.
I think that the Canadian Robo Advisors are the answer for the bulk of investors. Most investors need and want advice. Robo’s offer risk profiling and various levels of advice (digital and human). They place you in those simple and effective asset allocation ETF portfolios. The fees range from .20% to .60% area, plus ETF fees.
Fees can be less depending on the family asset level at Nest Wealth. They offer a subscription-based fee model.
Here’s a look at ETF retail growth drivers. Robo’s are starting to lead the way on growth rates. But it’s early in the game. They hold modest assets in the $5 billion range.
The advisor effect.
Most Canadians are advised in some manner. This area offers the greatest opportunity for ETF asset growth. Many advisors want to concentrate on the financial planning. And they want to separate themselves from the products and the fees. They want to offer conflict-free advice. Please have a read of what is advice-only financial planning?
This is a massive trend. I hear from advisors every week looking to make the move to the advice-only model. This is going to be a big driver over the next decade. Advice only planners often then send investors off to Robo’s, to self-direct or to a resource such as Glidepath Portfolio Services.
Thanks for reading my observations of the 2019 Canadian ETF report. You’ll find a link to full National Bank report on this Canadian ETF Association page.
And keep in mind that not all mutual funds are evil. Just the majority.
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