ETF sales grow, but mutual funds still rule

Canada’s exchange-traded fund industry reached quite the milestone last week, with net sales surpassing mutual fund sales for the first time in our country’s history. According to Strategic Insights, in the first 11 months of 2018, ETFs brought in $18.7 billion compared to $7.8 billion for mutual funds. That’s good news for the growing number of passive management fans, but let’s not get ahead of ourselves: mutual funds aren’t going anywhere, especially in Canada.  

Over the last 10 years, the world’s investors have been buying ETFs in droves, with total global assets under management surpassing the $5 trillion mark in 2018. The U.S. ETF industry accounts for about 72% of that total. While Canadians may have purchased more ETFs than mutual funds in 2018, Canadian ETFs have just $157 billion in assets under management, compared to about $1.47 trillion in mutual funds. As well, while December figures still need to be reported, net ETF sales are down about $8 billion from 2017’s total.

While Canadians may be more willing to give ETFs a shot, Yves Rebetez, founder of ETF Insights and a long-time proponent of passive funds, isn’t ready to unfurl his mission accomplished banner just yet. It could still be years before Canadians adopt ETFs in the way Americans have. “I don’t think we’re catching up at all,” he says. “ETFs remain a secret in Canada.”

That may seem like an odd comment, considering Canadian ETF assets have climbed by 74% since 2015, but with only five banks and a handful of investment firms holding the vast majority of Canadian assets, no one’s pushing investors to move their money into low-cost ETFs, he says. Indeed, since 2015, mutual fund assets have also increased by about 74%, a huge number considering the size of the industry.

To Rebetez, Canada’s asset management industry “is extremely self-serving and you have a regulatory body that is only paying lip service to (the idea of) putting investors interest first,” he says. “Investors are being lulled into a false sense of complacency and think they’re in a better place with actively manage funds than passive alternatives.”

Ryan Modesto, CEO of Toronto’s 5i Research, agrees that it’ll still be a while before ETFs become the preferred investment choice for investors. “We’ve still got a long way before (these sales figures) are a big deal,” he says.

Slowly, but surely, though, things will change and, ironically, it may be the big firms that ultimately force people into ETFs. With BMO, BlackRock and Vanguard all vying for the hearts and minds of ETF investors, other firms have begun adding various ETFs to their fund lineup.

Not all are the ultra cheap passive funds – many are actively managed and smart-beta funds, which are still less expensive than mutual funds, though not as cheap as an S&P/TSX ETF – but the fact that they’re now selling ETFs will cause more people to think about them.

As well, last week’s announcement that BlackRock Canada and RBC are teaming up to sell RBC branded iShares funds, which the bank will then sell through its distribution network, could speed up ETF adoption. “That could be a reality check for people who are paying attention,” says Rebetez. “It says that things are getting serious now that RBC, which hasn’t made a significant move into ETFs, is getting into this.”

Still, it will be a while before ETFs consistently outsell mutual funds though Modesto thinks it will happen at some point. “It’s inevitable,” he says. “More people are looking at their portfolio and seeing their mutual fund with a 2% fee perform the same as a TSX fund with 0.2% fee.”

Rebetez, though, doesn’t think mutual funds will ever disappear. There’s still a place for active management – people will always want to try and beat the market, even if it is difficult to do.

Plus, you need buyers and sellers of stock to create an efficient market. “When everyone goes passive, I’ll go active,” he says. “If everyone went passive you’d have no more allocation to capital and no new enterprise creation – you still need financial markets to anticipate information.”