The year 2022 has been rather difficult on the financial and real estate markets. Exchange-traded funds (ETFs) have not escaped this, but they have been able to defend their place, even if everything is still only marginal.
Last year, the traditional mutual fund industry suffered the dual effects of net redemptions and an unfavorable market, causing a 13% drop in invested assets after a record year 2021. In contrast, ETFs recorded declining but positive net sales — without being able to escape the market effect, however, the cumulative assets fell by 3% —, indicate the statistics of the Institute. Investment Funds of Canada (IFIC).
Small interlude, therefore, in a context of an uptrend. Over the past 10 years, mutual fund assets have more than doubled and ETF assets have increased more than 5.5 times, says IFIC. Despite this growth gap, the weight of ETFs in the industry as a whole remains modest. At the end of 2022, mutual fund assets totaled $1.809 billion compared to $314 billion for ETFs, giving the latter a weight of around 15% in total assets.
Certain enthusiasm
The enthusiasm is there. According to a survey conducted for the organization FAIR, dedicated to the defense of investors, that 83% of them buy mutual funds and ETFs. Also, people who consult a financial advisor are much more likely to own mutual funds (around 70%), while those who manage their own investments tend to hold fewer (around 39%). In other words, “on the whole, do-it-yourself investors tend to own mutual funds and ETFs in roughly equal amounts. Investors who consult financial advisors tend to hold significantly more mutual funds,” it reads.
This should be put in a broader context where fees receive particular attention. Most respondents are concerned about paying too many fees (77%) and said they don’t understand the fees charged (63%). Only a third feel very confident about their understanding of investment fees. It also shows that 39% of respondents agree that they get good value for the fees they pay, with this perceived value of advice increasing with the amount invested.
ETFs can be said to provide small investors with inexpensive exposure to asset classes previously available only to institutional investors or high net worth investors. These instruments provide access, sometimes specific, to a basket of diversified securities that may include stocks, bonds or commodities. Or even a targeted approach to investment and specific risk. They combine transparency, diversification, liquidity and risk control, at a lower cost.
In short, they have the advantage of offering portfolios the ability to position themselves or adjust at low cost.
A look at 2022, and beyond
In 2022, the first target date ETFs appeared on the market, which, simply put, revolves around adjusting the risk of the portfolio over the time horizon leading to retirement. Under the same theme of retirement, it is expected that ETFs that focus on objectives, offering withdrawal solutions or containing a margin of protection against price declines, will broaden the spectrum.
According to a survey from Mackenzie Investments, fixed-income ETFs have grown in popularity as interest rates rise. “The interest in inflation protection solutions, such as real return bonds and TIPS (Treasury Inflation-Protected Securities), increased, while alternative cash products, such as high-interest savings account ETFs, were also popular.
Cryptocurrency ETFs have also been a strong draw, but the appetite has waned quickly amid a lot of crypto drama. “Investors are now hesitant to hold risky assets and many of these ETFs have seen massive outflows. »
Looking ahead, Mackenzie observes that sectors that were out of fashion are now on the rise. This is particularly the case for infrastructure, whose contracts are often linked to inflation. “Fixed income ETF inflows are expected to continue,” while in the longer term, “as investors begin to take on more risk, thematic funds may be in demand. Digital infrastructure, green technologies and the energy transition are examples of investment themes that could attract investor interest in the future,” adds Mackenzie. Other examples of themes: travel and leisure, semiconductors, metaverse, lithium and battery technology.
A final nod can also be made to responsible investment strategies, which accounted for almost half of the 90 new ETFs launched last year. Then, to impact investing, which adopts a more targeted behavior.