How A Stronger Canadian Dollar Has ETF Investors Not Hedging Their Bets

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Includes: FXC
by: Alan Green

The streak is over.

Canada's ETF industry has suffered its first month of outflows in almost a full year, shedding $33 million* in net new business in September, according to BlackRock's data.

The outflow ends a stretch of 11 straight months of positive flows dating back to October 2016 that has helped fuel another record year for exchange traded funds listed in Canada. Through September, ETFs have attracted a total of $18.9 billion in new money, surpassing last year's total of $16.6 billion with three months to go.

The main reason flows fell into the red last month was a large redemption from iShares S&P/TSX 60 Index ETF (XIU). As we've mentioned in the past, this fund is used increasingly as an alternative to futures contracts to play or hedge the Canadian equity market and can have big swings in flows from month to month.

When XIU is left out of the equation, the numbers from last month start to look a lot more favourable with some of the same trends that have attracted new money throughout the year also evident in September. Here are the highlights:

  • U.S. and International equity ETFs continued to attract significant new money, but a stronger Canadian dollar was top of mind with investors seeking opportunities outside Canada. Non-currency hedged ETFs tracking U.S. and international stocks had inflows around $1.4 billion during the month, while currency-hedged ETFs had lost close to $600 million. This suggests the market anticipates a period of loonie weakness is ahead.
  • Fixed income ETFs gained another $380 million in new money, bringing total inflows for the asset class to $6.8 billion year-to-date. Funds seeking to track Canadian government bond indexes did particularly well, netting $117 million despite the Bank of Canada's second rate hike in as many months.
  • The industry's torrid pace of growth was again on display with two new providers entering the fold in September and a record 30 new funds launched, including three new actively managed ETFs from Dynamic iShares.

Overall, then, it was another strong month for ETFs in Canada. And despite one streak having ended, the momentum that has been building across the industry over the past several years has not.

*All amounts referenced throughout this article are in Canadian dollars unless otherwise noted.

This post originally appeared on the BlackRock Blog.

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