Exchange-traded funds (ETFs) are becoming increasingly popular with Canadian investors, and as more pop up on the world’s financial markets, they may soon outnumber individual stocks, an expert says.
“We may soon have more ETFs than stocks. I think that there’s some alarm in the U.S. that that’s already the case,” Daniel Straus, managing director of ETFs and financial products research at National Bank of Canada, told BNN Bloomberg in a Thursday interview.
“But as far as we see it, there’s many different ways to mix and match different kinds of portfolio styles or indices into an ETF so it shouldn’t be alarming or at all surprising that there might be, one day, more ETFs than stocks on the stock exchange.”
An ETF is an investment fund that holds a diversified basket of assets that can include stocks, bonds, commodities or other securities, and trades throughout the day on exchanges much like individual stocks.
They offer investors instant diversification, but usually with lower fees than traditional mutual funds. There are now more than 1,700 ETFs listed in Canada, said Straus, and the Canadian ETF market broke records last year for inflows, product launches, and assets under management.
In recent months, Canadian investors have tended to favour ETFs that include equities traded on exchanges around the world, rather than funds focused on North American markets, likely as a hedge against economic uncertainty in the U.S. and Canada, Straus noted.
“Rather than going into things like the S&P 500 (Index) or even Canadian equities, we’re seeing people use global equity ETFs that allocate across the whole world, we feel probably in something of a defensive crouch for the trade war that has been dominating headlines so far this year,” he said.
Over the past year or so, many investors have also flocked to cryptocurrency-linked ETFs, which aim to provide exposure to digital assets with less of the risk typically associated with purchasing them outright.
But Straus said investors should still use caution when purchasing those types of funds, as the asset class “remains quite volatile,” adding that for those looking to invest in ETFs, understanding their individual risk tolerance is key.
There are an increasing number of leveraged and highly leveraged ETFs available in Canada and the U.S. that use tools such as swaps, options and futures to amplify the daily returns of the underlying asset associated with the fund.
While those products offer the potential for higher short-term gains, losses are also amplified if the asset loses value, making them highly volatile and not suitable for long-term investors, Straus said.
“They’ve definitely attracted some attention… there are some new ETFs that are triple leveraged in Canada, so that’s something of a first here. Triple-levereged ETFs have been available in the U.S. for a long time,” he explained.
“You could argue the reason Canadian issuers have launched those here is because there are some Canadian traders who are very, shall we say, risk tolerant who already use the U.S.-listed products… (but), again, caution advised.”
Straus noted that more ETF issuers are also listing funds targeting a specific type of investor, as B.C.-based Capstone Asset Management announced last week.
“According to their filings, they will be (launching) biblically informed ETFs for socially conservative investors,” said Straus, adding that these types of products have been available for some time in the U.S., including ETFs targeting observers of certain denominations across different religions.
In a news release from Aug. 28, Capstone said it plans to offer two new funds, focused on Canadian and U.S. equities respectively, that will generate returns by investing in companies “that conduct their business, in Capstone’s view, in a manner consistent with biblical values.”
“It affects every aspect of life for certain investors, for sure,” said Straus. “If you can think of the idea, it will list.”