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

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.

Peter Tomiuk: Hello, everyone. My name is Peter Tomiuk, and I'm your co-host for The ETF Exchange.

Alan Green: Hi, my name is Alan Green, and I'm your other co-host.

Peter: Being the start of a new year, this episode is going to revolve around what happened flow-wise in the ETF industry in 2024. Alan and I may try and read the ETF tea leaves a little to see if we can paint a picture of where we may go in 2025. Alan, I think many of our listeners have probably come across very positive headlines for the ETF industry as a whole. Can you give us an overview of how we did flow-wise in 2024?

Alan: It was definitely a banner year for the ETF industry again. Now, if we start with the U.S. listed ETF market, flows were absolutely astronomical, $1.1 trillion in net inflows. That brought the U.S. total up to over $10 trillion, and the numbers just become hard to understand at that point. If you look globally, we're at $13 trillion. Again, that's a record high in terms of AUM for the ETF market. Coming back home, Canadian listed ETFs again had a tremendous year, over $70 billion in net inflow. That absolutely crushed the previous record set in 2021 by around about 50%.

The other thing I'd say is that the ETF AUM in Canada is over $500 billion. That's a significant chunk of the managed investment industry within Canada. I think a lot of people are sitting up and taking a look. I think we've really arrived on the scene. If you look at some of the studies going forward, PwC came out with an estimate the other day that the ETF industry in Canada is going to hit a trillion by the end of 2028. I think there's a ton of runway to growth, and I think what you'll see is the pace really picks up. That's happened around the world, so I don't see any difference in Canada. Turning back to you, Peter, what were your thoughts on 2024? What do you think caused such an explosive year there?

Peter: When it came to those astronomical flows you just discussed, humbly speaking, I actually found it to be somewhat predictable, at least from a directional standpoint. I would have never been able to predict that exactly $76 billion would have entered the industry, but I do believe the way we entered into 2024 set us up for a record year. Let me explain. In both 2022 and 2023, equity flows were muted, and fixed income flows were dominated by cash. There are plenty of reasons why that was the case.

Most of it revolved around a lack of confidence in both equity and fixed income markets due to the correction that we saw in 2022, central banks boosting up rates, inflation, and all the volatility that came with that. In about November of 2023, there was a sharp reversal of those flows, seemingly overnight. I think people had realized that the S&P 500 had quietly hit a low all the way back in the autumn of 2022.

Entering 2024, you had what I call a perfect storm of high cash positions, many market participants on the sidelines, central banks shifting their focus and rhetoric from raising rates to pausing on them. You had yield curves slowly normalizing. Interest rates were still at relatively high levels making bonds a compelling investment option. Finally, and perhaps most importantly, many investors, in my opinion, were suffering from FOMO, a fear of missing out due to missing out on the first 20-25% of an equity rally after suffering some rough drawdowns. I do call that a perfect storm, and as a result, you had a lot of flows going into a lot of different asset classes within the ETF industry.

Just here in Canada, not only did we have record flows in the industry as a whole, but when you look underneath the hood, you had record flows in equity, you had record flows in fixed income, you had record flows in covered option strategies, in multi-asset solutions and other asset classes as well. Flows in one area of the market were not coming at the expense of another, they were coming on top of it. That's a big reason why this was truly a historic year. Now, Alan, one thing that you were really curious about going into last year was fixed income. We had such a barbell, where on one end there was a ton of money going into cash, and then on the other end, we had record flows going into long-duration bond ETFs. Did this continue throughout 2024?

Alan: Fixed income ETFs, as you rightly said, had another record year, $24 billion in 2024 versus $21 billion in 2023. Now, we had generally strong flows in the fixed income, but it mirrored what happened in the market. I think you saw people expressing themselves to what was going on in the global macro picture, which was central banks moving away from that rate hiking cycle to combat inflation to cutting rates. There's a big reversal in that, and guess what, we saw that happening in the ETF flows as well. There's a real big difference where the money went from previous years.

Cash inflows, which were super popular, those cash ETFs, really dropped. We saw years with $9 billion in those guys, that went to less than $3 billion. What we saw as well was long-duration ETFs not getting too much love. A lot of money went into short and ultra short-duration ETFs, which I think you could expect with investors deploying maybe out of cash into something, giving them a little bit of yield, and also maybe a little caution.

It was hard to predict what rates were doing exactly when the pivot would happen. Hanging out in the short end of the curve through the ETF allocation made a ton of sense. Maybe throwing it back to you with a little bit more high-octane equity flows, they were pretty anemic in '23, '22, like some tough markets. Did that reverse last year? Maybe you can talk to us a little bit about what happened.

Peter: Absolutely, Alan. Yes, equity flows blew the lights out in 2024. You had a record $44 billion in net inflows versus about $13 billion in 2023. Now, half of that flow went into U.S. equity, and about three quarters of total equity flow actually went into market cap weighted equity ETFs. I think this is very consistent with the FOMO narrative I mentioned earlier. Indices like the S&P 500 were already well off their lows, but the initial rally wasn't really confirmed by flows. The rally we saw in 2024 certainly was. When I take a look at flows in Canada and also in the U.S., the amount of money that went into the S&P 500 index ETFs was unprecedented.

Now, going into 2025, I'm seeing signs of that broadening out. For example, in the last quarter of 2024, I couldn't help but notice solid positive inflows in sector ETFs. Financials led the way, which is not unheard of here in Canada. We love investing in our banks, and most of them had really started to rally in the latter half of the year. I think it's safe to say that there were a lot of investors that wanted to jump on that bandwagon.

What I found even more interesting though, was that technology sector ETFs seem to be a little muted. There were solid flows in areas like real estate, materials, and utilities. These tend to be much more interest-rate sensitive in nature and also very small components of major indexes like the S&P. That tells me that there may be a broadening out in flows occurring right now after a year of abnormally high flows in market cap weighted ETFs. This is something I'm definitely going to be looking at closely in 2025. Now, Alan, one thing I noticed was that despite Bitcoin rocketing up to $100,000, Canadian crypto ETFs had net outflows last year. I found this shocking. What happened there?

Alan: What happened was in the U.S., the SEC approved spot Bitcoin ETFs. Canada, which led the way, lost that monopoly. I think what you saw was a lot of investors actually going south of the border to buy their Bitcoin exposure. Flows were incredible. I think over $100 billion to date, and I think that's one of the most successful ETF launches we've seen in history. There's been a lot of good launches.

You saw household names like BlackRock and iShares, who, by the way, did a massive 360 going from crypto skeptics. I think that's probably a gentle term for their view on crypto early on to launching their own Bitcoin ETF. I would also say that iShares just listed IBIT, which is their Bitcoin ETF in Canada. I think it's going to be interesting to watch if that draws Canadian investors back north of the border, whether they'll stick with the south of the border options. If you consider Bitcoin to be an alternative, you passionately spoke about that this time last year about the growth of ETF alternatives, and specifically covered options ETFs. Did that trend continue?

Peter: I definitely did speak about that. Absolutely, we had another record year when it came to option-based ETFs here in Canada. About $6.3 billion entered the space in 2024, which was a 61% increase from 2023. Now in the Canadian ETF industry, you have about $2.3 billion in AUM spread out over 220 ETFs. Now, from a product development standpoint, these styles of ETFs are probably the most popular in terms of new launches. That being said, the types of option-based ETFs are continuously evolving over time. Gone are the days where it was simple rules-based covered call strategies.

Added to the mix are put writing strategies, defined payoff strategies, buffer ETFs, and so on. There seems to be a rise in popularity of these ETFs that combine the usage of calls and puts. It's always interesting to see how things are changing over time. I believe the reason for the popularity of all those strategies stems from the growing need for income and downside protection, which is very consistent with retirement needs which revolve around people in the decumulation phase of their investment life and just simply requiring income.

There is no doubt that there is a higher popularity for ETFs that pay relatively high yields in this space, and I would like to caution listeners to be careful of that. Depending on how those higher yields are generated, there can be a total return tradeoff for that income. Make sure to understand fully what you're purchasing, but there is no doubt that there's a lot of great solutions out there. It would not surprise me in the least if we had another record year in 2025. Now, Alan, speaking of 2025, how are we set up for this year? Do you have any bold predictions?

Alan: I think I've got three things for you, two on the market side and one on the ETF innovation side. Now, what I want you to do is agree or disagree with these predictions. I'll do the same for yours, and I think whoever wins the most buys each other a New Year's dinner.

Peter: Sounds good to me, Alan.

Alan: On the market side, the U.S. economy is now over 70% of the world's market cap. Now, at the time of the recording, we had the 47th president inauguration yesterday. As an investor, it seemed like there might be a couple of opportunities with a new administration coming in. First up, the U.S. consumer. A lot of talk about tax cuts, a lot of talk about drill baby drill, plus I think potentially the onshoring of more manufacturing jobs back to the U.S..

I think you could see a boom for the U.S. consumer. I think Trump called it the coming of the U.S. golden age. Now, if that happens, to me, U.S. mid-caps could be a really interesting way to play that trend. Mid-caps tend to earn more of their revenue from the home company, and therefore, be more exposed to the consumer. That's a little bit unlike the S&P, which has a bunch of large multinationals which are getting diversified revenue streams from around the world.

Mid-caps are probably less efficient market. To me, it's a place you need active management. We have a great product in that space, DXZ, that's a U.S. mid cap ETF managed by Steve Hall. For me, it's one to watch. Coming to my prediction here, will mid-caps outperform large caps in 25? I think there's certainly a really good chance. All right, Peter, over to you. Do you agree or disagree with that one?

Peter: I am going to agree with you on that one, Alan, the way I see it. Sooner or later, this concentration in major indexes is going to have to pay its due. Mid-caps seem to make a lot of sense. I am with you on that.

Alan: Up to number two, which is about all things tech, crypto, and AI. To me, this space looks really well set. Again, I was watching the inauguration. It was super hard to miss Trump's tech bros being seated at the very front of the stage in front of a lot of other important dignitaries. I believe some cabinet members were put at the back. To me, that's a sign that there's a massive amount of change going on. I don't think it's just in those leading tech firms. I think it's existing companies finding more efficient ways to do their business and grow their businesses using AI and tech.

Now, for me, that's impossible for a rules-based passive ETF to pick up on. Some of those trends, you really need someone that knows what they're doing, a fundamental manager looking at those trends and picking which companies will benefit. I don't think it'll be all. I think there'll be winners and losers. Now, I'm delighted to say at the time of the recording, we're actually listing our new dynamic active innovation and disruption ETF, ticker symbol DXID, that list tomorrow, the 22nd of January. Now, DXID is managed by Noah Blackstein. Noah has a 30-year track record in this field. Coming to my bold prediction, I think it's going to be DXID will be north of $100 billion in assets under management by the end of 2025. Peter, come back at me.

Peter: I agree with you. AI is not going away. I think we're just getting started, but I think the opportunities are going to differ going forward. I think the opportunities are going to continuously evolve, and you can't quant your way out of that. You need an active manager really getting to the wheeze with every single organization that can actually be a beneficiary of that. I do think that there is a massive opportunity there going forward in the months and years to come.

Alan: Let's roll into number three, bring it home. My question here or my prediction is, are we going to see the ETF-ization of private markets? Similar to the Bitcoin, there's now Bitcoin ETFs and that really opened the door to widespread adoption of the Bitcoin. Are we going to see the same? Now, for me, the biggest issue here is, how do you put a non-liquid private investment strategy into a daily liquidity vehicle, which is the ETF?

I think that's what still needs to be cracked. It's really not easy. A lot of very smart people are trying very, very hard to get something to market. I think we'll have to see if any of the regulators approve such a structure. If it is cracked, to me, there's a massive opportunity for the ETF market. In my opinion, State Street and Apollo, I think, are trying with a private credit ETF. It'd be really interesting to keep an eye on. My bold prediction is that we get one approved private market ETF launched in 2025 in the U.S.. What do you say, Peter?

Peter: I'm going to have to disagree with you, well, partially. I do believe that we will get those ETFs. ETFs, we know, have been continuously evolving for the last 34, 35 years. I have no doubt that the code will be cracked. I do think it's going to be one of those opportunities, though, where perhaps the ETF vehicle will not be as enticing to the end investor because of the liquidity component. I definitely see this being an area where mutual funds will continue to capitalize because of the actual structure of the mutual fund itself.

Alan: If I'm going to buy private markets, I want to buy it in the ETF, Peter. It's going to be alongside all my other ETFs that I hold. It'll be in my direct investing account, wherever I choose to hold it. I just think the appeal of the ETF, someone's going to do it and come up with a way to manage it. Maybe turning it over to you, what are your bold predictions for 2025?

Peter: First off, I think determining flows is going to be way less predictable this year than it was last year. One of the reasons for that is that you don't have that FOMO effect I was talking about throughout the conversation. There isn't that fear of missing out. I would say there's even maybe a little bit of caution going into this year because of the run-up that we've had. My first bold prediction is that I think it's going to be hard to beat that $76 billion net inflow that we saw last year. I think it's going to be still very high, but I have a feeling it's going to be $68 billion, give or take a few. That's my first bold prediction, despite being an ETF nerd.

Alan: I'm going to disagree with that. I think we're going to the moon. I'm in a very bullish mood. I'm going to say we have another record year.

Peter: Noted. We have the audio evidence here, so we'll definitely check on that at this time next year. Here's my next one. I think where last year was the year of FOMO, this is going to be the year of breadth. Now, I mentioned earlier that I'm seeing early signs of equity flows broadening out. I think we will see higher than usual flows in sectors that are both interest-rate sensitive and underrepresented in indexes like the S&P. My view, flow-wise, we're going to see a lot of money going into real estate, a lot of money going into gold, a lot of money going into utilities. I find that those type of sectors really fit the bill.

Also, part of the reason why I believe in that is because of what we all know and are all probably fed up of hearing, and that's the concentration risk in the S&P 500. We all know what's happening. At one point, I believe that is going to be an issue. I think part of the reason why we're seeing the start of flows going into that area is in anticipation that something's going to have to give.

Alan: What's the call here?

Peter: My call is, oftentimes, tech and financials lead the way when it comes to sector-specific ETFs. I believe this year, real estate, gold, and utilities will beat out tech and financials.

Alan: I'd actually probably disagree. I think we're going to get a ton of investment into tech, but I agree with folks I know that see it not purely as a tech play. I think you're going to see certain energy providers will benefit and traditional companies will benefit. Maybe I'll half agree with you there.

Peter: Fair enough. I have one more prediction for you here, Alan. I think fixed income is going to continue to fly. I think it's going to be heavily skewed towards active. I think that interest rates are very compelling going into 2025. You aren't getting too much cash anymore due to overnight rates being cut. I think many investors have some PTSD for some of those terrible 2021-2022 calendar years that we recently had, and maybe they felt that it was a bit of an instant replay of that at the end of 2024. My view is that you're going to have a record year when it comes to actively managed fixed income, and that will also include a surge in liquid-alternative hedge fund style strategies that have a fixed income focus.

Alan: I 100% agree with you on this one. I think there's a lot of uncertainty out there. With trade wars, who knows what will happen to inflation if suddenly you get a 25% hike on certain goods and stuff that's potentially in scope? I think it's just so uncertain that, to me, having a nimble, active manager makes a huge amount of sense and a truly active manager that's watching what's going to happen.

Peter: Alan, I'm looking forward to doing this again next year. I'd just like to thank all our listeners as usual for listening in. I hope you found it informative, maybe a little bit entertaining as well. With that, I'm going to sign off. I'm going to wish everyone happy investing and a happy New Year. Bye for now.

Alan: Thanks everybody.

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