A Tailwind for ETF Growth in Canada

In the world of exchange-traded funds

(ETFs), Canada is known for its history

of firsts.

The first successful ETF was launched on the

Toronto Stock Exchange in 1990. Called the

Toronto 35 Index Participation Units (TIPs 35),

the instrument tracked the TSE-35 Index

and allowed investors to participate in the

performance of the index without having to

buy individual shares in each company. As the

funds grew in popularity, Canada was later the

first market to begin using actively managed

products that do not disclose daily holdings.

Despite the head start, Canada saw only

moderate ETF growth in the next two decades.

That lag has started to recede recently due to an

increasingly favorable regulatory environment,

more distribution options and the draw of lower

fees. The surge of global managers entering

Canada’s market with innovative ideas and

products that work for both mutual funds and

ETF wrappers is further helping to boost growth.

According to Cerulli Research, ETF assets

under management in Canada grew by nearly

nine percent and net new flows expanded by

19.1 percent in 2018.1

So will the upward momentum continue?

Our experts highlight three trends helping

to propel growth.

Ongoing Regulatory Support

Since the early days of ETFs, regulators in

Canada have been known for their openness to

working with managers to introduce innovative

exchange-traded products while keeping the end

investor top of mind.

One of the advantages is that fund managers

in Canada are not required to reveal daily fund

holdings, a disclosure requirement that many

believe may have been holding managers back

from entering the ETF space in the US and other

global markets. In 2012, the Canadian Securities

Administrators (CSA) began to further modernize

rules and regulations to respond to the evolving

investment landscape. Recognizing the growing

role of ETFs, CSA sought to streamline market

access by eliminating the need to apply for

regulatory exemptions, a cost and time-to-market

savings for both managers and end investors.

Since the early days of ETFs, regulators in Canada have been known for their openness to working with managers to introduce innovative exchange-traded products while keeping the end investor top of mind.

1 Cerulli Associates, U.S. Exchange-Traded Fund Markets 2018: Innovating for the Investor, January 16, 2019.

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But regulation surrounding the Client

Relationship Model — Phase 2 (CRM2) is what

electrified the market in Canada. Introduced

by CSA, this mandate was developed to create

greater transparency for investors by giving them

a clear look at their account performance and

what they’re paying to achieve that performance.

Since its adoption in 2015, flows to ETFs have

trended 50 percent higher than flows to

mutual funds.2

An Innovation Edge

The openness to new product ideas by both

regulators and managers has long been

recognized as a driving force behind the

flurry of innovation in Canada’s ETF market.

Actively managed ETFs are a great example.

Because there are no daily disclosure

requirements, active managers feel more

comfortable bringing their best ideas to

market without concerns of having to reveal

their full strategy. While managers do have

an obligation to disclose top holdings and to

share fact sheets with their investors, they

do not have to reveal the full basket or

holdings. Investors have the transparency

they need to understand performance, fund

strategy and costs, while managers are able

to protect their intellectual property.

The advantages of active ETFs, which include

cheaper alpha and broader distribution, have

already started to emerge in Canada. ETF flows

to active investments surpassed passive funds

in 2019, and assets to active investments have

been steadily increasing since 2015.3

Another innovative approach in Canada is the

ability to add an ETF series to an existing legacy

mutual fund. This can increase speed to market

at scale by using the same legal structure and

single pool of assets as a mutual fund.

Additionally, this approach does not require

the complete ETF infrastructure that typically

accompanies a standalone physical ETF that

processes primary market activity in kind.

As ETFs are not required to disclose holdings

daily, using the ETF series approach allows

managers to invest in both passive and active

strategies. The benefit for the end investor is

that they have a choice of a single strategy using

both a traditional mutual fund and ETF wrapper

that trades intraday on an exchange.

While the market is still highly concentrated

among larger distributors, smaller managers

see a growing opportunity.

The growing interest in Canada’s ETF market

runs the gamut from global managers entering

Canada for the first time to local managers

entering the ETF space for side-by-side use

of ETFs and mutual funds.

2 ETFGI Canada ETF Insights 03/31/19. 3 ETFGI Canadian ETF Insights as of 07/31/19, 2019 flows annualized.

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4 As of October 31, 2019

Thematic Investing and Asset Allocations

For managers looking to hone in on a potential

market opportunity, thematic investments

have helped them to identify and invest in

macro-level trends. It’s an investment strategy

that appeals to a broad range of investors.

Investors may also find that they have access

to products not available in other domiciles.

Cannabis investment products were first to

launch in Canada, for example.

Certain products, such as digital currencies and

blockchain products, may appeal to a younger

generation of investors who can afford to take on

more risk and uncertainty in their investments.

For those closer to retirement age, a mixed asset

allocation strategy allows investment in an ETF

that covers fixed income, cash and equities all in

one product. Thematic investing has also opened

opportunities for asset managers to create unique

products for their end investors.

How We Can Help

At State Street, our purpose is to create better

outcomes for our clients and the people they

serve. As the largest provider of ETF servicing

to the Canadian market, with 80 percent of

ETF assets under management,4 we use our

knowledge, scale and global footprint to our

clients’ advantage. Our follow-the-sun global

operating model allows us to meet our clients’

needs wherever they do business. By building

strong relationships, we’re able to understand

the nuances and challenges they face and embed

our teams directly into their daily operations.

No matter the client’s size, our focus on

technology, experienced staff, consultancy

services and thought leadership means we’re able

to help at every stage of building an ETF portfolio.

Whether launching their first fund or adding to

a portfolio of existing products, we help clients

confidently connect to the ETF marketplace.

The openness to new product ideas by both regulators and managers has long been recognized as a driving force behind the flurry of innovation in Canada’s ETF market.

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For more information, contact:

JEFFREY SARDINHA

Vice President

+1 617 866 7283

jsardinha@statestreet.com

ROBYN THOMPSON

Managing Director

+1 647 775 5707

rthompson5@statestreet.com

FRANK KOUDELKA

Senior Vice President

+1 617 639 2006

francis.koudelka@statestreet.com

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This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk including the risk of loss of principal. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

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