Canada's ETF Market: A Hub for Innovation and Growth

Canada's ETF Market: A Hub for Innovation and Growth

June 21, 2023:- Canada’s ETF market has seen remarkable growth, driven by investors’ increasing adoption of innovative products, much like the U.S. ETF market. While Canada has been following in the footsteps of the U.S., with registered investment advisors, banks, and institutions embracing ETFs, many Canadians had early access to novel products that are gaining traction in the U.S.

It may come as a surprise to some, but the Toronto Stock Exchange listed the world’s first ETF in 1990. Moreover, Canada was also the birthplace of the first bond ETF and the first ETF to utilize options. To delve deeper into this topic, we interviewed Greg Walker, Director of Capital Markets and Strategic Relationships at BMO Global Asset Management. BMO currently holds a 25% share of the Canadian ETF market and has witnessed strong net inflows in the first five months of the year.

ETF Innovation Thrives in Canada Walker emphasized that ETF innovation thrives in Canada. For instance, covered call ETFs have been offered for a decade and make up a significant portion of BMO’s assets. There has long been a comfort level with using derivatives within the ETF structure to reduce volatility and increase yield.

Covered call ETFs gained traction in the U.S. following the launch of the JPMorgan Equity Premium Income ETF (JEPI), which now boasts $27 billion in assets. Within a short period, it became the largest actively managed ETF listed in the U.S., thanks to its success and demand from advisors. As a result, other asset managers have filed for competing products.

Aside from covered call ETFs, active ETFs offering multi-asset exposure to help clients achieve specific outcomes have also experienced strong adoption. However, Walker predicts that there will be a greater focus on high-conviction active strategies centered around security selection.
Fixed Income ETFs Attracting Investors Similar to the U.S., Canadian investors have gravitated towards fixed-income ETFs in 2023. In the first five months of the year, 60% of net inflows into Canadian listed products went to the fixed income category, as per data from the Canadian ETF Association.

Many investors who previously traded individual bonds have now turned to bond ETFs, witnessing their resilience during periods of market stress. The ease of extending duration or managing credit risk using ETFs has attracted new adopters who have benefited from early education on these products.

Despite recent adoption, Canadian-listed fixed-income ETFs, which currently hold $106 billion in assets, represent a small portion of overall fixed-income investments. This indicates significant growth potential in the years to come.

Canada’s First Spot Bitcoin ETF While BMO does not offer a spot bitcoin ETF, investors can trade Canadian listed products from other managers. In contrast, such options are currently unavailable in the U.S. due to the consistent rejection by the SEC of asset managers’ efforts to launch similar products.

Even if recent filings are approved, or a successful ETF conversion takes place, Canada would once again surpass the U.S. in ETF innovation. As of the end of May, Canadian-listed ETFs had attracted $340 billion in investments. Although smaller than the $7 trillion U.S. market, Canada’s ETF landscape continues to capture attention and warrant close observation.


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