The Canadian exchange-traded fund (ETF) industry experienced impressive growth in 2013, and its ongoing success will be determined by how well providers respond to key investor needs, according to a new report.
The BMO Canadian ETF Outlook Report notes that 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 means a need for more income from equity holdings. Equity exposures combining both growth potential and income will be highly favoured 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. As a result, investors have been switching between hedged and unhedged ETFs based on short-term currency movement.
“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,” says Rajiv Silgardo, co-CEO of BMO Global Asset Management.
The report also notes that ETFs had more than $5 billion in inflows, and assets under management climbed to $63.1 billion last year. Equity ETFs experienced $2.7 billion in inflows in 2013, while fixed income inflows slowed slightly but still reached $2.3 billion.
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