Assets in the Canadian exchange-traded funds market reached US$189 billion in 2020, fuelled by a compound annual growth rate of 25 per cent over the past five years, according to new research by Cerulli Associates.

Cerulli isolated true funds of funds with Canadian-domiciled underlying ETFs from non-fund-of-fund ETFs and fund-of-fund ETFs holding U.S.-domiciled ETFs and determined they account for seven per cent of Canada’s ETF assets.

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The already crowded ETF market in Canada, with 900 ETFs offered by 40 distributors, is expected to continue to expand, especially through active and strategic beta product development, noted the researchers.

“As additional products are rolled out, investors will likely gravitate to the lowest-cost allocations,” said Daniil Shapiro, associate director, Cerulli Associates, in a press release. “At the same time, more investors are willing to pay more for active allocations and are less sensitive to fees on thematic products where the quality of exposure plays a greater role.”

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Despite rapid growth, Canadian ETF assets have lagged U.S. ETF assets even after taking into account differences in population, gross domestic product and ETF assets compared to mutual fund assets, said Shapiro. However, the researchers found Canadian ETF issuers continue to benefit from their ability to use different wrappers — such as ETFs of ETFs and mutual funds of ETFs — without burdensome regulatory processes.

“To the extent that Canada’s ETF issuers have the flexibility to offer a wider variety of products, the ETF is an excellent vehicle for delivering innovative exposures,” said Shapiro.