A couple of weeks back, Noushin Ziafati reported that Canadian-domiciled mutual funds recorded $298 million in net redemptions in September. The previous month, those same funds recorded $4.7 billion in net sales, marking the 16th consecutive month in which purchases exceeded redemptions, according to the Securities and Investment Management Association (SIMA).
Mutual fund assets under management fell $15.6 billion, to $2.8 trillion.
That second number matters most. By comparison, assets in Canadian-domiciled ETFs rose $12 billion to $936.2 billion at the end of September, on net sales of $17.7 billion during the month.
You might not think it given all the ink dedicated to Canada’s dynamic ETF market, but the segment is only about one-third the size of the country’s mutual fund business. At the end of last month, Canadian mutual fund managers were responsible for nearly $1.9 trillion more in assets than ETF providers.
Thirty-six years after Toronto 35 Index Participations Units marked the launch of the ETF category, mutual funds have proven extraordinarily resilient.
SIMA released a study it conducted with Pollara Strategic Insights this week that found while 53% of Canadian investors hold mutual funds, just 29% hold ETFs.
Canadians continue to invest in mutual funds for a long list of reasons, not all of them financial.
“Moving your assets from a mutual fund to an ETF is kind of like moving your house,” said Ian Tam, director of investment research, Canada at Morningstar. He is my guest on the current episode of the Canadian Advisor.cast.
It’s more than a question of inertia, though. Tam said the top driver of investors’ loyalty to mutual funds is the strength of their relationship with the advisor who sold them the investments.
“We’re a conservative people by nature,” Tam said. “Once we get comfortable with an advisor, that’s worth a lot.”
Even assuming the advisor is licensed to sell both mutual funds and ETFs, investors who switch from an actively managed Canadian equity mutual fund to a comparable ETF may face transaction or account-transfer charges. There may be tax consequences if the fund is held in a non-registered account. And depending on where the investments are held, there may be administrative complications.
For many Canadian mutual fund holders, there are multiple reasons to stay put.
“Wrapper-agnostic”
The mutual fund-ETF debate is over, Tam told me. “The term I might throw around is ‘wrapper-agnostic,’ strategies available in multiple iterations, multiple ways,” he said.
It’s clear where the bulk of the new money is going. ETFs earned $155.5 billion in net sales in this year’s first three quarters, according to SIMA. Mutual funds took in just $38.6 billion.
Still, mutual fund investors looking to shave a few basis points off their investment fees aren’t likely to find it difficult to track down a less expensive ETF with a comparable management style.
That will matter a good deal more next year, when investors begin receiving annual statements showing a fuller accounting of what they’re paying.
Advisors who sell only mutual funds will face the same questions as those who offer ETFs: Are clients getting value for the fees they pay? Are less expensive products available that would meet their needs?
The answer won’t always be to switch investments. But it should involve more than defending the status quo.
Tam believes the value of advice will continue to matter.
“I don’t think we’re going to enter this regime where everyone’s going to be running from what they’re paying today,” he said.
Advisors whose client relationships are primarily transactional will be at risk. Those who provide holistic advice and build deep relationships are well positioned. That’s far more important than product wrappers.
Canadian Advisor.cast is available in both video and audio formats, via Advisor.ca, Spotify, Apple Podcasts and YouTube.