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Looking to Canada for ETF Innovation

Canada has experienced strong ETF growth aided by continued investor adoption of innovative products, much like the U.S. ETF market. While Canada is following in the US’s footsteps and growing ETF usage by registered investment advisors, through banks and other institutions, many Canadians had earlier access to many of the novel products gaining or potentially gaining traction in the U.S. 

Some know that the Canadian exchange Toronto Stock Exchange listed the first ETF in 1990, but likely fewer people know that Canada also had the world’s first bond ETF and the first ETF to use options. To learn more, we spoke to Greg Walker, Director of Capital Markets and Strategic Relationships at BMO Global Asset Management. BMO had 25% share of the Canadian ETF market at the end of May and saw strong net inflows in the first five months of the year. 

ETF Innovation happens in Canada 

“ETF innovation happens in Canada,” explained Walker. “We have offered covered call ETFs for ten years and it is a big chunk of our assets. There has long been a comfort level with using derivatives in an ETF structure to reduce volatility and increase yield.”  

Covered call ETFs started to first gain traction in the U.S. soon after the launch of the JPMorgan Equity Premium Income ETF (JEPI). JEPI now has $27 billion in assets. It is the largest US listed active ETF not long after its third birthday. Its success and demand from advisors has spurred asset managers to file for competing products. 

In addition to covered call ETFs, Walker has also seen strong adoption of active ETFs providing multi-asset exposure to help clients achieve an outcome. However, he expects to see more high conviction active strategies focused on security selection. 

Fixed Income ETFs in Demand 

Like in the U.S., Canadian investors have been gravitating to fixed income ETFs in 2023. In the first five months of 2023, the asset category pulled in 60% of the net inflows to Canadian listed products, according to data published on the Canadian ETF Association website.  

“Many people who used to trade single bonds are now using ETFs. They saw bond ETFs hold up during stress periods. There are many new adopters who benefited from earlier education. Now they are extending out duration or controlling credit risk more easily using ETFs,” added Walker.  

Despite recent adoption Walker noted that Canadian listed fixed income ETFs, which recently managed $106 billion in assets, represent a small percentage of fixed income investments, creating significant room for growth in the years ahead. 

The Canadians Launched a Spot Bitcoin ETF First Too 

While BMO does not offer a spot bitcoin ETF, investors can currently trade Canadian listed products from other managers. Currently this is not possible in the U.S., as the SEC has consistently rejected asset manager’s efforts from bringing a US product to market.  

Even if recent filings are approved and/or a product can successfully convert into an ETF, Canada would still have the distinction of once again being ahead of the U.S. for ETF innovation. 

At the end of May, there was $340 billion invested in Canadian listed ETFs. While much smaller than the $ 7 trillion U.S. market, we will keep watching what is happening in Canada.  

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