Note: For access to the charts or tables cited in this summary, contact Hugh Murphy at 905.919.1926 or Frank Hracs at 905.780.9309.

January ETF demand off to a solid start. Against a backdrop of record levels for North American equity market indices and a pause in bond market weakness, ETF flows of $1.598 bn were posted in Canada for January (Table # 6). Net Flows for 2016 totaled $16.27 bn vs $16.22 bn in 2015 (i.e. historically strong but essentially trendless). For 2017, we estimate net flows of about $14.0 bn. Total ETF assets under management stood at $115.6 bn during January for a gain of 32.2 percent from year ago levels, of which about 20.6 percent is from net flows and the rest from market returns and some closed end conversions (Table # 5 and Charts # 3 and 4).

Excluding the iShares XIU ETF, which is a volatile institutional investor dominated vehicle, long term ETF demand stood at $1.74 bn, currently above the 12-month average (Chart # 5). Total flows for this aggregate for 2016 stood at a record $17.1 bn vs $16.1 bn in 2015. For 2017, we estimate net flows of $14.1 bn. For January, net flows for the iShares XIU stood at -$162 mn (Chart # 4 and 16). Since 2009, the XIU has had a cumulative net outflow of $3.3 bn, while the latest 12-month total stands at +$496 mn.

Canadian Fixed Income was the net demand leader during the latest month followed by Canadian Equity excluding the XIU and US Equity (Table # 6). On a rolling 12-month basis, Canadian Fixed Income, US Equity and Canadian Equity excluding the XIU hold the net demand lead (57.6 percent of total 12-month ETF flows), (Table # 7) and (Chart # 1 and 2).

So called Smart Beta ETFs posted net flows of $3.92 bn in 2016 versus $3.07 bn in 2015 (Table # 7). As of January, Smart Beta AUM stood at $16.59 bn vs $10.82 bn a year-earlier (Table # 5). Smart Beta represented 14.55 percent of ETF AUM at year-end 2016 and accounted for 24 percent of ETF flows in 2016 (Table # 7). During January, Smart Beta flows stood at $121 mn (Table # 6).

As shown in Chart # 7 (excludes the iShares XIU), the six months through June posted annualized demand of $20.7 bn but the subsequent months are down some 30.0 percent to $14.5 bn annualized. Equity ETF demand has receded (Chart # 8) while Fixed Income ETF demand is also down significantly from recent highs (Chart # 9). Accordingly, our overall ETF demand forecast bias for 2017 remains to the downside.

ETF demand is braking primarily as a result of momentum loss for BlackRock (Chart # 15), BMO (Chart # 19) and Vanguard (Chart # 23). BMO’s demand appears to occur in bursts which makes it difficult to de-cipher what is really happening. To be accurate, BMO’s demand has not actually turned downward on a 12-month basis so this is still a source of industry wide demand gains. At the same time, the optics of BMO’s demand profile and in turn the industry totals benefit substantially from double counting (fake assets) via the firm’s premiere Canadian Fixed Income ETF which is a fund of fund that invests 100 percent in other BMO fixed income ETFs (ZAG: BMO Aggregate Bond Index ETF – top row of Table # 9). As a result, BMO ZAG’s $1.522 bn of flows during the latest 12-months provided $3.0 bn of the firm’s $8.1 bn in flows during the past year. Without this arithmetic phenomenon, BMO’s effective demand profile has long since rolled over.

During January, Dynamic joined the ETF crowd as a member of the iShares family and we will display and track separately as is the case with Claymore. AGF launched a suite of quantitatively based ETFs at month end.

In summary, the Canadian ETF industry enjoyed strong demand during 2016 and is off to a solid start in 2017. Stringent fee disclosure rules took hold at the beginning of 2017 and there are many who expect this will further bolster and illustrate the relative merits of ETFs versus mutual funds. As well, fixed income markets do not appear to have any grand positives ahead and this should act as a restraint to ETF demand. Finally, the year started off on a record footing for equity prices but the change in US administrations and a slew of new uncertainties at the end of January do not appear to be comforting variables for financial markets and ultimately ETF demand in general.

As Credo’s Chief Economist, Frank Hracs comments on trends in monthly reporting. His objective is to provide unbiased third party analysis about the Canadian ETF sector and individual firms. Any impression to the contrary is unintended. Mr. Hracs’ reporting is in no way an endorsement of the use of ETFs or of any ETF provider. The material in Canadian Mutual Fund Analyst’s regular reporting is intended for client use only. It is a component of Credo’s monthly econometric research program and is not intended for redistribution in any form. CMFA reporting is the sole property of Canadian Mutual Fund Analyst and CMFA reserves all rights regarding the use of this information and its forecasts.