Podcast: ETF Industry Flows - May 8, 2024

Equities continue to dominate Canadian ETF flows. Hear about this trend and more in today’s episode, as Erika Toth, David Cheng, and your host, Mckenzie Box, dive into the themes shaping markets this spring, including redemptions of HISA ETFs, rate cut expectations, the bounce back of balanced portfolios, and a retirement wave.

McKenzie Box is Vice President of Product Management and Strategy at BMO Global Asset Management (BMO GAM). She is joined on the podcast by Erika Toth, a Director of Institutional and Advisory for Eastern Canada at BMO GAM, and David Cheng, an ETF and Quantitative Analyst at BMO Capital Markets. The episode was recorded live on Wednesday, May 8, 2024.

Report: ETFs – Industry and Flows Update (April 2024)

Episode Summary

ETF Flows and Trends

We have been seeing a heavy tilt towards equities so far this year, which is a notable shift from the fixed income flows that dominated 2023. On the fixed income side, we’ve observed net redemptions from HISA names that are partially being recaptured by money market and ultra short bond ETFs. In April, we saw about $865 million flow out of cash alternative ETFs, which was almost exactly offset by about $868 million of inflows into bond ETFs. Part of this may be due to the regulatory changes from OSFI around HISA ETFs. When the market becomes more confident of rates cuts, this trend will likely accelerate. We are also seeing a pickup in the aggregate bond segment for holistic exposure. Asset allocation ETFs are reporting strong flows as well as investors may be looking for that one stop ETF solution across asset classes for diversification. The last trend worth noting is the interest in gold. In periods of stubborn inflation or when markets have gone risk off, gold has been an excellent hedge. If the U.S. economy were to cool faster than expected, gold would be an area to consider. We are fielding a lot of inquiries from investors right now about gold. 

• BMO Ultra Short-Term Bond ETF (Ticker: ZST)
• BMO Gold Bullion ETF (Ticker: ZGLD) 

ETF Industry

The Canadian ETF industry continues to grow at an average rate of about 20% per year. We’re also seeing evidence of broadening flows as investors are adding to a variety of differentiated ETF products. Over the past couple of years, we’ve been observing this pendulum swing towards the active side of things. Of all the new ETF launches so far this year, about 75% of them had an active management layer on top. Ranging from rule-based ETFs, to covered call and asset allocation ETFs, to the more active liquid alternatives and buffer ETFs. Given that the adoption of ETFs has been strong, there is now a growing base of more sophisticated ETF investors that are more comfortable with exploring more complex strategies. We’ve also been seeing some success with active management within the fixed income space. There is the argument to explore active management bond ETFs because of their all-inclusive management approach with added bond expertise.

• BMO US Equity Buffer Hedged to CAD ETF – April (Ticker: ZAPR)
• BMO Core Plus Bond Fund – ETF Series (Ticker: ZCPB)

Interest Rates & ETFs

Should the Bank of Canada follow through on cutting interest rates, I think we’ll see a pop to inflows across the board. Part of that, discuss already is more flows to bond ETFs with some duration exposure. This could also be bullish for utilities sector focused ETFs which are interest rate sensitive areas of the market. It would also been a boon for dividend and low volatility ETFs because these ETFs tend to have higher exposures to Consumer Staples, Utilities, and Financials, which all should benefit in the case of a rate cut in Canada. The market is pricing in about a 60% chance of a rate cut in June. In the last few years, balance funds have really struggled. There was a lot of talk of whether the traditional 60/40 balanced portfolio was dead. Looking at return patterns now, these portfolios have shown resiliency, after long stretches such as 2008, 2018 and 2022, we have seen decent rebounds. With rate cuts on the horizon, the outlook for balanced portfolio is a lot stronger going forward. 

• BMO Equal Weight Utilities Index ETF (Ticker: ZUT)
• BMO Covered Call Utilities ETF (Ticker: ZWU)
• BMO Low Volatility Canadian Equity ETF (Ticker: ZLB)
• BMO Canadian Dividend ETF (Ticker: ZDV)

ZST, total returns as at 2024/04/30: 1yr: 5.45%, 3yr: 2.78%, 5yr: 2.32%, 10yr: 1.93%, SI: 1.99%

Weighted Average Yield to Maturity: The market value weighted average yield to maturity includes the coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity.

Duration: A measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as number of years. The price of a bond with a longer duration would be expected to rise (fall) more than the price of a bond with lower duration when interest rates fall (rise).

• Alpha: A statistical measure of the value a fund manager adds to the performance of the fund managed. If alpha is positive, the manager has added value to the portfolio. If the alpha is negative, the manager has underperformed the market.
• Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.