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A Tailwind for ETF Growth in Canada
In the world of exchange-traded funds
(ETFs), Canada is known for its history
of firsts.
The first successful ETF was launched on the
Toronto Stock Exchange in 1990. Called the
Toronto 35 Index Participation Units (TIPs 35),
the instrument tracked the TSE-35 Index
and allowed investors to participate in the
performance of the index without having to
buy individual shares in each company. As the
funds grew in popularity, Canada was later the
first market to begin using actively managed
products that do not disclose daily holdings.
Despite the head start, Canada saw only
moderate ETF growth in the next two decades.
That lag has started to recede recently due to an
increasingly favorable regulatory environment,
more distribution options and the draw of lower
fees. The surge of global managers entering
Canada’s market with innovative ideas and
products that work for both mutual funds and
ETF wrappers is further helping to boost growth.
According to Cerulli Research, ETF assets
under management in Canada grew by nearly
nine percent and net new flows expanded by
19.1 percent in 2018.1
So will the upward momentum continue?
Our experts highlight three trends helping
to propel growth.
Ongoing Regulatory Support
Since the early days of ETFs, regulators in
Canada have been known for their openness to
working with managers to introduce innovative
exchange-traded products while keeping the end
investor top of mind.
One of the advantages is that fund managers
in Canada are not required to reveal daily fund
holdings, a disclosure requirement that many
believe may have been holding managers back
from entering the ETF space in the US and other
global markets. In 2012, the Canadian Securities
Administrators (CSA) began to further modernize
rules and regulations to respond to the evolving
investment landscape. Recognizing the growing
role of ETFs, CSA sought to streamline market
access by eliminating the need to apply for
regulatory exemptions, a cost and time-to-market
savings for both managers and end investors.
Since the early days of ETFs, regulators in Canada have been known for their openness to working with managers to introduce innovative exchange-traded products while keeping the end investor top of mind.
1 Cerulli Associates, U.S. Exchange-Traded Fund Markets 2018: Innovating for the Investor, January 16, 2019.
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But regulation surrounding the Client
Relationship Model — Phase 2 (CRM2) is what
electrified the market in Canada. Introduced
by CSA, this mandate was developed to create
greater transparency for investors by giving them
a clear look at their account performance and
what they’re paying to achieve that performance.
Since its adoption in 2015, flows to ETFs have
trended 50 percent higher than flows to
mutual funds.2
An Innovation Edge
The openness to new product ideas by both
regulators and managers has long been
recognized as a driving force behind the
flurry of innovation in Canada’s ETF market.
Actively managed ETFs are a great example.
Because there are no daily disclosure
requirements, active managers feel more
comfortable bringing their best ideas to
market without concerns of having to reveal
their full strategy. While managers do have
an obligation to disclose top holdings and to
share fact sheets with their investors, they
do not have to reveal the full basket or
holdings. Investors have the transparency
they need to understand performance, fund
strategy and costs, while managers are able
to protect their intellectual property.
The advantages of active ETFs, which include
cheaper alpha and broader distribution, have
already started to emerge in Canada. ETF flows
to active investments surpassed passive funds
in 2019, and assets to active investments have
been steadily increasing since 2015.3
Another innovative approach in Canada is the
ability to add an ETF series to an existing legacy
mutual fund. This can increase speed to market
at scale by using the same legal structure and
single pool of assets as a mutual fund.
Additionally, this approach does not require
the complete ETF infrastructure that typically
accompanies a standalone physical ETF that
processes primary market activity in kind.
As ETFs are not required to disclose holdings
daily, using the ETF series approach allows
managers to invest in both passive and active
strategies. The benefit for the end investor is
that they have a choice of a single strategy using
both a traditional mutual fund and ETF wrapper
that trades intraday on an exchange.
While the market is still highly concentrated
among larger distributors, smaller managers
see a growing opportunity.
The growing interest in Canada’s ETF market
runs the gamut from global managers entering
Canada for the first time to local managers
entering the ETF space for side-by-side use
of ETFs and mutual funds.
2 ETFGI Canada ETF Insights 03/31/19. 3 ETFGI Canadian ETF Insights as of 07/31/19, 2019 flows annualized.
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4 As of October 31, 2019
Thematic Investing and Asset Allocations
For managers looking to hone in on a potential
market opportunity, thematic investments
have helped them to identify and invest in
macro-level trends. It’s an investment strategy
that appeals to a broad range of investors.
Investors may also find that they have access
to products not available in other domiciles.
Cannabis investment products were first to
launch in Canada, for example.
Certain products, such as digital currencies and
blockchain products, may appeal to a younger
generation of investors who can afford to take on
more risk and uncertainty in their investments.
For those closer to retirement age, a mixed asset
allocation strategy allows investment in an ETF
that covers fixed income, cash and equities all in
one product. Thematic investing has also opened
opportunities for asset managers to create unique
products for their end investors.
How We Can Help
At State Street, our purpose is to create better
outcomes for our clients and the people they
serve. As the largest provider of ETF servicing
to the Canadian market, with 80 percent of
ETF assets under management,4 we use our
knowledge, scale and global footprint to our
clients’ advantage. Our follow-the-sun global
operating model allows us to meet our clients’
needs wherever they do business. By building
strong relationships, we’re able to understand
the nuances and challenges they face and embed
our teams directly into their daily operations.
No matter the client’s size, our focus on
technology, experienced staff, consultancy
services and thought leadership means we’re able
to help at every stage of building an ETF portfolio.
Whether launching their first fund or adding to
a portfolio of existing products, we help clients
confidently connect to the ETF marketplace.
The openness to new product ideas by both regulators and managers has long been recognized as a driving force behind the flurry of innovation in Canada’s ETF market.
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For more information, contact:
JEFFREY SARDINHA
Vice President
+1 617 866 7283
ROBYN THOMPSON
Managing Director
+1 647 775 5707
FRANK KOUDELKA
Senior Vice President
+1 617 639 2006
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This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk including the risk of loss of principal. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
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