The number of exchange-traded fund products that offer so-called one-ticket solutions to building a portfolio continues to grow in Canada amid their surging popularity.
Four new such “asset allocation” ETFs started trading Tuesday on the Toronto Stock Exchange: three from RBC iShares, bringing the bank’s total offerings in the space to five, and one from CI Financial.
Vanguard Group at the start of last year was the first in Canada to launch asset allocation ETFs, funds that provide a diversified portfolio of stocks and bonds that automatically rebalance to stay in line with an investor’s risk profile. They instantly grabbed the attention of retail investors, and were seen by some as a lower-cost alternative to pricier balanced mutual funds and even robo-advisers, which provide regularly rebalanced multiasset portfolios.
Competitors BMO Global Asset Management, Horizons ETFs Management (Canada) Inc. and RBC iShares quickly followed in Vanguard’s footsteps.
With the latest additions, there are now 30 asset allocation ETFs in Canada with combined assets under management of $4-billion, according to data provided by National Bank Financial.
“Balanced mutual funds are an incredibly popular category, but until Vanguard’s launch, we never really saw that area of the ETF market receive the same attention from investors,” says Daniel Straus, vice-president of ETF research at National Bank of Canada. “It turns out, the demand for single-ticket portfolios was always there, but investors must have been waiting for ultralow costs.”
Management fees among the top three providers for asset allocation funds – Vanguard, RBC iShares and BMO – range from 0.18 per cent to 0.22 per cent.
The new RBC iShares products are the iShares Core Income Balanced ETF Portfolio (XINC), iShares Core Conservative Balanced ETF Portfolio (XCNS) and iShares Core Equity ETF Portfolio (XEQT). CI Financial’s new fund, which carries a slightly higher management fee then many competing products of 0.6 per cent and is actively managed, is called the CI First Asset Global Asset Allocation ETF (CGAA).
“We have seen strong investor demand for the products we already have in the market but we wanted to increase the choice for the risk spectrum for investors," says Pat Chiefalo, managing director, head of iShares at BlackRock Canada.
Vanguard’s introduction of the products were seen as an innovative way for investors to access an automatically rebalanced portfolio at a fraction of more typical fees of about 2 per cent in a balanced mutual fund.
Mr. Straus says the popularity of the asset allocation segment was surprising as ETF investors were generally thought to be seen as “asset allocators” themselves who prefer to use single-exposure products as portfolio building blocks.
“It turns out, there are plenty of self-directed investors who are happy with a one-line solution, and even investment advisers are using them as a 'space filler’ in certain accounts or for smaller clients,” added Mr. Straus.
The growth of asset allocation funds comes at a time when exchange-traded fund sales outsold mutual fund sales for the first time in almost a decade, and are on track to outsell mutual funds again in 2019. Already in the first five months, Canadian ETFs have seen net inflows of $10.4-billion in assets, while mutual funds have brought in $4.9-billion, according to data provided by Strategic Insight.
The Canadian ETF industry currently has 35 providers managing approximately $181-billion in assets, a sliver of the $1.47-trillion invested in mutual funds. But as investors start to look for lower cost options – and easy-to-manage portfolios, specifically in balanced funds – asset management companies have begun to pivot toward asset allocation ETFs.
“Over the last decade, balanced mutual funds was an area that hasn’t experienced a lot of disruption from the ETF side because the industry never quite had the breadth of product to go there,” says Mark Noble, vice-president of ETF strategy with Horizons ETFs, who has filed to launch a third asset allocation fund in the fall. “But now, most of the larger providers in Canada have the scope to come up with much lower cost alternatives to balanced funds.”