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PRODUCTS
Building products for a different world
Manufacturers are weighing risk and choosing post-Covid exposures
By Mark Burgess
After some of the most volatile months for capital markets
on record, Canada’s ETF industry doesn’t appear the worse for wear. More than $22 billion flowed into ETFs
in the first six months of 2020, the most in a
decade and more than double last year’s gains for the
same period.
But these numbers don’t tell the whole story.
After 11 years of rising markets and passive funds outperforming, the ETF industry is processing the post-Covid landscape: risk appetite has changed, distribution has gone digital and bets are being placed on which sectors and themes will thrive in the pandemic and beyond.
Markets surged after March even as economies headed for recession, which Lala says is cause for a “‘wait and see’ approach.”
“All of us have been challenged to put a new lens on
our product-development approach, and to recognize
that things have changed — and they have probably
changed for good,” says Kevin Gopaul, global head of ETFs with BMO Global Asset Management in Toronto. “Are the products we have thought about in the past still viable in the future? Are the exposures relevant? Are our methods of distribution still relevant?”
The 11-year bull run that ended with the Covid-19 pandemic made for easy money in broad indexes. Now, Gopaul says, a lot of people have different ideas about the economy and which exposures will be successful.
“There’s no consensus on what [the post-Covid economic landscape] is going to look like,” says Gopaul.
The uncertainty caused by the pandemic may make firms more cau- tious about the products they launch.
“A lot of people have put their plans on the shelf at the moment,” says Raj Lala, president and CEO of Evolve Funds Group Inc. in Toronto.
Still, launches haven’t stalled so far this year. ETF providers introduced 99 products in the first six months of 2020 and
delisted 17 products, according to data from Montreal-based National Bank of Canada. That compares with 74 launches and 14 delistings over the same period last year.
Noble says providers may be rethinking the types of products they’re producing, though.
“Most of the higher-margin products that [firms] would have been launching would have been focused on riskier aspects of the market- place or on the alternative aspects of the marketplace,” Noble says. “That probably has product providers thinking, ‘How much of this do [we] launch now, and is there going to be an appetite for this stuff?’ I think you will see product development slow quite a bit because of the uncertainty.”
Barry McInerney, president and CEO of Mackenzie Investments, 6
Inflows went primarily to established asset classes
Mark Noble, executive vice president, ETF strat- egy, with Horizons ETFs Management (Canada) Inc. in Toronto, anticipates slower product development. The bull run was characterized in the ETF space by providers launching products to capture “the next hot asset theme or sector,” he says, whether it was crypto- currency or cannabis.
“That has really slowed down simply because of the amount of risk inherent in the market,” Noble says.
The slowdown may have happened anyway, he says — the Canadian market is maturing and most product categories are covered — but the pandemic is another reason for caution.
4 Investment Executive’s ETF Guide 2020
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