The rise in the number of companies that produce exchange-traded funds (ETF) and the ETFs that are available is putting pressure on these providers to develop cutting-edge products, according to a new report from Toronto-based Bank of Montreal’s (BMO) global asset management arm.
BMO Global Asset Management’s (BMO GAM) mid-year ETF Outlook Report, which was released Thursday, identifies key trends in the ETF industry and notes that Canada ended the month of June with 16 providers, which is up from nine providers at the end of 2014. Canada also saw the number of ETFs jump by 23% within the same time period.
“The jump in both providers and number of ETFs puts increasing emphasis on innovation, to create products that stand out in the marketplace,” the report states.
The firm’s observation comes as Canada is on pace to see another historical year in the popularity of ETFs, with more than $10.6 billion in inflows to date in 2016. There are more than $100 billion in Canadian assets under management in ETFs, which is double the amount that was present four years ago.
The report also looks to understand what will continue to drive investors to turn toward ETFs and the resounding answer is the current uncertainty that plagues the global economic landscape.
The most recent instigator of this uncertainty was the U.K.’s vote in June to leave the European Union; investors have also had a rough ride as a result of oil prices, which have been on an overall decline since mid-2014.
“Investors use ETFs to address volatility by moving to smart beta exposures that have lower risk than the broad market,” the report states. “Low-volatility strategies, investible more recently as ETFs, have proven to deliver returns in excess of the market over the long term, based on staying away from high-risk investments, mitigating market downturns, and thereby benefitting from compounding returns.”
Market volatility has also led to increased activity in fixed-income ETFs as investors look for products that will provide yield. The additional layer of liquidity that comes from the ability to easily trade fixed-income ETFs on an exchange will also make these ETFs an increasingly appealing option, says the BMO GAM report, which predicts that growth in fixed-income ETFs will outpace that of equity ETFs.
Meanwhile, ETFs based on individual sectors are also seeing heightened inflows, the report states: “We have seen investors migrate away from single security holdings, with associated concentration risks, to sector based ETFs that offer a diversified exposure in a single ticket solution.”
The full report can be found on BMO GAM’s website.
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