Volatility arrived in 2018 but the ETF Exodus didn’t

Figure 1 above 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.

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.

Jeff Weniger, CFA serves as Asset Allocation Strategist at WisdomTree Asset Management, Inc. WisdomTree pioneered the concept of fundamentally weighted ETFs and is currently an industry leader. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.

Commissions, management fees and expenses all may be associated with investing in WisdomTree ETFs. Please read the relevant prospectus before investing. WisdomTree ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

“WisdomTree” is a marketing name used by WisdomTree Investments, Inc. and its affiliates globally. WisdomTree Asset Management Canada, Inc., a wholly-owned subsidiary of WisdomTree Investments, Inc., is the manager and trustee of the WisdomTree ETFs listed for trading on the Toronto Stock Exchange.