Canadian investors made 2023 one of the best years for ETF sales in Canada

Investors poured more than $38-billion into exchange-traded funds in 2023, a significant divergence from the $52-billion that came out of mutual funds in the first 11 months of the year as popular cash ETFs dominated investor interest.

The Canadian ETF industry has 41 providers managing approximately $380-billion in assets, a sliver of the $1.9-trillion sitting in the mutual fund industry, according to a report by TD Securities. Yet, similar to the trend in 2022, ETFs heavily outsold mutual funds in 2023 as mutual-fund investors pulled out money for nine consecutive months.

TD’s head of ETF sales and strategy, Andres Rincon, wrote in his annual report that 2023 was one of the best years for ETF sales in Canada.

“It was a year where inflows did not disappoint despite a tough investing environment and in great contrast to the large outflows seen by mutual funds,” Mr. Rincon said. “This past year, not only the traditional passive equity ETF saw [sales], but also fixed-income ETFs and actively managed ETFs, which gained significant traction throughout the year.”

Most of the surge in sales came from fixed-income products, which brought in $21.3-billion, including sales from cash and money market ETFs. This was followed by equity ETFs with $12.1-billion.

Fixed-income ETFs accounted for 56 per cent of total ETF sales in 2023, despite their assets under management only making up about 31 per cent of the Canadian ETF market, according to TD Securities.

Cash was the “name of the game” for the first 10 months of the years, Mr. Rincon said, until banking regulators came in and clarified the liquidity treatment for the deposits used for high-interest savings account ETFs, also known as HISA or cash ETFs.

With surging interest rates, in 2023 investors piled in about $6.6-billion into HISA ETFs. However, in late October, the Office of the Superintendent of Financial Institutions announced a review on the liquidity rules for cash ETFs, which effectively will lower the interest rate investors receive. Although the implementation deadline of Jan. 31 has yet to arrive, Mr. Rincon said the review caused fund sales for the category to become “muted” for the last two months of the year.

And while gross yields still remain attractive at around 5.10 per cent for the Canadian version of the funds, Mr. Rincon said the yields in cash ETFs are already “30 to 40 basis points lower” than what the rates were prior to the OSFI review. (A basis point is 1/100th of a percentage point.)

“As a result, investors are perhaps hesitant to pump more money into these products given potential changes to yields,” he wrote.

Mutual fund sales for the full year will not be reported until later this month, but the sector had net redemptions of $51.9-billion in the first 11 months of the year, which means investors pulled money out of funds, according to data released from the Investment Funds Institute of Canada.

Investors also pulled $44-billion out of mutual funds in 2022, as many of them shifted their investment portfolios to move out of equities.

Almost every major mutual fund asset class generated negative sales for the month of November, except money market funds, which had a total of $1.2-billion sales and specialty funds which sold $397-million.

For the first 11 months of the year, bond mutual funds experienced the highest sales with $6.2-billion, while specialty brought in $3.3-billion.

Looking ahead to 2024, Mr. Rincon will keep a close eye on fixed-income ETFs. The category gained significant traction in 2023, he added, as many investors viewing fixed income, with attractive yields at lower risk, as one of the most popular investments in today’s environment.

However, with Consumer Price Index numbers cooling down, investors expect the Bank of Canada to cut rates sooner or later in 2024.

“The next couple of months will be crucial in determining whether central banks will start rate cutting cycles,” Mr. Rincon said. “Fixed-income ETFs may face challenges if yields decline. On the other hand, equity ETFs may see inflows as the equity market may be further boosted by lower rates.”