Hamish McArthur I’m Hamish McArthur. This is ETF TV and we’re at the ETFGI Global Insight Summit in Toronto. I’m speaking with Deborah Fuhr, the founding partner. Deborah, what are you expecting to come out of the conference today?
Deborah Fuhr, ETFGI I’m expecting a number of things to come out. So this is really intended to be thoughtful discussions on topics like ETF due diligence, portfolio construction around the regulatory changes that are happening and how that’s impacting investor choice, also how market structure is changing and how that’s impacting the trading, and then ending the day talking about what is the future of the ETF industry? And it’s exciting because this is three months away from the 30th anniversary of the listing of the first ETF. And last week the ETF industry broke through six trillion dollars. So pretty exciting time for the ETF industry.
Patrick McEntyre, National Bank Financial The state of ETF business in Canada at this point is very exciting. Fund flows this year, for the second year in a row, exceeded those of mutual funds. We feel that’s a real tipping point for the ETF industry in Canada. I believe actually just this week we crossed through 200 billion dollars.
Hamish McArthur And what do you see as the key drivers of growth in expanding both the users and uses of ETFs in Canada?
Patrick McEntyre, National Bank Financial A big focus for us more on the institutional ETF desk has been fixed income ETFs. I would say at this point we’ve seen nearly 100% adoption in institutional investors, in equity based ETFs, but fixed income institutional use is relatively new. We’d see about half of large institutional investors have some experience in using them. We’re seeing folks use them for acquisition. And then once they get used to the acquisition tactics, which is essentially putting their money to work to reflect the underlying benchmarks that they’re trying to achieve, so once they get used to the ETF use in that space, we’re seeing them use ETFs for all kinds of more interesting tactical overlays, slight tweaks in duration and other such strategies.
Mario Cianfarani, Vanguard Canada 2018 was a very strong year for the ETF industry. We’ve seen that trend continue in 2019 with strong asset pick up across sectors within ETF. So I would say that, that growth continues to the end of the year.
Hamish McArthur What do you see as the key trends in the next three to five years?
Mario Cianfarani, Vanguard Canada I would say two big trends for Canadians here. One would be international diversification. Canadians tend to have a very high home bias, so diversifying internationally within their portfolios. We also see diversification across asset types. So whether it’s factors, whether it’s active ETFs as well as beta, so big, broad beta within the ETF landscape will continue to do well over the next three to five years.
Jos Schmitt, NEO Exchange The education with the retail investor, the education with the investment advisor, I think will bring a much better understanding of the opportunities that ETF can bring them, because what an institutional investor can do, why would a retail investor or an investment advisor not leverage those same kinds of strategies? So I see a lot of growth, as I said, new underlying assets and education leading to a much wider use of the product.
Hamish McArthur Is the role of the custodian in the ETF market changing?
Ronald C. Landry, CIBC Mellon We’ve been doing ETF servicing for 10 years now in Canada. So it’s not just custodies, not just fun. I mean, it’s also ETF servicing. It’s about getting data there, it’s working with the other stakeholders. Make sure that the information that we’re providing is seamless, informative, and allows market makers and other participants to make markets in the clean space.
Hamish McArthur What do you see as the key regulatory challenges on the horizon?
Carol E. Derk, Bordner Ladner Gervais One of the big issues that the regulators need to address are all of the new asset classes that are coming out, fx crypto, you know, that is something that investors are wanting to invest in.
Hamish McArthur What’s top of your mind for portfolio construction in 2020?
Amol Sodhi, TD Asset Management Inc. When you look at things from a fixed income perspective, policy has been extremely accommodative. Interest rates are at all time lows. You look at yields or Japanese yields, they’re are sitting at negative levels. So it’s really challenging to allocate too much to fixed income. When you look at things from an equity perspective, both the political uncertainty in the horizon as well as the economic uncertainty, creates a bit of a challenge on allocating too much to equities as well. So from that portfolio construction perspective, currently we are just basically positioning to be very dynamic in 2020 with a bit of a bias towards equities, given it’s very hard to invest too much in fixed income with the levels of yields right now.
Michael Greenberg, Franklin Templeton We have a little bit of a concern that although we don’t expect a recession coming necessarily, we do think that we could see kind of more difficult economic times. So from an asset allocation perspective, we’re choosing to be a little bit more defensive with a slight underweight to equities, a little bit more fixed income within the portfolios. So all in all, going into 2020, a little bit more conservative, a little bit more on the defensive side of neutral with an asset mix, and at the margin a little bit more conservative as well in the selection of our underlying holdings.
Hamish McArthur What came out of the conference today?
Deborah Fuhr, ETFGI So I think there was definitely some interesting dialogues around regulatory changes, investor choice, ETF due diligence, portfolio construction. We also had a very interesting dialogue around what are the regulatory changes that have happened in the US in the past few months, we’ve seen the ETF rule is coming to market. We’ve seen periodically disclosed or non-transparent, active. There’s also the best interest rule, and the derivatives rule is coming out. So there’s a lot of change happening. And I think people here, we’re trying to understand what impact might translate here in Canada based on changes happening in the US. That was the intention of these events as to really allow for education. So it’s not sales pitches. It’s helping people have a safe environment to ask questions that they might feel are stupid, because there’s no dumb question. Never assume, always go and reach for the understanding before you make an investment choice.
Hamish McArthur Sounds like great advice, Deborah. Thank you so much for your time.
Deborah Fuhr, ETFGI Thank you.
Hamish McArthur I’m Hamish McArthur. This has been ETF TV, coming to you from Toronto. Thank you.