The Canadian ETF market saw record inflows in 2024, fueled by a combination of factors including the strong performance of U.S. equities and growing investor interest in active strategies. Experts predict continued growth in 2025, with trends such as the rise of covered-call ETFs, the increasing popularity of fixed-income funds, and the potential for greater ETF adoption by institutional investors shaping the sector's future.
Several trends fueled the surge in exchange-traded funds (ETFs) last year, culminating in record inflows, and new patterns are already emerging that could shape the sector in 2025. Canada experienced a record year for ETFs, witnessing a staggering $76-billion in inflows. Total assets for the sector reached an unprecedented $519-billion, and a remarkable 224 new products were launched.
'Inflows into Canada-listed ETFs originated from virtually all segments of the market, with insatiable demand for U.S. equity leading the charge,' explains Daniel Straus, managing director of ETFs and financial products research at National Bank Financial in Toronto. 'This year witnessed the S&P 500 and its large-cap constituents return another 20 percent-plus, and few catalysts are more potent for asset flows than sustained bull markets.'Mr. Straus observes that passive U.S. equity ETFs were the preferred choice for investors, but the immense popularity of these index-tracking products had a ripple effect on neighboring regions and categories. Equity ETFs dominated, accounting for 58 percent of total inflows for the year. The U.S. region emerged as the most popular, attracting nearly half of all equity ETF inflows, while other international markets captured 30 percent, and Canada-focused funds brought in 20 percent.A notable trend is the outperformance of actively managed funds compared to passive funds. By the end of 2024, 53 percent of all Canadian ETFs were actively managed, according to National Bank Financial, although active funds still hold less than one-third of total ETF assets. 'Interest in active ETFs has been skyrocketing,' says Mr. Straus. He notes that while the bulk of ETF assets continue to flow towards passive funds, active ETFs have been experiencing consistent year-on-year inflows. He attributes this to a new generation of products offering a compelling combination of high-conviction portfolios and competitive fees, particularly in the fixed-income space. 'The true debate shouldn't be between active versus passive; the real question is low cost versus high cost, or passive versus 'closet indexing,' a practice that we believe has driven some outflows from the mutual fund industry,' Mr. Straus says, referring to active funds whose holdings closely resemble those of an index fund.ETFs continued their dominance, outsold mutual funds for the third consecutive year. Despite two years of redemptions, mutual funds attracted $15.2-billion last year, representing 20 percent of the inflows into ETFs, according to the Investment Funds Institute of Canada, driven primarily by flows into bond funds. Andres Rincon, managing director and head of ETF sales and strategy at TD Securities in Toronto, also anticipates continued growth for active ETFs. He points out that 70 percent of new ETFs launched in 2024 were active, indicating a growing interest in these strategies. 'The trend is likely to continue in 2025 with more active fund managers entering the ETF space,' he predicts. Another notable 2024 trend identified by Mr. Rincon is the increasing popularity of covered-call ETFs. These funds generate income for investors by selling call options on the securities they own. 'These yielding assets are less susceptible to interest rate changes and have become attractive alternatives for yield-seeking investors,' he explains. TD Securities' data reveal that equity covered-call ETFs garnered $4.5-billion in 2024, while bond covered-call ETFs accumulated $1.4-billion.Mr. Rincon also highlights other 2024 trends, including the sustained popularity of fixed-income funds and the success of asset allocation ETFs as a 'one-stop shop' for retail investors. He suggests that institutional investors were drawn to broad-market ETFs last year partly due to higher costs for futures contracts, and he expects these flows to persist in 2025. He also envisions greater ETF utilization among Canadian life insurers following a regulatory change allowing insurers to treat fixed-income ETFs meeting specific criteria similarly to individual bonds. 'We're witnessing a quest for diversification, and a search for active strategies that deliver additional beta,' says Mike Philbrick, chief executive officer of Resolve Asst Management Inc., an alternative asset manager with offices in Toronto and the Cayman Islands. He notes that his firm is experiencing strong demand for products employing a technique called 'return stacking,' which, for example, provides exposure to both large-cap U.S. stocks and futures contracts for equities and other asset classes. 'It provides diversification through addition rather than subtraction,' he explains. 'Instead of divesting your equity position, you retain it but also add an investment that isn't correlated to your stock.' Mr. Philbrick also emphasizes that ETF flow trends in 2025 will be influenced by the overall market direction, with potential shifts if the bull market for equities falters. 'If the market doesn't surge another 25 percent this year, you'll observe greater interest in active funds that offer downside protection,' he predicts
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