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Canada’s ETF market enjoys double-digit growth

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Canada’s market for exchange-traded funds has grown to $63.1 billion (CDN) in assets under management (AUM), up $5 billion over last year and an increase of 11.9 percent over year-end 2012, according to new research.

BMO Global Asset Management (GAM) released this finding in its biannual “BMO Canadian ETF Outlook Report.” Fueling the market’s expansion, the report notes, were $2.7 billion in equity inflows in 2013. Fixed income inflows slowed but still attained $2.3 billion.

“The domestic ETF industry enjoyed another stellar year in 2013 with a variety of new and innovative portfolios contributing to its growth,” says Rajiv Silgardo, Co-CEO, BMO Global Asset Management. “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.”

BMO GAM’s ETF business led the Canadian ETF industry in new assets for the third consecutive year in 2013, bringing the company’s market share to 20 percent of industry AUM. Moreover, BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) was the top selling individual ETF in Canada, attracting investors who were seeking diversified yield sources and lower interest rate sensitivity relative to fixed income.

“Canadian investors are benefitting from increasing competition in our industry,” says Silgardo. “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 entail a need for more income from equity holdings. Equity exposures combining both growth potential and income will be highly favored 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.


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