Views from the Desk

Podcast: ETF Industry Outlook

Jan. 17, 2024

Despite turbulent markets in 2023, the ETF industry continues to thrive, providing Canadian investors with new options for growth. Portfolio manager Alfred Lee and your host, McKenzie Box, take a deep dive into the themes driving demand and the benefits ETFs have to various user types. Read the episode summary.

McKenzie Box is Director of Product and Strategy at BMO Global Asset Management. She is joined on the podcast by Alfred Lee, a Portfolio Manager and ETF Specialist at BMO Global Asset Management. The episode was recorded live on Wednesday, January 172024.

Industry Flows

The biggest trend that we saw in markets last year was in cash with $10 billion of inflows. That’s including money market, HISA, and Ultra Short-Term Bond ETFs. Not surprising with the risk-free rate for cash being the highest we’ve seen in a long time. Broad-based ETFs were a popular choice as well, being the most cost-efficient exposure and easy way to participate in the market rally. Sector ETFs were also popular with investors with specific pockets of the markets being undervalued. After the Fed pivot, we saw a lot of interest in adding duration. The most relevant tickers being BMO Equal Weight Banks Index ETF (Ticker: ZEB), BMO Covered Call Technology ETF (Ticker: ZWT) for sector exposure and BMO Aggregate Bond Index (Ticker: ZAG) to extend duration.

ETF Industry

When you look at ETFs, the audience is much broader relative to traditional funds. Mutual funds sell mainly to the retail channel, while ETFs appeal to many types of investors and channels, such as direct, institutional, and advisors. Also, ETFs now encompass both passive and active investing. Within the direct channel, younger investors are more inclined to use ETFs, and they will be the beneficiaries of the great wealth transfer. From a technological perspective, advancements have helped the ETF ecosystem where you can convert a single bond or basket of bonds into an ETF through custom creations. So, the ETF ecosystem has become a lot more dynamic than traditional funds.

ETF Usage

The Advisor community continues to use more and more ETFs in their portfolios; as mentioned previously, ETFs are suitable for fee-based models. More Advisors are becoming registered Portfolio Managers and they are building portfolios very differently versus 10 years ago. Instead of stock picking they are using ETFs as building blocks to portfolio construction. They are also looking for more tax efficient solutions, such as covered call strategies or discount bond ETFs such as BMO Discount Bond Index ETF (Ticker: ZDB). On the institutional side, conversations have revolved around index-based products and fixed income ETFs. Larger asset owners tend to use more fixed-income ETFs and plain vanilla broad-based ETFs, and hedge funds and family offices lean towards using ETFs for liquid alternatives. As for the direct channel, investors are looking for more simplicity, meaning low-cost, index-based products as well as covered call strategies and asset allocation ETFs. Retail investors are looking for that one-ticket solution where they can basically set and forget.

2024 Key Themes

Fixed Income will be a trend in 2024, bringing in $21 billion last year; investors are looking for that efficiency that an ETF structure offers in terms of getting exposure to bonds. Factor based ETFs will probably make a comeback as well. Broad-based ETFs outperformed most Factors, except for Quality last year; we will probably see a reversal as investors use Factors to manage risk as the market slowly shifts throughout the year. Covered Call ETFs will remain popular this year, as well as Structured Outcome ETFs with non-linear payoffs, as investors may want more predictable outcomes. The ETF industry has grown 20% compound annual growth rate over the last 10 years, we will likely see the ETF industry grow at a similar rate going forward.


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*The Advisor industry is largely moving toward a service-oriented model using managed money, which ETFs are a natural solution for. Read more in our industry outlook linked above.

Source: Bloomberg, All returns and data points December 2023.

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