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THE FIRST $100 BILLION IS THE HARDEST
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By Atul Tiwari  | Wednesday, May 04, 2016


It took 25 years, but by the end of 2015 exchange-traded funds had reached nearly $90 billion in assets under management (AUM) in Canada, with a record $16.5 billion in net inflows last year alone.1 Based on recent growth trends, ETF assets could top $100 billion sometime during 2016.

While growth for growth’s sake is nothing to celebrate, the more than doubling of assets and tripling of ETF providers since 2010 is an indication that ETFs are being integrated into more investors’ portfolios.

What’s behind the recent growth? The drivers include:

  • The rise of indexing.
  • Increased competition.
  • Regulatory efforts to increase the transparency and awareness of investment fees.
  • And more fee-based advisors.

More ETF providers, more ETFs

While Canada was an early innovator in ETFs, the marketplace for these flexible, lower-cost products actually developed relatively slowly here for much of the last quarter century. One reason is that index-fund investing has accounted for a small portion of AUM in Canada compared with actively managed investments-just 12% as of December 2014.2 However, passive investing has been on the rise since the end of the global financial crisis, and ETFs have typically been passive investments.

Now, as Canadians are allocating more to index-based investments, they’re increasingly choosing ETFs. In 2014, ETFs accounted for 82% of the cash flows into passive investments.3 While mutual funds remain the dominant investment product for many Canadians, ETFs have been gaining AUM at a higher rate on a year-over-year basis compared with mutual funds - 16% versus 8% as of December 31, 2015.4

Competition has expanded as well. At the end of 2007, there were only two ETF providers in Canada. Today, there are 13,5 including Vanguard, which entered the market in December 2011. Between 2008 and February 29, 2016, the number of Canadian ETFs rose to 383 from 77 while AUM increased to $89.0 billion from $19.4 billion.6

Fee-based versus commission-based practices

Shifts in the regulatory environment designed to benefit investors have also provided momentum for low-cost ETFs. Client Relationship Model (CRM) reforms in Canada require advisors to provide greater fee transparency to clients. When the requirements of the second phase of the CRM reforms are fully implemented by July 15, 2016, investors will receive a more complete picture of the impact of costs on their investments, including an annual summary of all advisor fees and compensation, such as trailer fees and transaction costs.

In response, advisors have been adjusting to help clients understand what they’re paying for and why. Many have migrated to a fee-based model from a commission-based one, listing the fee for each service they provide. Fee-based advisors tend to favour ETFs because of their transparency and low costs.

If Canada were to follow the lead of the United Kingdom and Australia, which have banned commissions, or if competitive forces drive greater change as has happened in the United States, advisors would have even more incentive to use lower-cost investments, including ETFs, as building blocks for client portfolios.

Playing our part

These changes are reshaping the investment industry in Canada, and Vanguard stands ready to help advisors and investors adjust. Whether it’s with our 23 ETFs, our "Plain talk" investment brochures, or the Vanguard Advisor’s Alpha™ framework, we are a resource you can rely on.

Our core purpose is to take a stand for all investors, to treat them fairly and to give them the best chance for investment success. It’s what inspires us to make a difference in the Canadian marketplace.

Atul Tiwari is Managing Director of Vanguard Investments Canada Inc., www.vanguardcanada.ca.

Notes:

1 Source: Vanguard analysis of Investor Economics data from the Canadian ETF Association's monthly reports on the CETFA website as of December 31, 2015.

2 Christopher B. Philips, Francis M. Kinniry Jr., Todd Schlanger and David J. Walker, April 2015. The case for index-fund investing for Canadian investors. Valley Forge, PA: The Vanguard Group, Inc.

3 Source: Morningstar, Inc. as of December 31, 2014.

4 Vanguard calculation using Investor Economics data for ETFs from CETFA and Investor Economics data from mutual funds from the Investment Funds Institute of Canada's monthly Industry Overview report. Data as of December 31, 2015.

5 Source: CETFA monthly report as of February 29, 2016.

6 Source: Vanguard analysis of Investor Economics data from CETFA's monthly reports on the CETFA website, including the most recent as of February 29, 2016.

Important information:

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

While this information has been compiled from sources believed to be reliable, Vanguard Investments Canada Inc. does not guarantee the accuracy, completeness, timeliness or reliability of this information or any results from its use.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

All investments, including those that seek to track indexes, are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While ETFs are designed to be as diversified as the original indexes they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.

 
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