This article was co-written with Luke Kahnert.
It’s been a pleasure to contribute ETF columns every quarter for the past five years. So much has changed since I first began using ETFs in my discretionary portfolios over 10 years ago, and in my writing, I have had the chance to consider the ETF space from many different angles, from portfolio construction to index methodologies, thematic investing and ESG.
In this, my last regular ETF column, I would like to highlight the importance of having a solid investment committee, to debate portfolio changes and “look under the hood” of the products we choose for our clients.
Over the years I have had the pleasure of working with many esteemed colleagues, outside and inside my firm, including invaluable exchanges with my team, to make investment decisions for my discretionary portfolios.
I recently collaborated with our firm’s senior mutual fund and ETF specialist Luke Kahnert on a Q&A ETF outlook for 2025. Here are some of my questions and Kahnert’s responses.
Q: The ETF industry endured more active ETFs entering the business amid some challenging market conditions in 2024. How well did the industry cope?
A: Despite this year’s market volatility, the Canadian ETF industry navigated the challenges well and is poised for another strong year. Data from TD Securities show that Canadian ETFs have seen year-to-date inflows of $62 billion and reported industry assets under management (AUM) of $500 billion as of Nov. 19. Depending on what happens over the next few weeks, the industry is on track to surpass the previous annual record of $58 billion set in 2021.
While the future remains uncertain, the Canadian ETF industry has shown remarkable resilience over the past 30+ years (ever since the world’s first ETF was launched in Canada in 1990), and I’d expect to see the industry continue to grow in the years ahead.
Q: Which geographical areas will do the best in terms of asset raising over 2025: the U.K., Europe, Canada, the U.S. or Asia?
A: A study by JPMorgan Chase & Co. reports that as of the end of May, there were over 12,000 ETFs listed globally, with a total AUM of about US$13 trillion. This includes approximately 3,500 ETFs in the U.S. with about US$9 trillion in assets (nearly 70% of global assets), 3,800 ETFs in Europe, the Middle East and Africa with about €2.0 trillion in assets (about 16% of global assets), and 3,600 ETFs in Asia-Pacific with US$1.5 trillion in assets (about 12% of global assets). Since the industry’s humble beginnings in Canada, we have certainly seen significant growth for the ETF industry both in size and variety of products available to investors on a global scale.
The global ETF industry is poised for future growth and will likely continue to be led by the U.S. ETF industry in terms of absolute-dollar asset raising. Although the Canadian ETF industry is smaller, what impresses me is its consistent growth and innovation year after year. Canada is currently home to a wide selection of 1,536 tickers according to Morningstar data as of Oct. 31. Innovation has always been a hallmark of the Canadian ETF industry, and I expect Canadian ETF issuers will continue to focus on developing new solutions to meet the evolving needs of Canadian investors.
Q: What sector trends and thematics will dominate ETFs in 2025?
A: Product launches can provide valuable insights into how ETF issuers are positioning themselves to meet future investor demand. In 2024, we’ve seen a diverse range of fixed-income and options-based ETFs enter the market, indicating that issuers are focusing on the growing need for investor income.
ETFs offer numerous benefits, including instant diversification, targeted market exposure and portfolio transparency. Leveraging an ETF structure for complex fixed-income and options-based strategies can be convenient, and I believe this characteristic will continue to support future growth for these ETF strategies in 2025 and beyond.
Q: Does the market provide enough active ETFs?
A: We’re beginning to see several existing mutual funds now offered in an ETF purchase option, which may reflect the overall strategic decisions of fund companies. I expect to see this trend continue in the coming years as fund companies aim to cater to all investor preferences. As more mutual fund strategies are launched in an ETF series, this should further boost ETF flows, giving investors access to strategies previously exclusive to mutual funds. This is an exciting development as more purchase options means Canadians have a wider array of tools to build portfolios that meet their unique goals.
Also, it should be noted that, while ETFs are a convenient investment vehicle, there are scenarios where a mutual fund structure might be more appropriate. ETFs are traded throughout the day and therefore it is best to buy or sell an ETF when the market of the securities within the ETF is also open. If the underlying market is closed, pricing may not be ideal and bid-ask spreads may widen. On the other hand, mutual funds are priced at end of day net asset value (NAV), and one may wish to consider a mutual fund structure for these scenarios for a more stable pricing experience.