You may be surprised to know that Exchange Traded Funds (ETFs) are actually a Canadian invention.
On March 9
th, 1990, the TSX launched the Toronto Index Participation Fund (TIP 35). This was not only a watershed moment for the Canadian investment industry, but the entire global ETF industry.
From this humble beginning, the global ETF industry now represents nearly $2.8 trillion in assets across approximately 4000 ETFs. The ETF industry in Canada has grown to encompass more than 300 Canadian-listed ETFs representing nearly $80 billion in assets.
Despite the fact that ETFs originated in Canada, ETF growth has not been as dramatic as other major developed markets in the world. However we believe that this will change over the next 2 years. There are currently only 9 ETF Providers in Canada with 468 ETF Listings - in the US, there are 46 Providers and 1,411 ETFs (as of November 2014). U.S. assets are more than 15 times more than Canada – whereas the U.S. mutual fund industry is roughly 12 times the size of Canada, this means that Canadian ETF industry has a lot more growth potential to attract new assets, if we expect the Canadian ETF industry to take a similar market share to that of the United States.
This doesn’t even take into consideration other factors in the Canadian marketplace like regulatory changes over the next three years which will force Canadian financial advisors to disclose the compensation they make on the sale of ETF and show performance figures versus industry benchmarks.
Much of the growth of the ETF industry globally has been the result of a wholesale shift of investor assets from higher fee investment funds to lower-fee and transparent ETFs. Once investors understand what they are paying for an investment fund, understandably, they opt for lower cost solutions, particularly since the lower cost options usually have the same or even better long term performance than higher fee ones.
Aside from having strong performance over the last several years, there are several other benefits that exchange-traded funds have over mutual funds.
- Actively-managed mutual funds have management fees that can be more than 2.00%, however most ETFs expense ratios are typically in the 0.25% – 0.75% range.
- ETFs are completely transparent. Investors can see exactly which securities are held in each ETF. Actively-managed mutual funds only provide holdings to their investors on a periodic basis – with delayed information
- ETFs have lower taxes because of their construction and their passive nature.
- More trading flexibility: Mutual funds are only priced once per day, at the close of the market. Conversely, ETFs are priced throughout the day and can be bought and sold on the exchange.
We also think that Canada’s status as an ETF innovator will also play a prominent role in its asset growth. Canada has a progressive regulator environment that has allowed it to launch many “world’s first” ETF mandates. For example, Canada is the home to the first currency hedged ETFs (XSP and XIN) and has the bigger proportional (by assets under management) Actively Managed ETF market in the world.
This robust breadth of product allows the Canadian ETF industry to capitalize more effectively on different investing trends.
We are also the first country to establish a successful Association for the industry. The Canadian ETF Association was established in 2011 to assist with the dissemination of information and education on the ETF as well as to provide a voice for the product in an environment where the mutual fund is the norm.
The CETFA works collectively with providers, regulators, portfolio managers and investment industry service providers to improve the usage of ETF investing.
We believe that over the next 24 months, the ETF industry will grow at a higher rate than in past years – which already averages over 20% annually. It’s not too late to get started as an ETF investor. If you’re new to ETF investing or an old pro, the CETFA has built a robust set of resources and tools you can use to improve your ETF investing skills which can be accessed at
www.cetfa.ca