New research from Cerulli Associates sizes the Canadian exchange-traded fund (ETF) market at USD$189 billion in assets in 2020, growing at a compound annual growth rate of 25% over the last five years. The proprietary sizing model developed by Cerulli divides the universe into non-fund-of-fund ETFs, fund-of-fund ETFs that hold Canadian-domiciled ETFs, and fund-of-fund ETFs that hold U.S.-domiciled ETFs. The sizing shows that approximately 7% of Canada’s ETF assets are true funds of funds with Canadian-domiciled underlying ETFs (as compared to the portion of unique Canadian ETF assets).

The rapid market growth is supported by product innovation, favorable regulatory conditions, and more open platform access than in the U.S. market. Canada boasts the first ETF—the Toronto Index Participation Fund (today XIU)—and beat the U.S. to bring a Bitcoin ETF to the market. Despite these wins, ETF assets in Canada have lagged those of the U.S. by a greater multiple than would be expected. “When considering factors such as population, GDP, and ETF assets as compared to mutual fund assets, this is surprising,” remarks Daniil Shapiro, associate director.

As distribution dynamics evolve, Cerulli anticipates that the market will heat up. According to the research, many distributors expect growth to be driven by advisors increasing existing allocations and their movement to fee-based practices. “As advisors have to defend all-in costs, it will be imperative for them to build a low-cost passive core allocation via ETFs,” Shapiro comments.

Cerulli finds the Canadian market to be crowded and highly fee-competitive. Canadian investors now have a choice of 990 ETFs across 40 ETF distributors and both counts are expected to grow as ETF issuers continue to focus on active and strategic beta product development. “As additional products are rolled out, investors will likely gravitate to the lowest-cost allocations,” states Shapiro. “At the same time, more investors are willing to pay more for active allocations and are less sensitive to fees on thematic products where the quality of exposure plays a greater role,” he adds.

Expansion opportunity will continue to exist for Canadian ETF issuers. According to the research, Canadian ETF issuers have the benefit of using different wrappers to deliver innovative exposure, including ETFs of ETFs and mutual funds of ETFs, without often burdensome regulatory processes. “To the extent that Canada’s ETF issuers have the flexibility to offer a wider variety of products, the ETF is an excellent vehicle for delivering innovative exposures,” concludes Shapiro.