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By Christian Charest | 12-29-2016

ETF trends to watch in 2017

Demand should pick up for strategic-beta and U.S.-equity ETFs, says BMO's Alain Desbiens.

Christian Charest: For Morningstar, I'm Christian Charest. Exchange-traded funds in Canada just had another outstanding year in terms of sales. I'm here today with Mr. Alain Desbiens, vice president of sales at BMO ETFs, to talk about the trends that he expects to see in 2017.

Alain, thank you very much for being here with us today.

Alain Desbiens: Hello, Christian.

Charest: So, nearly $16 billion in sales for the first 11 months of 2016, more than 400 unique funds on the market. Yet a lot of the money is going to a handful of traditional funds.

Desbiens: Exactly. In the U.S. and Canada, it's roughly 8% active or smart beta versus 92% indexed, so more than 90% of the asset base is still index-driven, whether you speak about Canadian equity, U.S. equity, international equity or fixed income. That trend is still valid in 2016 in Canada, though we are seeing more smart beta within the top 20 net sales in Canada. That's a change over two years. Three years ago, you had exclusively indexed, market-cap-weighted equity or fixed income ETFs. Now we're seeing more dividend, low-volatility, covered call. New strategies are emerging, but still it's dominated by the indexed.

Charest: As you just said, a lot the new funds that are being launched are what we at Morningstar call strategic beta. A lot of people still call it smart beta. What do you expect to see in the upcoming year in that segment?

Desbiens: I think providers in ETF will find their niche if they answer needs. Do you provide growth with lower volatility? Are you providing growth with better quality? Are you generating income with a better methodology on the dividend side? Are you generating extra tax-efficient income with covered call? Those are really important. Also, in 2017, with the election in the States, probably you're going to see a resurgence of demand for U.S. equity and fixed income, and also what we call value solutions, whether it's on the smart beta side or fixed income or on the S&P 500. That's used to answer the U.S. estate tax problem for Canadians, and also the T1135.

Charest: As far as the number of funds that are being offered, do you believe that the market is saturated, or are there still areas where there is room for growth?

Desbiens: When I joined the ETF industry in 2010, the industry was roughly $40 billion. We had 125 ETFs. We're approaching 500; we're going to be probably at 550 next year. So far, what we see in the market is that the top four ETF providers are still having more than 87% of the sales and 91% of the AUM. The industry as a whole has to do a great job on financial literacy and education with retail investors, portfolio managers, investment advisors and also on the institutional side.

Charest: Any other trends that you expect to see in the coming year?

Desbiens: Probably more sector-based and more alternative solution. To generate a 7.5% return on a portfolio is tough. People are looking more at 4% to 6%, depending on the asset mix. What we're seeing is an increased demand for sectors; big trends right now are infrastructure, industrials, oil and gas, Canadian and U.S. banks. There's also more demand around option-based strategies, like covered call; this is a big segment. In the industry, there's $4 billion of what we call alternatives, which includes covered call, commodities and infrastructure.

Charest: Alain, thank you very much for sharing your thoughts with us today.

Desbiens: Thank you.

Charest: For Morningstar, I'm Christian Charest. Thank you for watching.