According to a report by BMO Asset Management, the Canadian ETF industry is set for dramatic growth and change in the coming year, following the growth of market assets of 13% in 2011 despite continued market volatility.

The Canadian ETF is industry set for dramatic growth in 2012, says BMO.

This year’s growth will, in part, be caused by the emergence of new providers, the introduction of more ETFs, increased price competition and more sophisticated product offerings, says BMO.

“While still in its infancy, Canada’s ETF industry has shown impressive growth, with a compounded annual asset growth rate of 18.5 per cent over the last five years, and 28.6 per cent over the last ten,” said Rajiv Silgardo, Co-CEO, BMO Global Asset Management.

There are currently fewer than 250 ETFs in Canada, compared to 4,500 mutual funds.

“In 2012, we expect the industry will continue to grow, although competition will be stiffer and market conditions more volatile,” noted Mr Silgardo.

According to the report, the industry will see:

• The introduction of more ETFs, particularly from the newer participants.
• Increased price competition.
• More hybrid structures, such as mutual funds that invest explicitly in ETFs to provide long-term strategic investment exposures.
• The emergence of more active and strategy-based ETFs, with some large and well-known firms looking to enter the space.
• Changes of ownership in the industry, which may lead to some consolidation and possibly the closing of some of today’s existing ETFs.
• Increased regulatory focus, particularly in Europe, over synthetic ETFs that use asset-based swaps to create the desired investment exposures.

The report also notes that ETFs continue to gain popularity in Canada because of their cost effectiveness (including low management fees), real-time transparency into underlying portfolios and investments, liquidity whenever markets are open and the efficient addition of many more investment opportunities and solutions compared to other products.

“All of these benefits have allowed investors – from individual investors to institutional investors – to build more sophisticated portfolios with a far better balance between the ‘hoped for’ returns versus the almost guaranteed risks and costs that accompany investments in almost any form,” stated Mr Silgardo.

The report also considers other benefits of ETFs, including market de-segmentation, where all investors, large and small, can and generally do use the same kinds of ETFs, and portfolio diversification.

The report also comments on how investors are becoming more knowledgeable and are increasingly combining the two types of products to provide the optimal trade-off among returns, risk and cost.