(Special) - Two thousand and twelve appeared to be another good year for Exchange Traded Funds (ETFs).
Back in September, the value of ETF assets on U.S. exchanges climbed to $U.S. $1.3 trillion with a net inflow of U.S. $38 billion, the most positive month since December, 2008.
BMO Bank of Montreal has predicted that the Canadian ETF market will experience double digit growth in 2012 and now stands at about $50 billion in assets under management.
The main drivers of the growth in ETFs are competitive pricing, greater choice of products, new suppliers, new distribution channels and the potential entry of actively-managed ETFs in Canada.
"Increased awareness of the benefits of ETFs among Canadians is translating into increased adoption rates," says Rajiv Silgardo, Co-CEO of BMO Global Asset Management. "The ETF space should continue to grow as long as suppliers continue to focus on innovation and anticipate the needs of investors."
The number of providers of ETFs in Canada has grown from two to seven in just a few years, offering investors considerably more choice. As well, the number of asset managers is growing, now offering both active and passive options. ETFs now are starting to be used in defined contribution pension plans and the possibility exists that ETFs will be used more in managed programs in various brokerages.
"As more entrants come on board over the next several years and existing manufacturers ramp up their product offerings, it will open the door to more solutions, a wider range of investors and more diverse portfolios," Silgardo says.
Investors now can choose among index, stock, bond, commodity, currency, active, passive and inverse and leveraged ETFs.
The range of ETF implementation strategies also is growing.
"As a result of their varying styles, exposure types and niches, ETFs are being used in various ways by investors," Silgardo says. "New applications most likely will be the driver of ETF growth. With increased segmentation and ETFs based on specific area, even basic uses of ETFs such as cash equitization will become more efficient for investors."
Some industry specialists fear that the rapid growth of ETFs is creating an education gap that could leave investors exposed to risk from a lack of understanding of some of the products more complicated variations, such as leveraged and inverse options.
"Although existing ETF users are becoming increasingly sophisticated, it's critical that newer investors receive the same level of support (as experienced users)," Silgardo says. "Local expertise and on-the-ground specialists will be essential to ensuring new and existing clients get the education and support they need."
Data from the Investment Funds Institute of Canada also shows that investor confidence in ETFs has increased in the last three years.
In the 20 odd years they've been around, ETFs have grown from a relative small and simple financial product into a trillion-dollar global business.
An ETF usually consists of a portfolio of stocks or bonds that track a specific market index, sector or commodity. They were first introduced in 1989-1990 in the form of index participation shares in the United States tracking the S&P 500 and the TSE 35 here in Canada.
Between 30 and 40 per cent of all exchange trading volume in the U.S. now is ETFs, and there are more than 1,500 of the funds in North America. ETF assets in the U.S. are now estimated to be about $1 trillion, $50 billion in Canada and about $1.4 trillion globally, and could quickly exceed US$2 trillion.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
Copyright 2012 Talbot Boggs
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