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The success of the Canadian ETF industry will be determined by how it responds to investor needs like more fixed income alternatives, increased exposure to income-producing equity holdings and a growing demand for innovation, says BMO.

The industry currently stands at $63.1 billion in assets under management (AUM), says BMO’s Canadian ETF Outlook Report . That’s up $5 billion over last year and an increase of 11.9% over year-end 2012. Equity ETFs experienced $2.7 billion in inflows in 2013, while fixed income inflows slowed slightly but still reached $2.3 billion.

Read: 101 need-to-know facts about ETFs

“Investors concerned about the impact of monetary policy on financial markets and the sustainability of global growth prospects continued to invest in ETFs, largely because of the flexibility they offer and their cost-effectiveness,” said Rajiv Silgardo, co-CEO, BMO Global Asset Management.

BMO GAM says its ETF business led the the country in new assets for the third consecutive year in 2013, as they hold 20% of industry AUM.

“Canadian investors are benefitting from increasing competition in our industry,” says Silgardo.  “ETF providers are focusing more on product innovation than ever before and we’re all being compelled to develop stronger product suites and to find ways to differentiate ourselves.”

Read: Are leveraged ETFs smart investments?

The BMO report identifies four key trends for 2014.

More Fixed Income Alternatives: In late 2013, investors shied away from fixed income purchases and avoided longer-term exposure. This has highlighted a need for alternative ways to generate yield. Alternative fixed income options include preferred shares and credit-focused fixed income such as floating rate securities, high yield debt and investment grade corporate bonds.

Equity Income: Defensive fixed income holdings mean a need for more income from equity holdings. Equity exposures combining both growth potential and income will be highly favoured in 2014.

Smart Beta: Market capitalization weighting continues to be a key strategy to achieve market exposure. However, investors are also exploring alternative-weighting strategies, known as smart beta. Products that offer exposure based on various factors such as low volatility, momentum and quality are growing in popularity.

Currency Hedging: Traditional international ETFs based in Canada hedged the foreign currency exposure. However, the recent decline of the Canadian dollar has heightened interest in un-hedged products, which provide a way for investors to take advantage of foreign currency gains. Also, the increased volatility in currencies has compelled investors to use technical trading signals, and they have been switching between hedged and un-hedged ETFs based on short-term currency movement.

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Originally published on Advisor.ca

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