Volatility Arrived but the ETF Exodus Didn’t
Money managers had a rough year in 2018. The S&P/TSX Composite Index was off 8.8%, while the MSCI World Index of global equities was down 0.1% in Canadian dollar terms. About the only bright spot was the S&P 500 Index, which was down 4.4% in USD but up 4.1% for Canadians because of U.S. dollar strength. But these tepid figures mask the freefall’s extent; many markets met the bear market definition—declining more than 20%—inside the confines of Q4.
Figure 1 grabbed attention in our 2019 Canadian ETF Industry & Market Outlook. Many didn’t realize how much market share the smaller players have gobbled up recently.
Figure 1: Market Share, Canadian ETFs
No doubt, the biggest ETF providers are doing just fine. In fact, we imagine most of the 33 Canadian ETF companies in our corner of the asset management industry must be downright giddy. Many are hitting the sweet spot where track records are becoming seasoned, brand recognition is solidifying and product users are now proselytizing for them.
Grasping at Straws
“Active” mutual fund managers have for years been tossing around a prediction that needs to be checked at the door. To paraphrase them: Wait until we see a downturn in stocks. That’s when everyone is going to dump their ETFs and come back to active mutual funds.
Be careful what you wish for; we think the exact opposite.
The stock market peaked in September, but the exodus from ETFs and into mutual funds never materialized. As an industry, our collective AUM is ever so slightly off its peaks, but that’s because of market losses, not outflows.
If the goal of an active manager is to beat a passive, cap-weighted benchmark, then what on earth is a firm like WisdomTree doing every day? In fact, our claim to fame is how much our exposures differ from indexes like the S&P/TSX Composite. If all ETFs were “beta” trackers, those grumbling about ETFs might have an argument, but there are hundreds of different strategies available in ETF form, right there on the TSX.
Here’s the painful truth for the legacy fund firms: the single biggest hurdle we face in winning business from them is not investors’ love affair with their offerings, but quite the opposite. Fund investors feel stuck, paying fees that are relics of the 1990s, reluctant to liquidate because they bought the fund years ago and are loath to pay capital gains taxes.
But take away the capital gains…
If there is volatility in 2019, that’s the “out” for big MER funds. Fees come into focus in tough markets. Bye-bye mutual funds. And with about 10 times more money in them than ETFs in this country, there are plenty of vulnerable candidates.
Have fun reading the 2019 Outlook.