The Investment Funds Institute of Canada (IFIC) recently released its Investment Funds Report 2023. The report reflects investor trends and provides a full-year picture of data, as well as analysis of Canadian mutual fund and ETF assets and sales. At IFIC, we are proud of our robust data collection and reporting capabilities, which allow us and our members to better understand how economic factors and the investment funds industry interact.
At the end of the year, assets were up for both mutual funds and ETFs.
Asset growth in investment funds is affected by two factors: overall sales and market effect — the rise and fall of the underlying value of the stocks, bonds and other securities held by the funds.
In the case of mutual funds last year, despite overall net redemptions of $57.1 billion, assets increased by 7% from 2022 due to positive market effect.
For ETFs, assets increased by almost 22% due to both positive net sales and positive market effect. Compared to mutual funds, changes in ETF assets have typically been more dependent on sales than market effect because of the smaller relative asset base.
ETF assets also reversed the decline seen in 2022 and reached their highest total ever at the end of 2023. While there is no doubt that ETFs continue to rise in popularity among Canadian investors, bear in mind that, unlike for mutual funds, ETF data represent the sales activity of Canadian retail investors as well as institutional investors.
In total, ETF net sales amounted to $37.6 billion in 2023, with strong flows across equity, bond and money market categories. It’s interesting to note that close to one-quarter of total annual ETF net sales occurred in the last two months of the year as markets rallied and, subsequently, investor confidence grew.
While mutual fund sales were positive in the first two months of the year, we saw them turn to net redemptions in March and then remain in negative territory for the rest of the year.
Our 2023 report reflects two notable but not entirely surprising investor trends.
As a result of the economy being under pressure, many investors pulled back on their savings and investing. This was likely driven by a combination of market volatility, economic uncertainty, and stubborn inflation and interest rates, which made it more expensive for Canadians to put food on the table and pay the mortgage.
We also saw a “flight to safety,” with some investors seeking more conservative investments, such as bond funds and money market funds. Bond mutual funds had $7 billion in net sales and bond ETFs had $11.9 billion in net sales, while money market funds, benefiting from higher interest rates, saw net sales of $14.8 billion for mutual funds and $9 billion for ETFs, with most of this money going into high-interest savings funds.
A higher interest-rate environment was also associated with growing investor enthusiasm for fixed-term deposits, including guaranteed investment certificates. With rates for short-term products nearing or even reaching 6% in 2023, investors took the opportunity to shift toward lower-risk options compared to long-term funds.
Two other mutual fund categories saw positive inflows: responsible investment funds and alternative funds (liquid alts). Alternative funds use strategies like short selling and leverage, with the aim of delivering returns less correlated with equity and bond markets than conventional funds. Alternative mutual fund net sales were $2.4 billion in 2023.
Ultimately, despite it being a tough year for many investors, there were some bright spots, and many economists are predicting a cooling of inflation and a lowering of interest rates in 2024. It may be that those trends, combined with the market rally in the last quarter of 2023, will help to improve investor confidence.
Watch a short video for insights from the report.
Andy Mitchell is president and CEO of the Investment Funds Institute of Canada.