Exchange-traded funds are popular: for over 10 years now — and especially since the 2008 financial crisis — they have become the fastest-growing vehicles in institutional portfolios.
Daniel Strauss knows that. When he started at National Bank of Canada just over a decade ago, ETFs in Canada sat at about $35 billion with about 100 products; now, they have grown to what he calls a “truly staggering” $3.7 trillion spread out over 2000 products in Canada. Now, he is head of the bank’s research and strategy team.
“Ever since the global financial crisis, ETFs have been outselling mutual funds in the United States for every calendar year,” he told the conference. ETFs are so popular that there’s “an ETF for every asset class under the sun.”
And there are new launches everyday. “We’re still seeing innovation, new product categories that keep my team up at night, as we just try to add everything to the database with high integrity data.”
When he started, there were four cumulative average growth rate ETFs spread out over 35 providers; that figure has now jumped to 880 ETFs spread over 35 providers.
“Very rare that you see anything in the financial service sector growing at that pace,” he told the gathering. The growth rate of ETFs in Canada has been 25% a year for the past 10 years.
Large institutional investors are using ETFs in a variety of different strategies.
The US market has grown at about 20%, which he says is still “double-digit eye watering growth,” but a little bit slower than Canada — and that is because Canada’s ETF market has been playing catch-up to the much more mature ecosystem in the U.S.
Interestingly enough, the first ETFs were actually launched in Canada. National Bank had the first fixed income ETF, the first currency hedge ETF and the largest proportion of actively managed ETFs in the country.
And, from there, things have marched on. And the experts concur.
Mr. Strauss’ observations were corroborated by Alfred Lee, a portfolio manager with the Bank of Montreal’s ETF team. BMO’s core portfolio management team started in 2009. Since then, despite large growth, the firm’s ETF products are made up of “five pillars”: standard beta, smart beta, fixed income and structured solutions.
Active ETFs are also still being launched — and they are also evolving, now being used as alternative sales strategies, such as hedge funds. “In the last five years, we’ve definitely been having more conversations with hedge fund users in how they use ETFs.”
Brian O’Donnell, now Senior Vice President at Northern Trust, told attendees that ETFs used to be “a fraction” of what they are today. He started with shares that had $2 billion in total assets in the early 2000s — and by the time he left BlackRock at the end of 2017, he had $1.4 trillion in assets.
Alternative investment managers have really picked up the pace. As Mr. Lee pointed out, as ETFs become more actively traded, borrowing costs on the ETFs go down and they then become cheaper.
And as for ETF strategies?
“A lot of the sales we’re doing are with asset managers themselves. They’re using them for core exposure as well. It’s much easier to purchase an ETF. It’s just like a stock, it’s held in a custody account and you don’t need to have futures contracts,” he said.
ETFs are built around the concept of liquidity as a bedrock without a liquid and tradable basket that you can use for hedging. And the fee war in Canada and the U.S. is something that’s raging on and is one of the reasons that ETFs have come to so many investors’ attention.
Where will it all go?
So far, the future for ETFs looks promising, according to all of the participants. With a unique investment flexiblility, ETFs have become valuable for hedge funds, asset managers, endowment funds and pension funds.