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The Canadian exchange-traded funds (ETF) industry experienced impressive growth in 2013 and its ongoing success will be determined by how well providers respond to key investor needs. That’s according to a report released by BMO Global Asset Management, one of Canada’s leading ETF providers.
The report notes that the growth of the Canadian ETF industry continued unabated in 2013 and currently stands at $63.1 billion in assets under management (AUM), up $5 billion on last year and an increase of 11.9 per cent over year-end 2012. Equity ETFs experienced $2.7 billion in inflows in 2013, while fixed income inflows slowed slightly but still reached $2.3 billion.
Rajiv Silgardo, Co-CEO, BMO Global Asset Management, said: “The domestic ETF industry enjoyed another stellar year in 2013 with a variety of new and innovative portfolios contributing to its growth. Investors concerned about the impact of monetary policy on financial markets and the sustainability of global growth prospects continued to invest in ETFs, largely because of the flexibility they offer and their cost-effectiveness.”
Silgardo added: “Canadian investors are benefitting from increasing competition in our industry. ETF providers are focusing more on product innovation than ever before and we’re all being compelled to develop stronger product suites and to find ways to differentiate ourselves.”
According to the report, the following trends will impact the Canadian ETF industry in 2014:
More Fixed Income Alternatives: In late 2013, investors shied away from fixed income purchases and avoided longer-term exposure. This has highlighted a need for alternative ways to generate yield to make up for a lack of income. Alternative fixed income options include preferred shares and credit-focused fixed income such as floating rate securities, high yield debt and investment grade corporate bonds.
Equity Income: More defensive fixed income holdings means a need for more income from equity holdings. Equity exposures combining both growth potential and income will be highly favoured in 2014.
Smart Beta: Market capitalization weighting continues to be a key strategy to achieve market exposure. However, investors are also exploring alternative-weighting strategies, known as smart beta. Products that offer exposure based on various factors such as low volatility, momentum and quality are growing in popularity.
Currency Hedging: Traditional international ETFs based in Canada hedged the foreign currency exposure. However, the recent decline of the Canadian dollar has heightened interest in unhedged products, which provide a way for investors to take advantage of foreign currency gains. Also, the increased volatility in currencies has compelled investors to use technical trading signals, and have been switching between hedged and unhedged ETFs based on short-term currency movement.