How risk-off mentality affected ETF industry in 2022

“In past years, factor ETFs, or smart beta ETFs, have struggled to gain market share in Canada,” he adds. “However, in this newer environment of lower growth and higher interest rates, we have seen factor ETFs come back into vogue and really prove their worth with value, low volatility and dividend ETFs generating strong relative returns.”

Market volatility and declines have also created investment opportunities for those who are willing to be active and tactical with their portfolios. Amid a wave of tax-loss selling and portfolio repositioning, CI GAM is seeing investors turn toward more active ETFs – including quantitative and fundamental strategies – particularly within the fixed-income category.

The 2022 cocktail of higher inflation, aggressive monetary policy, and heightened market volatility has not paired well with the 60-40 balanced portfolio, as both equities and fixed income were hit simultaneously. As traditional asset classes become increasingly correlated, Kanagasingam says investors are turning toward liquid alternatives, which offer ways to enhance risk-adjusted returns, preserve capital, and achieve greater diversification by virtue of their unconventional strategies and flexibility.

“Liquid-alt funds, including alternative mutual funds and ETFs, have seen a 10% year-over-year increase in AUM as of October 31,” he says. “With liquid-alt ETFs particularly, we have seen 38% AUM growth year-on-year, with 20 new liquid alternative ETFs launched in 2022. We expect more innovation on the liquid alternative side the next couple of years.”

Coming into 2023, Canada is facing prospects of slowing economic growth and a higher risk of a recession. That risk is offset by the possibility of inflation continuing to cool going into next year, which would prompt central banks to slow the pace of their interest rate hikes.