More Canadian investors choosing ETFs

Canadian-listed exchange traded funds (ETFs) continue to show strong sales for the fourth quarter of 2011 (4Q11), finds the Canadian ETF Association (CETFA).

The CETFA's latest "Quarterly ETF Asset Flow Report" shows that the Canadian ETF industry had nearly C$3 billion in net new sales during 4Q11, finishing the year with more than $7.6 billion in net new sales.

Despite difficult market conditions in 2011, Canadian ETF assets grew by nearly 13 per cent to slightly more than $43.1 billion.

"It's still a new product and it's just starting to become part of people's portfolios and more people are noticing ETFs," Pat Dunwoody, general manager for the CETFA in Toronto, says of the growth. "And given what the markets have done in the last couple of years people are more cost-sensitive."

What is an ETF?

Simply put, an ETF is an investment fund, similar to a mutual fund, that's traded on stock exchanges. The fund can hold a variety of assets, including stocks, bonds, commodities, and will often track an index like the TSX Composite Index.

However, ETFs differ from mutual funds because they don't offer a fixed price. An ETF's price can change throughout each trading day. There's about $1 trillion invested in ETFs worldwide today, Dunwoody says. That sounds impressive but lest we forget the size of capital markets are worth multiple trillions of dollars.

Interestingly, Canada is somewhat of a pioneer in the ETF game. The first Canadian ETF appeared around early 1990 as the Toronto Index Participation Shares. It's known today as the iShares S&P/TSX 60 Index fund — the largest ETF in Canada worth approximately $12 billion.

Why do Canadian investors love them?

"Like any investment product, some ETFs are more appropriate for the general, smaller investor and some that are more sophisticated," she says. "Because of their transparency and low fees, they're generally very appropriate for a lot of investors."

And there are tax efficiency benefits to be had.

"With ETFs you buy and sell the unit from one another like stocks so there's no fund company in the middle collecting that capital gain," she continues. "Investors are insulated from the consequences of what other unit holders do."

This is the second quarterly report from the CETFA that compiles the sales data for the entire Canadian ETF industry. In order to determine net sales, the CETFA looks at the amount of money that is used for the creation of new ETF units. If any ETF experiences net creations, it means more units of that ETFs are being bought than sold. If the industry is in net creations, positive sales are occurring. If it is in net redemptions, money is flowing out of the industry.

The top 10 ETFs in 4Q11 accounting for 87 per cent of the net creations for the quarter:

ETF Name	Ticker	Q4 ($ in millions)	2011 ($ in millions)
iShares S&P/TSX 60 Index Fund	XIU	$ 558	$899
iShares DEX Universe Bond Index Fund	XBB	$209	$287
HBP NYMEX® Natural Gas Bull Plus ETF	HNU	$207	($131)
BMO Aggregate Bond Index ETF	ZAG	$200	$267
HBP NYMEX® Crude Oil Bear Plus ETF	HOD	$151	($19)
Claymore 1-5 Yr Laddered Corporate Bond ETF	CBO	$133	$259
Claymore 1-5 Yr Laddered Government Bond ETF	CLF	$132	$256
iShares DEX All Corporate Bond Index Fund	XCB	$106	$177
Claymore S&P/TSX CDN Preferred Share ETF	CPD	$95	$260
BMO Covered Call Canadian Banks ETF	ZWB	$85	$703

Which ETFs are the most attractive?

The CETFA found that ETFs that paid regular income distributions accounted for more than $4.4 billion in net creations during 2011, continuing a strong trend amongst Canadian investors for yield-seeking ETFs. Six of the top 10 asset gathering ETFs for Q4 were income-focused ETFs.

Amongst the asset classes, the fixed income ETF asset category saw the largest inflows both throughout the year and Q4. There was approximately $3 billion in net creations in fixed income ETFs during 2011, with $1.4 billion in net creations occurring in Q4 alone.

"That's not unique to ETFs, it's a trend across North America where investors are seeking yields instead of equity growth," Dunwoody says of the income-focused ETFs. "Part of it is also due to the fact that many investors are still not comfortable with putting their money into equity markets and instead prefer a safe, consistent return of income as opposed to taking on a riskier return."

New money into Canadian Equity ETFs during 2011 amounted to $1.3 billion of net creations, with $595 million of that coming in 4Q11. Of those sales, $558 million flowed into just one ETF, the iShares S&P/TSX 60 Index Fund.

The Dividend Equity and Sector Equity asset classes also saw strong inflows during 4Q11, the report adds. Net inflows into Dividend Equity increased $112 millions during the course of 4Q11, while Sector Equity ETFs earned even twice that with more than $240 million in net creations during the same period.