Exceptional ETF Demand? Not Without Fake-Flows

In summary, the Canadian ETF industry’s record demand performance during 2017 occurred against the background of record global equity indices and respectable economic growth. So far, 2018 is experiencing choppy equity markets and now global trade war uncertainty between the USA and China. Apart from “fake flow” distortions, ETF demand is nevertheless holding its own so far in 2018 but does not appear on course to set new calendar year records.

The Details and Forecast

ETF demand stood at $2.96 bn in March versus $2.55 bn in February and $2.16 bn in January. Year-to-date net flows stand some 19.6 percent ahead of 2017. Net flows during 2017 stood at $26.1 bn versus $16.4 bn in 2016 and $16.4 bn in 2015. Our calendar 2018 net flow forecast is $25.7 bn.

Total ETF assets under management stood at $151.8 bn during the latest month.  This represents a gain of 23.6 percent from year ago levels.  About 22.3 percent of this gain is from net flows and the rest primarily from market returns.

Exhibit 1. Canadian ETF Industry Fund Flows over time.

Excluding the iShares XIU ETF (what we contend is a volatile institutional investor dominated vehicle) March ETF demand stood at a record $3.3 bn versus $2.0 bn in February and $2.8 bn in January. Total flows for this aggregate during 2017 stood at $28.1 bn and our forecast for calendar 2018 is $26.1 bn.

For March, net flows for the iShares XIU stood at -$315 mn. Since 2009, the XIU has had a cumulative net outflow of $5.5 bn, while the latest 12-month total stands at -$2.3 bn.

European Equity (note “fake flows” below) was the category net demand leader during the latest month followed by Canadian Equity (ex XIU), Emerging Markets Equity, Financial Services Equity and International Equity. On a rolling 12-month basis, Canadian Equity (ex XIU), International Equity and US Equity hold the net demand lead.

Active ETFs posted net flows of $9.21 bn during the latest 12-months or some 33.6 percent of the total. Active ETFs represent 18.5 percent of industry assets versus 15.4 percent a year-earlier for a gain of 19.7 percent. On a year-to-date basis through March, net flows of $3.198 bn are up some 123 percent versus 2017.

Strategic or Smart Beta ETFs posted net flows of $4.3 bn in 2016 while 2017 stood at $3.7 bn for a decline of some 14.4 percent. During the latest month, Strategic Beta AUM stood at $25.42 bn vs $20.7 bn a year-earlier. Strategic Beta represents 16.7 percent of industry assets versus 16.9 percent of ETF AUM a year ago. During the latest 12-months, Strategic Beta accounted for 15.3 percent of total ETF flows. On a year-to-date basis, net flows are up 138 percent versus 2017.

The top fund during March was BMO Europe High Dividend Covered Call ETF (ZWP) with $992 mn of net flows. However, this fund was launched in March and was “wrapped” into its originating fund: BMO Europe High Dividend Covered Call Hedged to CAD ETF (ZWE) and its flow is therefore more apparent than real; it is ultimately a “fake flow” for the purposes of tracking underlying industry demand trends. At the 12-month level, the demand leader is the iShares S&P/TSX Capped Composite Index Fund (XIC) which has garnered $1.486 bn in net flows and boosted AUM to $4.42 bn.

The Competitive Landscape

At the firm level:

  • the BlackRock aggregate, excluding the XIU, Claymore and Dynamic components had broadly moved to new
    demand highs in recent months but fell significantly through March. The net swing or acceleration in 12-month net
    flows leads the industry at +$3.2 bn. The BlackRock Claymore unit continues to lose assets via persistent and substantial monthly net outflows.
  • BMO net flows during March stood apparently at record levels. This was a result of its wrapping activity and would otherwise stand at multi-year lows.
  • The Horizons demand trend has been oscillating upwards on a 12-month basis since late-2014 but February/March saw a significant demand retreat.
  • PowerShares registered a decent demand month in February which was back to zero for March.
  • RBC had a very strong demand performance during October/November as a result of new launch activity and such was the case again during March.
  • Vanguard has been treading water on the demand front for the better part of the past two years as its 12-month trend has pointed sideways. Nevertheless, Vanguard posted historically strong demand performances during Q1.
  • First Asset net demand has been trending upwards on a 12-month basis but took a pause during February/March
  • First Trust recorded substantial net outflows during November/December and after a shift to positive are back to negative during March.
  • Finally, Purpose has been losing demand momentum with deeply negative months as of February/March.
Exhibit 2. Market share by company

Notes: Data used to create this report are compiled from public domain sources. Designations such as active or passive ETFs are sourced from the Canadian ETF Association while so called Strategic Beta are determined by our own application of industry definitions and corroboration by respective ETF providers. Since there will often be some discretion as to an ETF’s Strategic Beta status, no two sets of Strategic Beta analyses are likely to match perfectly. Our measure of ETF demand is “Net Flow.” Net Flow is calculated as the new level of an ETF’s assets minus what is implied by the ETF’s reported monthly return. There is no work done on creations and redemptions. XIU is the original ETF in Canada. (It is the BlackRock-iShares S&P/TSX 60 Index Fund.) It is the largest ETF in Canada by far and is used extensively by institutional investors. To the extent that XIU is more an institutionally used ETF than an indicator of retail demand, for analytical purposes, CMFA presents BlackRock’s iShares data as two basic entities: (1) BlackRock-iShares excluding the XIU entirely; and, (2) the BlackRock- iShares XIU by itself. In turn, the original Claymore iShares brand is reported separately as is the Dynamic iShares brand. We believe this enables readers to make better use of this reporting. As CMFA comments on the trends in this report, the objective is to provide unbiased third party analysis about the Canadian ETF sector and individual firms. Any impression to the contrary is unintended. This report is in no way an endorsement of the use of ETFs or of any ETF provider. The material in this report is for client use internally only. It is a component of Credo’s monthly research program and is not intended for redistribution in any form. It is the sole property of Canadian Mutual Fund Analyst, Frank Hracs. CMFA reserves all rights regarding the use of this information and its forecasts. © 2018.

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