On the Money with Dynamic Funds

PARTICIPANTS

Peter Tomiuk
Vice President of ETF Distribution, Dynamic Funds

Alan Green
Vice President and Head of ETFs, Dynamic Funds

Chris Pitts
Partner, Asset & Wealth Management, PwC

Announcer: You're listening to the ETF Exchange, presented by On the Money with Dynamic Funds. Join us as we dive into the latest trends and investment strategies to help you navigate the ever-evolving landscape of ETFs.

Welcome to ETF Exchange, presented by On the Money with Dynamic Funds. This series will explore the world of exchange-traded funds, where we break down complex financial concepts into easy-to-understand discussions. Join us as we dive into the latest trends and investment strategies to help you navigate the ever-evolving landscape of ETFs. Whether you're a seasoned investor or just getting started, our goal is to provide valuable insights to help you make informed decisions and grow your wealth. Subscribe now for a deep dive into the exciting world of ETFs.

Alan Green: Hello, everyone, and welcome to another episode of the ETF Exchange. I'm your co-host, Alan Green.

Peter Tomiuk: I'm your other co-host, Peter Tomiuk.

Alan: Today we're going to spend a little bit of time looking at the future of the ETF world. It's that time of year where we pause, and we reflect. Now today, Peter and I are joined by a great guest, Chris Pitts. Chris is part of the PwC Asset Management business based in Toronto and part of the PwC team that surveys the global ETF industry, looking at some of those key trends and trying to find consensus from all the ETF issuers and industry participants on where the whole thing's going. It's something I look at every single year it's published. I must say, Chris, it's been very accurate with its findings. I think you're going to be a great guest to look into the future.

Before we really get into it with Chris, I think maybe Peter and I, we could have a little bit of a sharing of thoughts of what we've seen in 2024. Some of my highlights are, one, I think it's been another record year of flows. Canada saw a huge record, actually. We haven't quite closed the year out, but AUM's at a record high, over $0.5 trillion of AUM. It's honestly now to me a really significant part of the investment industry and not something that is going away. Another record year in the US industry, over 10 trillion. It's mind-blowing. They added $1 trillion to AUM. The numbers are becoming too hard to gauge once you get into the trillions. Again, huge flows there.

I had a physical Bitcoin. I think we talked to Eric Balchunas earlier in the year about that. We weren't sure if it was going to happen or not. It did. Wow, now over 100 billion in AUM. I think options launched this or last week. It'd be really interesting to see what happens. Hundreds of active ETFs. That's our business here at Dynamic. Not talking factors or index stuff, true fundamental active management. To us, that's great to see that legitimate active management in the ETF wrapper.

Lastly, for me, it doesn't seem to stop. More and more ETFs are coming out. You'd have thought we'd have covered everything now as an industry, but it doesn't seem like it. Now, to me, I see a lot of these ETF launches, those single stock ETFs and inverse levered. Probably not for the long-term buy-and-hold type stuff, but still it's interesting to see so many launches. Now, Peter, what's your big take from 24?

Peter: To me, it just appears that we're firing on all cylinders. Whether it's equity, fixed income, covered call strategies, multi-asset solutions, passive, active, doesn't matter. What's interesting is that none of it seems to be coming at the expense of the other. I love doing history lessons from time to time. We went from two years in 2022 and 2023, where we saw fixed income leading the flows. Most of that being cash. Then at the end of 2023, we did a full 180. Equity quickly started outpacing fixed income three to one for a while. I call that the era of FOMO, fear of missing out, because equities had already been rising substantially, but it wasn't confirmed by flows. Then it finally was.

Now, if you fast forward to the month of June, we saw again a resurgence in fixed income. I think a lot of that has to do with central bank policy shifting from a pause to actual cuts. Again, this flow is not coming at the expense of equities. We're also seeing an increased breadth into active ETFs in both fixed-income and equity. There could be a variety of reasons for it. It could be maybe trying to reduce concentration risk from major US indices. Maybe it's trying to get increased exposure into interest rate-sensitive areas of the market through the use of ETFs.

Again, I will end where I started off. We seem to be firing on all cylinders, and none of it seems to be coming at the expense of the other. Chris, I've been following PwC's analysis and surveys regarding the ETF industry for over a decade. I have always found them very informative and also very clairvoyant. I want to start asking you, actually, the same question that Alan and I have been just discussing here. We've seen tremendous growth in ETFs over the last decade. Can you discuss some of the key trends you've observed over the last few years?

Chris Pitts: Yes. Thanks very much. That global survey is specifically dedicated to the ETF industry, and we've been running now for 10 years. It really helps to provide both a global as well as a regional and Canadian lens to how the ETF market is evolving. Back in 2013, we were seeing ETFs exploding in the US after a quiet introduction 20 years ago. I will say that the first ETF product that you probably know was an innovation that occurred right here in Canada, which is a fact that often doesn't get trumpeted as much as you'd like it to. Really, the driver was, US products were very much passive investment products, focused on their key ETF characteristics of liquidity, transparency, that intraday pricing, and low cost, all compelling advantages over traditional mutual funds.

Our contention was that the industry was being significantly disrupted by this growth, requiring fund providers to have or even develop an ETF strategy. Then for investors and their advisors to consider how they could best utilize these types of innovative products. That was the driver for creating the survey, and it's been repeated, as you said, every year for the last 10 years. It's really been helpful in terms of tracking key trends for the industry, from product development to distribution, regulation, and innovation. From a Canadian perspective, as you said, the ETF assets have finally hit 500 billion. Amazing, because eight years ago was when we just broke through 100 billion in Canada.

Our initial perspectives on emerging trends back in 2013 were around a number of things which I think still resonate today. In the US, we were seeing a widespread move by advisors away from commissions towards fee-based compensation, and ETFs offered a convenient way to manage exposure using more customized allocation models. At the time, it was notable you didn't really have active ETFs. They were in the infancy, although to the extent they existed, they were in the fixed income space because the US markets focus on daily transparency. Along with this, we saw the early days of smart beta.

Over the last few years, certainly in Canada, we've seen a similar move by advisors towards fee-based comp that helps them provide a more relationship-oriented focus, enabling advisors to discuss the value and benefit they provide to clients. Some of this has really been impacted by regulatory reforms on the sector. Canada has also been a significant innovator in product development, particularly when it comes to thematic offerings. Then most particularly, as it relates to active management within ETFs, there's a structural difference from a regulatory perspective between Canada and the US in this regard.

As a result, actively managed ETFs have really flourished in Canada, representing somewhere around 25% of ETF assets under management versus maybe 6% or 7% in the US. Then finally, the other trend I would note is the impact of technology on the industry, a real enabler of change in recent years, accelerated by the effect of the pandemic on how consumers become more comfortable online. Our surveys over this period have shown extensive growth in demand for ETFs from both advisors as well as online platforms.

That's really provided much greater accessibility for investors to increase financial information, access to their advisors for more frequent interactions, and those automated platforms which may use algorithms to provide investment advice, even social media channels for education. ETFs are doing exceptionally well as products of choice. What I found is that benefits as typically lower-cost investment products has also been well described, including through regulatory focus on cost disclosures for all ETF and mutual fund products. I'd suggest that's also impacting investor behavior and demand.

Alan: Chris, is that a short-term or maybe a longer-term trend that you're seeing out there that's come through?

Chris: Probably the biggest thing has been the growth in active ETFs. I spoke about that earlier. It's something you've seen people move towards in the Canadian market. In fact, mutual fund providers have been able to use the ETF series concept within their existing mutual funds in order to launch ETF aspects to their active products. What you've seen is that real breadth of availability of active products right the way through to liquid alternative products that are available today as well.

Peter: Chris, I'm going to shift gears a little bit. Over the last two, three years, maybe even longer, we've seen a lot of ESG-style mandates, a lot of ESG-style ETFs that have been launched into the market. How are thematic ETFs that are focused on ESG shaping the market?

Chris: The ESG ETFs have really shown mixed prospects globally based on our survey just in the last year. That demand was driven heavily in Europe, and it continues to be strong there. We found that 7 out of 10 European respondents to our survey expecting more than half of their launches in the next 12 months to focus on ESG. However, what we found is the momentum in the US and Canada has slowed somewhat. There's been increasing tension that's been apparent in North America over diverging political viewpoints, despite continued severe weather, climate events occurring. Our Canadian data saw a slight drop in this year's expected growth opportunities for ESG ETFs, around about half of what we were seeing in Europe. Perhaps a pause for now, but there's certainly interest and we see that particularly among younger investors. We'll see whether the trend picks up again in Canada in the upcoming survey.

Alan: Maybe switching to the side of the balance sheet. What are some of the biggest challenges that you've seen come through in the ETF industry today?

Chris: There's a really positive outlook for the ETF industry, and that's supported by the growth projections that we've got in our survey. When you sit back, the challenges seem limited because our surveys are so positive in terms of the expected growth. Perhaps, I think, some of that challenge is going to come from rising complexity of products. There's development of more complex custom indices or use of AI within the investment decision-making process. All of those could create challenges, not least from an increased regulatory scrutiny if something perhaps unexpected were to happen that impacted investors.

On the other hand, advances in automation and the potential to use other technologies in the future, such as tokenization, could well help to mitigate some of those risks. The other thing I think, as I said, on the regulatory side is regulators are certainly cautious in the area of technology platforms supporting online access for investors, particularly over trends of gamification through interactive tools. They don't always promote good investor behavior. They can be well-designed, but they're not always.

That's certainly, despite the benefits to these technological advances, where it engages investors, helps them with financial planning, making it more approachable and user-friendly, we certainly see the regulators just signaling care around how those technology works so that it's supportive of the investor experience and doesn't promote inappropriate investing behavior. That regulatory overlay, I think, will be something to watch out for.

Alan: Do you think there will be some regulation on those type of platforms regulating what those platforms can do, or do you think it's more on perhaps the product side? We talked a lot in the industry about labeling ETFs, for example, an S&P 500 ETF against a single-stock double-levered Tesla so-called ETF. Do you think it's more on the product side that regulation is going to come, or do you think it's more on the access and the platform side?

Chris: The regulation is coming from all angles, to be honest. I think there's concern on the access in terms of promoting good behavior rather than what could be inappropriate behavior. On the product side, the regulator continues to look at how do we understand the nature of the products that are coming out, the innovation that's come out. Certainly, Canada has been so good at bringing innovative products. You mentioned the Bitcoin, the cryptocurrency funds, which again were started in Canada. The regulators have been pretty accessible in terms of promoting positive innovation, with care, of course. I think that seems to be working pretty well.

Alan: Do you see the ETFs eventually overtaking the mutual funds? We're at half a trillion. I think the mutual fund industry is multiples of that. Both are great options. I'm just curious to get your thoughts.

Chris: My sense is over the next 10 years; it's going to vie for that prominence. I'm not sure it's quite there yet. I think mutual funds are a 2 and change trillion. Multiple of four or five times. There's such a strong tailwind behind ETFs. That crosses the technology aspect. It crosses the cost aspect. I think all of these are very positive in terms of the growth of the industry.

Peter: That ties into a question I have for you as well, Chris. I did mention a little bit earlier that I've always loved the PwC surveys because they're both informative and clairvoyant. For investors listening in, by the way, these surveys are done with dozens of key executives, many of them who are ETF managers and sponsors. If you ever want to get information, just google PwC ETF surveys and you can definitely look at the history of them. It really articulates beautifully, the points of view that they see in the ETF industry going forward. I guess that's the question I have for you as well. How do you see the ETF market evolving over the next 5, 10 years?

Chris: As you said, it's been a remarkable growth to now. We've seen a compound annual growth rate of something like 17% since we started that survey in 2013. That rate, in fact, has accelerated over the last number of years. When we look into the future, what we're seeing is a continued growth rate coming through in the survey responses that we get. That looks, in the range of global ETF growth to exceed something 19.2 trillion by June of 2028. That represents a five-year compound growth rate of 13.5%, which is, to the earlier point about mutual funds, it's more than double the anticipated 5% rate for the asset management industry as a whole up to a similar timeframe.

What's remarkable is to see that continued exceptional growth rate is predicted to continue exceeding the broader industry. I think that what's underpinning that growth story are a number of factors. It's demographic changes, technological advancements that we're seeing combined with the effect of the global pandemic, again, making that online investing far more accessible, together with the versatility of the products, the proliferation of active as well as thematic products, which have all really helped the advisors' ability to customize solutions to meet client needs. I think those future growth expectations from the survey really demonstrate that these trends will continue to drive demand.

Peter: Do you have any final thoughts to share with investors interested in ETFs? Also, when do you expect the next PwC survey to be launched?

Chris: Our next survey is in process. It typically gets launched around about early spring. Expecting that in a few months’ time. Really, after 10 years of conducting surveys, I think what we've found is this continued projected outsized growth trajectory is really quite extraordinary. We continue to see it into the future. I just think the industry has demonstrated its ability to innovate, bring relevant and impactful products to the investor. We certainly see that continue into the future. Plenty of opportunities for investors to access a breadth of really interesting product strategies.

Peter: Thank you very much, Chris. There's no doubt of the value of your insight today. ETFs are truly an exciting space. I would also like to thank all our listeners. I hope you found this insightful. Both Alan and I look forward to joining you on our next episode of the ETF exchange. Bye for now.

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