Despite December’s volatility spike and stock-market gains for the year completely wiped out, the industry’s AUM grew from $147.1-billion at the end of 2017 to $156.8-billion at the end of 2018, according to data from the Canadian ETF Association (CETFA). 2018 has been a hectic year and we saw trends that contributed to the ascending of the Canadian ETF market:
EXPANDING PRODUCT RANGE
More than a hundred ETFs were launched in 2018, including some innovative products like Vanguard’s ETF suite that provides a single-fund portfolio solution to investors according to their risk tolerance. Thematic ETFs were also among the popular products launched last year. They cover themes such as blockchain, artificial intelligence and environmental, social and governance (ESG). These new ETFs make investing more accessible, whether it is through a one-stop fund or through themes that investors believe in.
LOWER MANAGEMENT FEES
The competitive market drove down fees. In 2018, 35 ETFs had their management fee reduced by two to 35 basis points (bps). Horizons even launched zero-per-cent-management-fee ETF portfolio solutions. In Canada, exchange-traded funds remain considerably cheaper than their mutual fund counterparts. Investors slowly turn to these cheaper solutions as they become aware of the impact of fees on their return.
JUMP IN THE NUMBER OF ETF PROVIDERS
Last year, nine ETF issuers joined the market, bringing the total count of providers to 33. The new players include Scotiabank, one of the five largest banks in Canada, and iA Clarington, whose parent company is Canada’s fourth-largest life and health insurance company. Asset managers are joining the ETF bandwagon at a time when asset flows are moving away from traditional mutual funds toward ETFs. Unfortunately, not all of them are able to make the transition. Five sponsors exited the industry, which were mostly through acquisition by bigger players. For instance, WisdomTree Investments acquired Questrade ETFs, Evolve Funds took over Sphere Investments’ ETFs, Redwood Asset Management was amalgamated into Purpose Investments and Sun Life Global Investments acquired Excel Funds before exiting the market altogether.
While we expect some of the above trends to persist into the new year, the following catalysts will likely have an impact on the industry in 2019:
Liquid alternatives are available to retail investors as of Jan 3, 2019. Liquid alternatives (or liquid alts) are funds that aim to provide diversification and downside protection through exposure to alternative investments. Up until now, alternative strategies were limited to institutional or high-net-worth individuals due to their complex nature. Several liquid-alts ETFs – for example, NBI Liquid Alternatives ETF and Desjardins Alt Long/Short Equity Market Neutral ETF – are waiting to be approved by regulators.
A WAVE OF CLOSURES IS ANTICIPATED
The Canadian ETF product lineup has increased significantly over the past few years. Some of the new ETFs have been very lucrative, attracting more than $300-million in AUM in less than a year of existence, while others did not attract enough assets to break even. Profit to an issuer is determined as a percentage of assets invested in the ETF. ETFs without enough AUM to cover costs will presumably be terminated.
SHIFTS IN MARKET SHARE
While the industry remains heavily concentrated, the market share of the three largest ETF sponsors plunged from 86.8 per cent to 78.2 per cent over a three-year period in December. In 2019, the arrival of new entrants like National Bank Investments and CIBC will cause even more disruption. We are also anticipating consolidations and exits during the year. BlackRock Canada and RBC Global Asset Management, the first and fifth largest ETF providers, already announced that they are being brought together under one new brand – RBC iShares.
We have rebalanced the Nasdaq Inovestor Canadian Index based on our Canadian Model Portfolio, which will be effective on January 18th after market close. Here are the details:
- THE NORTH WEST COMPANY INC (NWC) – Market Trend. Increase in Consumer Staple sector as seen in the Top 100 index therefore increasing our position in the portfolio.
- PAREX RESOURCES INC (PXT) – Market Trend. Increase in Energy sector as seen in the Top 100 index therefore increasing our position in the portfolio.
- NFI GROUP Inc. (NFI) – Market Trend. Decrease in the Industrials sector as seen in the Top 100 index.
- WEST FRASER TIMBER CO. Ltd. (WFT) – Market Trend. Decrease in the Materials sector as seen in the Top 100 index.
You can also find the transactions on Inovestor For Advisors, in the Model Portfolios – StockPointer Canada section.
Please contact us for more information.
The Inovestor Team
The S&P/TSX Total Return Index ended the month of December down 5.4% and the year of 2018 down 8.9%, making it the worst year for stocks since 2015. This downturn has been driven by signs of a global economic slowdown, concerns about the direction of the US monetary policy, inflation fears from a strong job market, ongoing trade tensions between the US and China and the political dysfunction causing a US government shutdown. Meanwhile, the price of crude oil plunged 9.6% to $45.81, its lowest settle since August 2017, on fears of a weak oil demand from lower global growth. Our Nasdaq Inovestor Canadian Equity Index (NQICA) fell 6.8% for the same period, 143bps below the benchmark. Our sector allocation contributed 50bps as our decision to overweight staples and underweight energy proved to be fruitful. However, our stock selection contributed a negative 193bps as a couple of stocks underperformed. You will find below the top three and bottom three contributors to performance. (Download)
The top three contributors to performance were:
1. Metro (MRU:CN), a food & staples retailer, rose 3.4% following the approval of the TSX for its Normal Course Issuer Bid (NCIB) program to repurchase 2.7% of its outstanding shares.
2. Stella Jones (SJ:CN), a paper & forest producer, declined -1.3% after the company announced it would pursue its own NCIB program to repurchase 4.3% of its outstanding shares.
3. West Fraser Timber (WFT:CN), a paper & forest producer, fell -2.5% after implementing a temporary production curtailment in BC over the holiday period at four of its BC sawmills.
The bottom three contributors to performance were:
1. Canadian National Railway (CNR:CN), a railway operator, declined -11.1% as investors fear a global growth slowdown might impact the firm’s crude-by-rail and commodities shipments.
2. Equitable Group (EQB:CN), mortgage and thrift company, fell -14.7% as Canada’s mortgage credit growth continued to decelerate in Q3 2018, on pace to weakest growth in 22 years.
3. TFI International (TFII:CN), a transportation company, dropped -19.5% as price increases in the trucking market are leveling off. This could prove difficult for operating margins in 2019.
The Inovestor Asset Management Team