Pace of ETF Growth Likely to Persist

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David Stephenson

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David Stephenson, director, ETF strategy and development, CIBC Asset Management.

Where are ETFs headed and will the growth continue? The ETF industry has grown significantly over the last 10 years by a factor of eight times AUM growth from 2011, but growth has really accelerated over the last four years. In fact, 2021 was another record year for ETF flows, $56 billion, which translated in the 35% year over year growth, well above the 10 year average of 23%. As we enter 2022, the question is whether this growth will continue and I would argue a resounding yes, that this will be the case. Strong equity markets have definitely been a tailwind for growth but it wasn’t long ago that the industry consensus was expecting $500 billion in Canadian ETF AUM by 2025.

I see three primary drivers contributing to future growth. They are one, product innovation; two, increased adoption of ETF use by retail and institutional investors; and three, new distribution channels evolving as well as new investors. Although there are currently over 1200 ETFs in Canada and over 200 new ETFs were launched in 2021 alone, product innovation will continue to drive ETF flows. One only needs to look to crypto ETFs in 2021 as an example. This new category alone brought in six billion in flows, contributing significantly to the record year. Going forward, there are further opportunities in ESG, which is just getting started, active ETFs and thematics will continue to evolve. To be clear, index ETFs are the origin of the industry and will continue to contribute to overall growth as Canadian investors value them for low cost, transparency, access and diversification. Active ETFs are approximately 30% of total ETF AUM and as investors search for income in a low yield world or look to further diversify globally, outcome oriented ETFs and portfolio solutions will continue to attract inflows.

The second driver of continued ETF growth is increased adoption of ETF use by investors. Millennials for example, have been a key driver of recent ETF flows and will continue to be going forward along with Gen Z, as the ETF has become their investment product of choice. Canada is also expected to have the greatest wealth transfer in history as an estimated one trillion is expected to be inherited over the next decade. On the advisor side, the shift to fee based is still playing out and ETFs are a natural fit for that business model. Finally, institutional ETF usage accelerated in 2021 and I expect this to continue going forward as this investor base values ETFs as an efficient method of obtaining exposure to various asset classes in both equity and fixed income.

The third reason ETFs will continue to grow is new distribution channels and investors are evolving. Since the pandemic began, over two and a half million self directed brokerage accounts have been opened in Canada. Many companies have focused on selling through online platforms and have a digital strategy or robo advisor. The ETF wrapper has proven critical to this new world of faster dynamic digital investing and these changes offer clear opportunities for ETFs to be part of the value proposition to investors. In short, with ETF assets at approximately $340 billion at year end 2021, these opportunities ensure that the best days for ETFs still lie ahead.