Getting onside with ETFs
E xchange-traded funds at their core are elegant envelopes. Just as we use email, texts or tweets instead of traditional letters, your investments should also use the most relevant delivery vehicle, but many Canadians aren’t onside yet.
On the surface, ETFs are fitter than ever in Canada, sporting aggregate assets under management of $68.5-billion spread among more than 300 individual funds, as of May 31. AUM are almost triple what they were five years ago, a short couple of months after the trough of the great financial crisis of 2008/2009.
Come March 2015, ETFs will reach a significant milestone — the quartercentury mark of their existence, having been launched first in Canada in 1990.
Meanwhile, the traditional mutualfund industry is basking in the glow of having surpassed the $1-trillion mark earlier this year.
U.S. investors have already bought en masse into the overall value proposition of ETFs, whose assets there amount to a US$1.8-trillion slice as of May 31, according to ETFGI LLP.
Even when augmented by the estimated US$15-billion of U.S. ETFs held by Canadians, Canada’s ETF industry has plenty of catching up to do before getting a commensurate share of investors’ wallets.
Yes, Canada’s growing ETF asset base and share of turnover activity are good signs, as is the breadth of access they facilitate, and similarly that there are now nine providers, with possibly a couple more by the end of 2014, compared to one a decade ago.
But beneath the surface of those numbers lies a troubling truth.
BMO ETFs, which recently marked the fifth anniversary of their arrival on the Canadian scene, have accumulated some $14.5-billion of assets or almost 64% of the total AUM represented by the 71 ETFs with at least $100-million in assets that have entered the market in the past five years.
The industry’s growth picture without the power of BMO’s distribution and network would not look nearly as impressive as it is, especially since ETFs should be able to rapidly grow due to the inherent advantages they bring to the table.
On the plus side, however, is that the percentage of the market controlled by the top 25 ETFs, which have traditionally commanded a very large share of total AUM, is shrinking, down to 60.3% versus 65.4% last year.
That means the second layer of ETFs has continued to grow nicely, reaching asset levels that should provide comfort to any and all investors as to their relevance, market acceptance and, ultimately, longevity.
Investors who haven’t paid attention to these trends should ask why not? And if no one has suggested they deploy ETF power in their investment portfolios, again, why not?
For all the background noise about ETFs — greater tax efficiency, lower costs and hallmark transparency — their overarching attribute is that they are very effective envelopes, which now come in a variety of colours far removed from their original purpose of accessing index basket of securities. They can now provide access to additional asset classes, methodologies, strategies and even active management.