A lot can change in a year. In 2022, both equity and fixed income markets globally had strong drawdowns, ending the year in negative territory. In contrast, 2023 proved to be a year of recovery and growth for global capital markets, which was reflected in the strong performance of Canadian ETFs. This paper will look back at the 2023 Canadian ETF landscape, highlighting the areas of growth, notable trends, and the seminal industry developments that came to fruition.
Overview
ETF assets in Canada reached a new historical high of $383 billion at the end of the year, growing by $38.4 billion in 2023. For the second consecutive year, fixed income ETFs outsold equities, bringing in $21.4 billion and accounting for approximately 56% of total inflows for the year. Within the fixed income ETF category, there was a heightened demand for cash-like or money market ETFs, which were 44% of total fixed income ETF flows, the largest inflow segment by far. Equity ETFs pulled in $13 billion for the year, where Canada, developed markets, emerging markets and global equities enjoyed steady year-long inflows. Despite the recovery in U.S. equities, U.S. Equity ETFs pulled in only $641 million in 2023 – the smallest annual figure in the past decade.
Flows into other ETF asset classes varied, as the multi-asset ETF category welcomed $1.8 billion into asset allocation ETFs and $0.5 billion flowed into “alternative” ETFs, many of which employ hedge fund-style strategies. Regarding Canada-listed crypto-asset ETFs, flows in 2023 totaled $ 1 billion.
Notable Trends
Ironically, against the backdrop of an uncertain macroeconomic environment, low volatility ETFs suffered outflows of $217 million in 2023 and multi-factor ETFs had relatively small inflows of $212 million for the year. Conversely, option-based ETFs, which include covered call, put write, defined payoff, buffer, collar, and other combinations of different option-based strategies, amassed $4 billion in new creations, their highest-ever net inflows in a calendar year. Within the category, covered call remains the most prominent option-based ETF strategy, accounting for 80% of all option-based ETF market share. Target (NYSE:TGT) maturity bond ETFs were also extremely popular in 2023 and doubled their category size, given their ability to minimize interest rate risk. It is anticipated that this product type will continue to resonate with investors in the future, as evidenced by Guardian Capital’s recent fund launch and RBC’s existing success.
In 2023, 164 ETF products were launched in Canada, which was above the long-run average of 150 per year. However, there were 122 delisting’s that occurred, which is materially higher than in previous years. The impetus behind these delistings was two-fold:
- Several small ETF manufacturers ceased their operations, namely NCM, Smartbe, Emerge, and Evermore; collectively they accounted for 36 product offerings.
- Invesco Canada Ltd and CI Global Asset Management (“CI GAM”), respectively, engaged in fund rationalization activities throughout the year that resulted in the closure/termination of several ETF offerings. As a point of reference, their press release can be viewed here: Invesco ETF Terminations and CI GAM ETF Terminations.
While the number of delisting that occurred in 2023 was noteworthy, as the Canadian ETF landscape continues to grow, ETF closure numbers of this magnitude may become normalized. With new ETF manufacturers entering the field and the level of product development from incumbents increasing, the number of ETF offerings available to investors will continue to grow, however, their success will be determined over time.
Industry Developments
In 2023 several regulatory policies pertaining to the ETF industry were updated or announced, detailed below are summaries of the prominent ones:
I. The Canadian Securities Administration (“CSA”) announced that it would undertake a thorough examination of ETFs in Canada, assessing the adequacy of current regulations surrounding the unique characteristics of ETFs and International Organization of Securities Commissions (“IOSCO”) principles. This review might lead to new regulations focusing on disclosure and transparency. It could also impact exchanges, ETF providers, designated brokers and market makers.
An article on this topic was published in 2023, for more information it can be accessed here.
II. The Office of the Superintendent of Financial Institutions (“OSFI”) announced changes pertaining to the liquidity requirements for HISA ETFs that may affect the rates offered by these product types going forward. Because HISA ETFs provide a high degree of liquidity, the concern was that the current liquidity coverage rules in place for banks, as it pertains to this product type, were insufficient and that banks would not have adequate capital in place if there is “en masse” liquidity event that occurred with these products. Based on OSFI’s findings, though HISA ETFs exhibit retail-like characteristics, the wholesale funding products they analyzed during their research were held directly by fund managers for purposes that are not specifically operational. Simply put, because of the new OSFI rules, the money in cash ETFs – which gets invested in bank savings accounts with preferential rates to generate their yield – will have to be treated as wholesale deposits, not retail deposits.
An article on this topic was published in 2023, for more information it can accessed here.
III. The CSA and Canadian Investment Regulatory Organization (CCIR) finalized changes to improve cost reporting for investment and segregated funds. An implementation committee was formed to assist stakeholders during the transition, ending on December 31, 2025. ETF holding costs, which include management fees and trading expense ratios, will be more transparently reported.
This content was originally published by our partners at the Canadian ETF Marketplace.