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Andres: Most of the money this year-- or a big majority of it-- has gone to broad market US equities. And that's really centered around US elections-- not just US elections but also a move away from international because of all the conflicts that are happening around the world. US is seen as a safe place to invest in.
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Chiara: Welcome to The ETF Experience Podcast, powered by TDAM Talks. I'm your host, Chiara Carozzi. And in today's conversation, we'll be taking a look back at the defining ETF trends of 2024, a year that has been nothing short of transformative for the industry, as ETF assets in Canada have gathered year-to-date inflows of $66 billion, surpassing the record year of 2021 with $58 billion in inflows.
Joining me today is our special guest, Andres Rincon, managing director, head of ETF Sales and Strategy at TD Securities, an ETF industry veteran with deep insights into evolving trends occurring in the ETF space. Andres, it's a privilege to have you and have your experience on the podcast. Welcome.
Andres: Thank you for having me.
Chiara: The momentum of ETF flows in Canada in Canadian-listed ETFs seems unstoppable, as ETF assets have passed the $500-billion mark, reaching $517 billion in AUM by end of November of 2024. So let's dive in. What is the first theme that has captured the investors' attention in 2024?
Andres: Before we go to the themes, I actually thought it would be interesting to mention that those numbers you just highlighted-- those were net numbers. So gross numbers are the ones that include when funds, like an ETF, buy other ETFs. So we net those out. But if we look at gross numbers, actually, much higher than that. So the industry as a whole continues to really, really grow.
And it's also not just Canada that's seeing records. Obviously, we beat the 2021 record, like you just mentioned in Canada, last month. But the same goes for the US, where we had record inflows there. And that previous record was $905 billion. And now we got to $983 billion just as of last month too. But it's also for international ETFs. So if you look at globally, ETFs is breaking records across the world. And it's because, obviously, it's the favorite vehicle for many of our investors globally.
But back to your original question-- what has really resonated? Really, I think what's driven a big part of the market in inflows this year is the US election. That's been the single biggest driver of flows. And we see it's because of where the money is going. Most of the money this year-- or a big majority of it-- has gone to broad market US equities.
And that's really centered around the US elections-- and also not just US elections but also move away from international because of all the conflicts that are happening around the world. US is seen as a safe place to invest in. So that's been really what's impacted the market inflows into the US market.
Chiara: Have you seen any themes in those US-tailored ETFs or geographic focus?
Andres: So it's been very much focused on broad markets. [INAUDIBLE] basically is the story. But we have seen very much risk-on environment. So small cap with cash flow has been very popular too-- things that probably, a couple of years ago, you would have never had. And there's many other areas that are very popular thematic ETFs. There are risk-on, basically, baskets. We've seen a lot of interest in towards semiconductors, towards AI. Those are areas that we've seen a lot of interest in those areas.
We've also seen the growth of covered calls, both in Canada-- it's been a theme for many, many years, continues to grow. But in the US, the covered call ETFs have dominated this year to quite a bit. And, obviously, we continue to see the growth of fixed-income globally. But I think one of the main themes that is important to highlight is that Canada is the leader in fixed-income ETFs and also in actively managed ETFs. And the US always lagged in this part. And they're actually catching up. This year was very big for actively managed strategies in the US.
Chiara: Maybe talk to me a little bit about why Canadians are so yield hungry. We've seen a massive influx of new launches when it comes to derivative strategies. Talk to us a little bit about that.
Andres: Yeah. The Canadians tend to be a little bit more conservative on their needs for investment, and yield is a very important part of that. It can also play because of demographics here in Canada. But yield is a key reason for why people invest in different ETFs. In the US, growth tends to be the main driver. And just remember that a lot of investors in the US are also global investors, and they want exposure to the US.
Here in Canada, if you want exposure to beta, you go to US ETF or a Canadian ETF that gives you exposure to the US. But a lot of the Canadian investors want yield. And because of that, the yielding products are very popular. And this is fixed income. Covered calls-- obviously a big part of that.
Another great area that we're seeing growth this year is bond covered calls. This is a new phenomenon that launched in the US not too long ago, now in Canada. There's only 20 products now in Canada. And they now cover 25% of the inflows into covered call funds, which is significant because that area is really untouched. There's over 150 covered call funds on the equity side. And there's only 20 in the bond covered call. And they're really dominating a big part of the flow.
So I think this is the next frontier for covered call land-- and basically adding yield to yielding product. So more yield more yield-- and, once again, ties back to the need for yield. People like the stability of a certain yield and in those sort of assets, even though they have some volatility and there's some downsides to covered calls too. But this is something that they [INAUDIBLE] to want in that space.
Chiara: I often find it so interesting that there's such a divergence in trends between the US and Canada when it comes to the ETF land. I do want to shift gears a little bit. Let's talk about cash and cash-like ETFs. We have seen significant inflows, especially in the beginning part of 2024. Talk to us a little bit about the different types of cash ETFs available and what was driving that trend early on this year.
Andres: Yeah, so there's three-- simply speaking, there are many different products. But you have what we call high-interest savings ETFs. Some people might call them cash management ETFs. They have different names. But all they are is, you give them money and they literally put money in a savings account. There's nothing to it. So they're not actually buying a security on your behalf. They are just depositing the money on your behalf.
These were very, very popular over the last few years. They've actually gathered quite a bit of momentum. And they've been in the market for quite some time. But as rates increased over the last year and decade, they became more and more popular to a lot of investors as a replacement to just putting it in cash or a GAC or something along those lines.
There were some regulatory changes that happened-- or took effect this year that lowered the rates of these products. And also, we are now seeing a change in the rates environment, where we're seeing lower yields. So these products from a rates perspective will come a little bit less attractive but are still very, very popular within all of our channels and in Canada and across retail and across advisors.
So that's one set of products. The other product is what we would call a money market product. So this is where you would have CDs, T-bills, commercial paper. You might have savings accounts. So it's a mix of different products or securities that give you money market exposure. That is a very popular product right now.
And the other area is short-term bonds, which is-- these are bonds that are expiring within the next year or so. Together, these are what you would call short-term, fixed-income products. And they're very popular. Why? Once again, the need for yield. And this yield is actually quite attractive these days.
So in terms of flows what we've seen is, this year, cash management ETFs-- or the high-interest savings ETFs, they've actually seen some modest outflows because of the regulatory changes that I mentioned. And a lot of money has gone into the other ones I've mentioned, like in money market and also ultra short term.
So, obviously, TDAM launched a money market ETF not too long ago. And that's been very successful too. So there's a lot of money going into those areas, especially as you see people move over from GACs into these products-- and as they use these products as a way to manage between exposure and non-exposure.
Chiara: Nice. Thanks for breaking that down. I find it's interesting how these products can be utilized for investors that are looking for a place to park their cash. I want to turn it over to bonds. I know target maturity bonds, although they have been around for several years, they have recently become popular again. I would love to get your thoughts on, where are you seeing the flows in the fixed-income round?
Andres: Funny enough, you mentioned the target maturity bond ETFs have been around for a long time. And they did very little, from a flows perspective, for a long time until recently. And I think there are several drivers to that. But let me step back and answer first your question on flows.
Last year, we would categorize the year as a year of fixed-income [? inactive. ?] It was one of the first times that fixed income had more inflows than in equities. And it's massive because it's understood, from an advisor point of view, they're heavy users of fixed income. But direct investing doesn't necessarily always go to fixed income first. And this is where we saw a huge growth.
So, once again, because of the rising yields and the need for yield in the direct-invested space, we got a lot of interest in this space-- also from bond-cover-call ETFs, as I mentioned. But we continue to see growth there. And what's interesting is that last year was a phenomenal year for fixed income, and this year continues to be very strong. But compared to equities-- obviously, equities is dominating this year. And it's very much-- as I mentioned earlier-- broad-based US equity's the main focus. But we continue to see a lot of flows in fixed income in general.
Where are we seeing most of the flows continues to be ag. So your traditional ag exposure is where you're getting about 60% of the flow. So call it 2/3 or so. You're seeing most of the money go there. You're also seeing some money go into bond covered calls, as I mentioned. And the rest is really at the short end of the curve, which is on the money market side on short-term bonds. That's where you're getting quite a bit of it.
The one area that, as you mentioned earlier, has stood out is target-maturity-bond ETFs. They've become really popular over the last-- call it three, four years again. And you're seeing a lot of interest there for our advisors. And the story is quite simple. Advisors want simplicity in their products. They want some certainty as to the pricing of these products over the next year or so. And this is what these products provide you, right?
You're buying a product that has a bond that is expiring with a set date, and it's going to expire [? power. ?] And because of that certainty, there's a little bit more certainty on the ETF. And it provides more of a safeguard for a lot of the holders of these ETFs. So because of the higher degree of certainty, we have a lot of advisors that are now looking to these ETFs.
You can also use them to build ladders. Because at the end of the day, what these products do is, they buy an ETF with the same expiry year, basically. And the other reason that you use it is because of, generally, lower duration as the bonds go towards expiry. So there's several reasons with-- if you don't want to be exposed to or don't have one or have too much duration, some certainty and some flexibility in building ladder, they've become really, really popular.
And they've been popular in the mutual-fund world for a long time. And now they're becoming very popular in the ETF world. So it is an area of growth. TDAM has a lineup, and several other competitors have grown their lineups. And I do think it's an area of growth for the industry too.
Chiara: Yeah. I find one of the other great benefits of it is that it provides that liquidity. You can time your liquidity needs based on the maturity date of that ETF. Shifting gears over here, I want to talk about my favorite-- asset allocation ETFs. This is the last trend that we've seen. And we've seen a lot of flows go into the balance and the growth. Talk to us a little bit about that.
And I also know that the US isn't too focused on these ETFs, right? That's something I'm really curious to understand, why Canadians favor this type of strategy versus the United States.
Andres: Yeah. It's actually-- Canada and Europe are big users of asset allocation ETFs. The US is not. They have these lineups, they're just not as popular. A big part of that is, a lot of people just want to build them themselves, instead of buying a package that already has it built. I think it's more of a cultural thing, if I'm honest. Because at the end of the day, you could still use it.
It also is a structural part, and that's-- some of them don't want to use some of these products, that they already have other competing products in there. So they just haven't pushed it as much as Canadians have. But going back to the point of their growth, they are the fastest-- if not one of the fastest-- growing areas in ETFs. There's many lineups. TDAM obviously has one, but there's many lineups here in Canada.
And it is very much a direct investing product. We do see advisors buy these, especially on the balance side. So I would say that the flows depend on, or who's buying which ETF depends on the type of product. So if you look at direct investing, which is the majority holder of these products, it's very heavily skewed towards growth and equity. And if you look at flows in the industry, it's mostly equity this year. Last few years, it's been growth and balance. This year, it's been mostly growth and equity.
On the balance side, it's very heavily skewed towards-- or more skewed towards-- the advisor. So how it generally works is that they have a smaller account, the daughter or son of a existing client that wants to bring money in. Instead of building an entire portfolio around them, they just buy a single-ticket solution as a standalone ETF. So that's become very popular for advisors. But the growth that we've seen, a lot of the money that we've seen is into pure equity or growth.
And just to explain these, what they are is an ETF that wraps other ETFs that give you exposure to a balanced portfolio or growth or conservative. Or in the case of the equity ones, it's just a global equity or certain exposure.
Chiara: Yeah, based on asset allocation mixes. Yeah, I often find the use cases for these are your small accounts, like you mentioned, the TFSAs, the FHSAs, even RESPs. It truly is a very easy, simple solution for investors and advisors to use. As we look back on this year's trends, it is also exciting to think about what lies ahead. Let's wrap things up with some of the predictions for the ETF market in 2025. What should investors keep their eyes on as they head into the new year?
Andres: So I have predictions, in terms of products. And I have predictions, in terms of areas of growth. So in terms of product, we are 100% going to see a private asset ETF in Canada within the next year. We already saw bond blocks launch one recently. And State Street is working with Apollo, and they have already filed. But they're working to launch it-- and very likely in 2025.
But we are going to very likely also see something similar in Canada at some point. And I think this is a big part of the market. $13 trillion are in that space, and the ETF space is not really there today. And that's an area of growth for the industry, so we're going to see that.
Also, we are also going to see more crypto funds in the US with the new SEC chair. The previous SEC chair has already said that he's going to leave, and the new one is very crypto forward. We've seen a huge rally in crypto as a result. And so we are very likely going to get a Dogecoin ETF and other crypto ETFs-- is my expectation.
But I think, in terms of areas of growth, in the US, the other thing that the SEC might do is approve the ETF series, which was a patent that Vanguard had. And there's currently a lineup of 22 issuers already waiting for the ability to launch an ETF series of their existing mutual funds. It's already very popular in Canada. It doesn't exist in the US.
This will transform the US ETF market. And I believe, with the new SEC chair, that will be greenlighted. So that's the other one.
Chiara: And it was Vanguard that had that patent, right?
Andres: That's right-- for many, many years. And there's many benefits to it, which I won't get on this podcast. But every issuer in the US, big issuer, wants this, especially all the traditional active-mutual-fund managers in the US. And the last one that I'll mention is in Canada, the change in the LICAT guidelines. I think it will be an area of growth for ETFs, in terms of getting access to insurance arms in Canada.
This is an area that, currently, insurers don't really use ETFs. And through the changes that have already been approved, it will make it easier for them to buy ETFs. And so I do think this is an area of growth for ETFs.
Chiara: Fascinating, some really exciting stuff coming up in 2025. Well, Andres, thank you so much for sharing your experience and helping us unpack these major trends. It's been a super insightful conversation. But before we end things off, I believe you are also a host on a podcast, one that I am a fan of and a listener of. So why don't you share the details with our audience?
Andres: Well, thank you. Yes, I am the host for Buyside Views, which is our TD buyside views, which, for TD Securities, is our platform to really highlight the expertise and the views of our partners on the street. So we do have external clients that come in to the podcast and talk about their views in the markets and their businesses. And it is one of the most followed podcasts here or multi-format series at TD securities.
We are not just on LinkedIn and on my social media but also on Spotify and Apple Podcasts, and obviously, on the TD Securities website. We have a space there.
Chiara: I really enjoy the fact that it has a visual component to it as well. Well, amazing. To our listeners, we hope you found this episode helpful and engaging. If you enjoyed today's discussion, don't forget to follow and share with anyone that's curious about the evolving ETF landscape. See you next time.
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