The home of the world’s first exchange-traded fund has become a little too cozy with the product.
Canada is registering more and more ETFs each month, rapidly expanding offerings in a market where the average fund is roughly a 10th the size of its U.S. counterpart. Newfangled funds—not least those pegged to Bitcoin—are responsible for some of the glut as Toronto upholds its mantle as an industry laboratory.
The sheer scale is prompting concern that investors will lose out as they struggle to decide what to do when faced with more than 1,000 choices.
“It is incredibly challenging for investors, for advisers, even institutional clients to make their way through the number of different products and providers,” Pat Chiefalo, head of Canada ETFs and indexed strategies at Invesco Ltd., said in an interview.
It seems like an unsustainable situation, but with the industry logging record inflows year after year, a reckoning may not be imminent. Still, participants suggest that a market that offers one fund for every $219 million of assets—versus one for every $2.6 billion in the U.S.—will eventually have to shake out.
“Canada is not going to be served by over 40 ETF providers and over 1,000 ETFs,” said Hamilton Capital Partners co-founder Robert Wessel, who foresees a wave of mergers of both funds and providers. But highlighting the appeal of jumping into what looks like a saturated market, he also predicts that ETF assets will grow more than 20% annually for the next five years.
ETF providers wrapped up another record year, with C$52.5 billion ($41.3 billion) of inflows, a 27% increase from 2020. Still, what Canada amassed in 12 months, the U.S. collected in about two weeks.
Investors’ hunger for low-cost funds prompted many Canadian asset managers to offer products in-house rather than through competitors, which explains the 10-fold jump in the number of providers over the past decade. This isn’t necessarily healthy, according to National Bank Financial analyst Daniel Straus.
Canada is the birthplace of exchange-traded funds. Since the 1990s, it has pioneered myriad new products, such as fixed-income and currency-hedged ETFs. That helps explain the current oversupply, as Canadians’ sensitivity to multiple currencies affecting their portfolios justifies the creation of even more products, Straus said.
The nation’s permissive regulatory environment has allowed financial firms to experiment with new offerings before moving to larger markets. In 2017, for example, Canada introduced the world’s first cannabis ETF, followed by one for psychedelics last year.
The market got another boost in 2021, when regulators cleared the way for cryptocurrency funds, which drew C$6 billion of inflows.
In 2021, more than half of the new flows went to Bank of Montreal’s ETF division, RBC iShares and Vanguard. Those firms accounted for 70% of assets under management, according to Straus’s calculations. Their dominance ebbed slightly from 2020 as smaller, local managers captured market share.