What can Canadian ETF investors expect in 2019?

New technologies and themes are bringing exciting investment opportunities to the fingertips of investors

Andrew Willis: ETFs are on the rise in Canada. These efficient investment vehicles are picking up steam with digital investor platforms continuing to innovate and the integration of new technologies enabling exchange-traded funds to take on new forms and better bring new investment opportunities to the fingertips of investors. With the recent Bank of Montreal report predicting sales in the exchange-traded asset class to double with Canada expected to experience an even greater growth in sales, it’s clear that investors have their eye on ETFs in the year to come.

Back with us today to discuss what we might expect in 2019 is Mark Raes, Head of Product at BMO Global Asset Management Canada and the author of the latest ETF report. Mark, thank you for joining us again today.

Mark Raes: Thanks for having me.

Willis: Let’s start with strategy. What kind of new structures or investment approaches might we expect to see in 2019?

Raes: Well, I think it’s going to be another interesting year for the ETF industry. We are seeing a lot of new players come to market and with that, we are seeing a lot of new products. Certainly, the industry is growing and that puts a lot of great energy behind all the new things that come to the marketplace.

First, I’d start off with asset allocation ETFs. So, where ETFs have traditionally been segmented exposures, so Canadian equities, sector ETFs, pieces of fixed income, now you are going to see the rise of more of a true balanced product. So, something that’s been very successful in the mutual fund space that hasn’t really translated yet to the ETF world, I think you are going to see a lot more of that in 2019.

Beyond that, I think the rise of further thematic type approaches is going to be very interesting. Certainly, ESG, environmental, social and governance, where you are looking to make an impact with your investment, and you want to be aware of what’s going on in the world besides just putting your money to work is an area that’s getting a lot more attention. Certainly, in Europe starting in the U.S. and now, I think, it’s coming more and more into Canada and what’s probably most interesting about that is that people are realizing that they don’t have to leave returns on the table to invest their money more responsibly.

Beyond that, I think, it’s more attention to where ETFs really put a segmented approach to the marketplace, whether that’s through sectors, pieces of the fixed income universe, either by credit or by curve, where you are giving an investor an opportunity to really build the portfolio just as they want to see it, but yet, still have the benefit of the diversification of ETFs.

Willis: So, we have ETFs enabling new themes and also, perhaps, new sector opportunities. What kind of sectors would you recommend Canadian investors watch in 2019 when they are placing their ETF bets?

Raes: Well, it’s going to start with what’s the investor’s view on the marketplace, right? If you are thinking that there’s years of growth ahead and that this cycle will continue and that the Federal Reserve will have a light touch, you are going to look at more growth-oriented sectors, so communications, financials, industrials, those types of things, where thankfully there’s a lot of Canadian ETFs that offer that. But just as importantly, those Canadian ETFs can give you exposure to international, global and U.S. markets to get a better diversified approach to those sectors.

Now, on the other hand, if you are more defensive and you think that this cycle is starting to reach its end, you want to be invested in more defensive sectors. So, the things have equity exposure but don’t have the same level of risk, so things like consumer staples, utilities, those types of sectors that don’t put quite the same amount of money at risk as some of the higher-volatile sectors.

Willis: Any sectors you would recommend Canadian investors watch when placing their ETF bets in 2019?

Raes: Well, I think, an interesting area that they should be paying attention to is actually fixed income sectors. So, when you think about carving the fixed income universe by credit quality, by curves, or going short, mid, long, there’s a lot of interesting ETFs out there that can really help investors build their portfolio. And when I think of the benefits of ETFs and how we know those to apply that the equity markets, diversification, low costs, easy to trade. You take those benefits and you put them on fixed income, which trades over-the-counter, it becomes that much more amplified. So, the ETF solution starts to make even more sense that way. So, I think, that is an area that’s really going to continue to take off in 2019 and beyond in the Canadian marketplace as Canadians look to reposition their fixed income, potentially as they look to shorter-term bonds, as they look to take a credit trade on and off depending on what their view of the marketplace. ETFs really help them do that. And it’s such an efficient way to trade on the exchange like a stock instead of trying to source individual bonds and deal with any concerns you might have on an OTC marketplace.

Willis: Mark, thank you again for joining us today.

Raes: Thank you.Willis: For Morningstar.ca, I’m Andrew Willis.