Assets continue to flow into Canadian exchange-traded funds (ETFs). The Canadian ETF Association (CETFA) and Strategic Insight are reporting Canadian ETF assets at $113.6 billion as of Dec. 31, 2016, after net creations of $16.4 billion in the year, representing year-over-year growth of 26.9%. BMO, Vanguard, and BlackRock are the top three ETF providers in terms of net creations, having generated $8.0, $2.6 and $2.0 billion for the year. We know that in general, ETFs have been gaining popularity and will continue to do so, but with all this money flowing into ETFs, which market segments and strategies are garnering the most attention?

In Fundata’s database, 74 ETFs were launched in 2016 (not including those from Sphere Investments, which launched five ETFs, and WisdomTree, which launched nine). Of the 74 ETFs, 14 went to the Global Equity category, 13 to the U.S. Equity category, and five each to International Equity and Canadian Equity. So in terms of asset classes, Global and U.S. Equity have been the most popular, which makes sense because they are among the most popular mutual fund categories as well.

Next I wanted to determine what drives these asset flows, and more specifically, has the money been following performance?

For calendar year 2016, the CETFA and Strategic Insight reported that U.S. Equities led the way in terms of net asset creation, at $3.7 billion. This came after the S&P 500 Composite Index posted an unimpressive -0.73% return in 2015. However, if you convert the S&P 500 back to Canadian dollars, as most Canadian funds that track the index do, you get a much better 18.25% for 2015 and 26% over three years. The table below shows some other short-term performance numbers for the index leading up to the beginning of 2016:



In terms of category averages, the next table lists the top 10 categories by 3-year returns at the end of 2015:



With this strong short- and mid-term performance, U.S. Equities are clearly seen as solid asset class. There are 13 ETFs that track the S&P 500 (including versions hedged to Canadian dollars and those held in U.S. dollars), as Horizons ETFs added a Canadian dollar-hedged version and TD Asset Management added a straight-exposure version as well as a Canadian dollar-hedged version in 2016.

The largest inflow of assets in 2016 went into the rules-based BMO U.S. Dividend ETF (TSX: ZDY) at $840 million.* In terms of 1-year return, it ranked 44 out of 428 ETFs that had at least one year history at the end of 2015. The largest net redemptions, of $621* million, came out of the iShares S&P/TSX 60 Index ETF (TSX: XIU) after it lost 8% in 2015, ranking 327 out of the 428. I don’t think it’s really a secret that fund flows follow performance, even though the top-performing funds don’t necessarily get the most inflows.

So what can we expect in terms of asset flows in 2017? The next table shows the top-performing categories at the end of 2016:



You see a lot of the same asset groups in the top 10, with Precious Metals, Greater China, and Canadian Focused Small Mid Cap joining the mix. This would suggest an uptick in the assets for these three categories.

There have already been 14 new ETF launches in 2017, five of which are the actively managed Dynamic iShares series, which added to Canada’s surging actively managed ETF population. The actively managed and rules based quant segment should continue to grow as investors who like the idea of active management look for cheaper options in the wake of the new regulatory disclosure rules dubbed “CRM2.”

The recent bull trend has made the U.S. index funds look very good, but if the bull market wanes and we start to experience more downside volatility, we should see a pick-up in the assets for the low-volatility and actively managed strategies. At the end of 2016, only three of the top 25 ETFs by assets were rules-based or actively managed. I expect that number to increase significantly in the next few years.

* Source: CETFA, Strategic Insight