Canada’s ETF universe by the numbers

Where the money goes, which fund categories perform best

Investing is a numbers game. Prices, performance metrics, statistics are the daily meat and potatoes of investors, analysts, and managers. But numbers can tell us a lot not just about investment performance of a single security, but also the state of entire markets. The Canadian exchange-traded fund (ETF) market is a case in point.

In fact, the world’s first ETF was created in Canada in 1990. From that modest beginning, the Canadian ETF market today has grown to 1,496 funds. And assets under management are north of $450 billion, a 150% increase over the past five years, or a 20% compounded annual growth rate.

Equity-based ETFs dominate

The largest percentage of Canadian ETFs are equity-based, at 61% (911 funds). Fixed Income funds form that next largest category at 25%. A much smaller portion of the market share is claimed by Alternative funds at 6%, Balanced at 4%, Commodities at 2%, and finally Cash, which includes money market and high interest savings funds, making up 2%.

Equity ETFs include all funds that primarily invest in equity securities as well as derivatives with exposure to equity markets. These exclude alternative funds such as long-short equity strategies. In the equity space, factor-based strategies account for the largest group of funds, at close to a 40% share. And while factors can include things like growth, momentum, and quality, the largest factor strategy belongs to dividend funds, which make up over 30%. Another popular factor is low volatility (10%). At the other end of the spectrum there is one ETF that is based on gender diversity metrics.

Sector-based ETFs account for 27% of the equity universe, with technology funds comprising 24% of this category, while financials make up 21%. Broad market ETFs, which can be both index-based or actively managed, make up 29% of the equity funds, with U.S.-focused funds accounting for 37% and Canadian funds at less than half of that, at just 14%.

Some of the more niche equity ETFs include a handful of options-based funds that include put-writing strategies. There are also a growing number of ETFs that track a single U.S.-listed stock, such as Amazon or NVIDIA.

From a risk perspective, the majority of equity ETFs (62%) are rated medium risk, while 14% are rated high risk. Just one equity ETF is rated low risk.

Another way to slice up the equity category is by management style. The majority (56%) of equity ETFs are still index funds (often called “passive” funds) whose objective is to track an index such as the S&P/TSX Composite or the Nasdaq Composite, with no investment decisions made by a manager. Actively-managed funds, which include ETFs where the manager makes the investment decisions, make up 30%. Rules-based funds, where prescribed rules are used to make investment decisions, make up 8% of management styles. Enhanced index ETFs, which include ETFs that track an index and overlay a strategy (primarily using covered calls) to limit downside, produce additional income, etc., comprise 6%.

Fixed-income ETFs invest primarily in investment-grade government and corporate bonds, as well as emerging market debt, high-yield bonds, and preferred shares. Geographically, Canadian-focused funds make up 44% of this category, while U.S. funds take a 28% share, and global funds at 20%. In the fixed-income category, 59% of funds are actively managed, while 40% are index based.

In recent years, non-conventional investment strategies (e.g., short-selling and other forms of leverage, derivative contracts, and so on) dubbed “Alternative” investments, have become increasingly popular with money managers and more sophisticated investors. Accordingly, financial markets, being endlessly innovative, introduced Liquid Alternative funds to make such strategies more easily available to investors. These funds now make up 12% of all Canadian ETFs. Within the category, cryptocurrency funds make up 22%. While 16% are funds using Passive/Inverse Leveraged strategies.

From a currency perspective, 86% of all ETFs are denominated in Canadian dollars with the remainder denominated in U.S. dollars.

Responsible Investment (RI) funds, as defined by the Canadian Investment Funds Standards Committee (CIFSC), make up almost 8% of all ETFs. The majority of these are Equity funds, at 74%, while Fixed Income funds account for 20%.

Fees and performance of ETFs

Looking at fees, Equity ETFs have an average management expense ratio (MER) of 0.62%, and Fixed Income funds average 0.45%. Active Equity funds average 0.90%, index-based funds average 0.44%, and rules-based funds average 0.62%. In the Fixed Income space, index ETFs have an average MER of 0.25% while active funds average 0.62%. Alternative funds have the highest average MER, at 1.42%. When comparing ETF fees with mutual funds, it is important to keep in mind that MERs do not include any brokerage fees that can be associated with buying and selling ETFs.

So what does all of this mean for performance? Year to date (YTD) to the end of July, Equity ETFs on average, have gained 13.4%. Fixed Income funds are up 3.9%, and Cash funds made 3.2%. Of the Equity funds, U.S.-focused funds lead the way at 15.7% YTD, followed by Global funds at 13.0%, and then Canadian at 10.6%. Over the past 3 years, U.S. funds still lead the way, with an average annual compounded rate of return of 7.6%, followed by Canadian funds at 7.1% and then Global funds at 4.8%. Of the three groups, Canadian funds were the least volatile, with a standard deviation (SD) of 15.0%, more than 2 percentage points lower than the U.S. funds and 3 percentage points lower than global funds.

Across all three regions, rules-based strategies not only outperformed over the past three years, they did so with either lower or similar volatility compared with actively managed and index strategies. For instance, Canadian rules-based ETFs have a 3-year average annual compounded return of 7.72% with a SD of 13.3%. Index funds were close behind, at 7.71% but with an SD of 15.0%. Active funds earned just 4.0% with an SD of 14.1%.

Responsible Investment funds’ performance has been similar to non-RI funds so far in 2024. The only material difference was in the Fixed Income space, where non-RI funds outperformed with a YTD return of 4.0% compared with 2.8% for RI funds. Over the longer term, non-RI funds outperformed across most asset classes and geographical regions. Equity funds delivered an average annualized 3-year return of 6.4% compared with 5.5% for RI funds. Fixed Income funds produced a 0.1% annualized return in the same period, while RI Fixed Income funds lost an average 0.8% annually. And Balanced non-RI funds outperformed their RI counterparts by 50 basis points. RI equity funds did experience lower volatility over the past 3 years, with a SD of 15.9% compared with 16.6% for non-RI funds.

Brian Bridger, CFA, FRM, is Senior Vice President, Analytics & Data, at Fundata Canada Inc. and is a member of the Canadian Investment Funds Standards Committee.

Notes and Disclaimers

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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