By year-end, there will be more than $26 billion in ETF inflows, a year-over-year increase of approximately 30%, finds a WisdomTree Asset Management Canada, Inc report.

Flows into equity ETFs were strong at $15 billion, with just over half of the flows in this asset class moving into international equity products, while fixed-income ETFs continued to see sizable inflows of more than $10 billion.

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“Over the last year we saw sharp increases both in terms of ETF assets under management and number of providers entering the market as the rate of adoption among Canadian investors continued to strengthen and reach new highs,” says Jeff Weniger, WisdomTree Asset Allocation strategist, in a release.

The firm notes the following trends occurred this year.

  • Interest in ETFs grew: The industry continued to develop in Canada as investors further shifted their assets into low-cost ETFs, from actively managed mutual funds. ETF usage and adoption has not yet hit its full potential in Canada, with the industry expected to grow exponentially over the next decade, says the firm.
  • A move from smart beta to modern alpha: 2017 marked a greater adoption of smart beta ETFs, with many new entrants taking this approach with their offerings and investors increasingly seeing this as a more optimal approach to ETF investing.
  • Strengthening in foreign currencies: For Canadians, a generalized strengthening of foreign currencies has greatly influenced returns, particularly with variably hedged classes of foreign equity ETFs. These ETFs have performed favourably in such environments since they have the potential to reduce volatility while offering tactical currency metrics to the low-conviction investor.

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WisdomTree notes the following trends in 2018.

  • Accelerated adoption: As ETF usage becomes more mainstream, WisdomTree predicts annual AUM growth rates will increase significantly. If, for instance, the industry experiences 20% annual rises in AUM and underlying assets appreciate 4% per year, the Canadian ETF industry would be about one-third the total size of the mutual fund industry by 2024 (assuming mutual funds do not experience net outflows).
  • A search for smarter solutions: With developed market interest rates expected to remain at low levels, investors are likely to shift allocations toward fixed-income ETFs that are weighted more towards credit and have less concentration to interest-sensitive sectors, such as government bonds. Further, investors are likely to consider shorter-duration instruments if they wish to mitigate interest rate risk.
  • Additional innovation: WisdomTree anticipates 2018 will be a year of heightened innovation for ETF providers, as increased demand for solutions that provide low-cost alpha will continue. This trend is expected to occur across the globe, notably in Canada, given that this market is still a few years behind others (namely the U.S.) in terms of adoption. The emergence of thematic ETFs tied to millennial demand, artificial intelligence, robotics and political and social trends will continue.
  • More fee transparency: As investors demand more fee transparency, the industry is expected to begin seeing heightened discussions around CRM3, a proposal to extend fee disclosure. As a result, advisors and investors are likely to look to ETFs given their cost benefits.

Read the full report.