Popular ETF Themes in 2023 and Who's Buying

It has been a mixed year for the investment fund industry. On the one hand, the broad market has delivered attractive performance as the S&P 500 Index delivered a year-to-date return of 9.5%, and the S&P TSX Composite Index delivered a year-to-date return of 2.9% despite underperforming Canadian equity markets. Despite this market performance, recession concerns urged investors to put money into safer assets. ETFs with defensive themes – such as cash, government bonds, covered call, and asset allocation ETFs – have been more popular than more growth-oriented themes. Taking a closer look at fund flows and trading data helps identify the most popular ETF themes in 2023 and the investors that may be behind them.

Popular ETF themes in 2023

First, despite the challenging environment, Canadian ETFs have observed inflows of C$12.5B in the first four months of 2023 compared to outflows of C$4.5B for mutual funds during the same period.

• Cash is undoubtedly the most popular ETF theme this year. With relatively low risk and zero duration, CAD and USD cash ETFs can offer attractive yields of nearly 5.0% and 5.2% respectively. Together the nine cash management ETFs listed in Canada gathered new assets of C$3.4B year-to-date.
• Government bonds have also been very popular this year given their low-risk profiles and defensive nature. Government bonds historically outperform during recessions, and investors have accumulated government bonds to preposition themselves for a potential recession this year. Among government bond ETFs (C$2.4B), the long end of the maturity curve has seen most of the inflows (C$1.9B), accounting for two-thirds of the total inflows into government bond ETFs.
• ESG is a theme that regained some popularity this year. This year, ESG ETFs have accumulated new assets of C$1.9B, and both emerging market and Canadian ESG ETFs are seeing inflows. Consistent interest in ESG ETFs indicates investors' growing focus on ESG investing.
• Covered call ETFs extended their positive momentum into 2023, seeing inflows of C$1.7B year-to-date. Those focusing on the financial industry gained the most traction among all covered call ETFs.
• Asset allocation ETFs saw monthly inflows regardless of market performance. Accumulating C$1.3B in new assets this year, these have always been a star among retail investors regardless of market performance. These ETFs offer a one-stop shop for investors seeking exposure to a portfolio based on risk appetite.

So, who are the investors behind the buying?

Now that we've identified the popular ETF themes for this year-to-date, we seek to understand who the investors are behind these themes. Identifying end investors in ETFs has always been challenging for the industry. Trading patterns of these ETFs, however, provide clues as to who are their ultimate holders.

Our analysis identifies non-block and non-cross trades as retail trading, and block and/or cross trades as advisor/institutional trading. We studied the percentage of retail trading vs advisors/institutions trading, and one can estimate the ultimate holders of ETFs. If most trading activities of an ETF are from retail investors, the ultimate holders are very likely to be mainly retail investors. Also, if most trading activities of an ETF are from advisors/institutions, the ETF is very likely to be held by wealth clients or institutions. Though the trading data alone cannot identify trades initiated by advisors or institutions, we provide color to distinguish advisor or institution trades based on observations on the desk.

• Cash ETFs: Although cash ETFs are generally considered a retail product, 69% of the trading value YTD in these ETFs are traded as blocks or crossed, which is a more common execution type for advisors and institutions.^1. Based on our observation, however, most cash trades are initiated by advisors in the wealth channel as blocks and not by institutions. As a result, though most inflows are from individuals, these trades are not shown as retail in the above chart. Still, the majority of flows come from advisors on behalf of individual investors instead of institutions.
• Government Bond ETFs: Similar to cash ETFs, government bond ETFs also had 69% of their trading value concentrated in block/cross trades.^1. Both advisors and institutions are potentially behind these trades. We observed some interest in these products from advisors, while institutions have been key players in this space.
• ESG ETFs: Broadly considered an institutional product, the data this year supports this view of ESG ETFs. A full 83% of the trading value so far this year are block and/or cross trades.^1. As we observed limited interest in these products from the advisor channel, institutions have been the main contributors of the trading activity and inflows of these products.
• Covered Call ETFs and Asset Allocation ETFs: These ETFs are traditionally retail products. This year, retail accounted for 64% and 71% of trading values in covered call ETFs and asset allocation ETFs respectively.^1. These two products may attract some interest from advisors, but the main buyers remain retail investors.

This year, the advisor channel has contributed significantly to ETF inflows, especially cash ETFs. In addition, both the advisor channel and institutions have been actively investing in government bond ETFs. Institutions have also been active in the ESG ETF space this year. Retail investors have continued their focus on covered call ETFs and asset allocation ETFs, similar to last year.

Strong economic growth in Canada raises the odds of future rate hikes from the Bank of Canada, leading to further interest in cash and money market ETFs. The lingering fears about a potential recession in the U.S. and Canada may also continue to favour low risk assets in the near future.

1. Source Bloomberg, TD Securities, as of May 25, 2023