Help your clients understand indexes and the ETFs that track
As the global ETF market continues to grow, the number and
variety of available indexes is also expanding. As investor appetite for
index-based strategies swells, financial advisors can add value by helping
clients better understand indexes and the investment products that offer access
Recent research conducted by Credo Consulting on behalf of
the Canadian ETF Association (CETFA) found that ETF investors are more
financially literate than other investors. Specifically, they “scrutinize their
investments,” “value transparency” and “are much more likely to get advice.” Importantly,
they are also “more prone to leave an advisor if they do not feel they’re
getting what they need.”
For advisors, this provides a business opportunity to offer
clarity and valuable knowledge around indexes and the investments that track
A rich history
Market indexes have been around for decades and have been
evolving ever since. In 1896, Charles Dow developed what is now known as the
Dow Jones Industrial Average. In 1926, the Standard Statistics Company
(predecessor to S&P Global) launched the 90-Stock Composite Price Index.
The FTSE Canada Universe Bond Index was introduced nearly 40 years ago.
The world’s first exchange-traded, index-linked investment
vehicle — the Toronto 35 Index Participation Units — launched in 1990 on the
Toronto Stock Exchange. The ETF industry recently celebrated its 30th
Historically, market indexes in Canada have been mainly the
“plain vanilla” variety, designed to benchmark the major equity and
fixed-income markets for retail products such as mutual funds and ETFs. But
more recently, the world of indexing has shifted significantly to include a
vast array of approaches that provide investors — both retail and institutional
— exposure to specific portions of the market.
The Index Industry Association, a New York-based trade
association for index providers, now reports that there are 2.96 million
indexes worldwide, as at October 2019, with fixed-income indexes growing the
most (7.15%) from the previous year.
Increased interest in exchange-traded products over the last
decade has stimulated innovation in indexing. New indexes have been developed
to meet the needs of investors and ETF providers and the offerings continue to
evolve and grow.
These include niche indexes covering geography, sector and
different investment themes. For example, indexes that track ESG-related
sustainable investments have grown dramatically in popularity. Other thematic
indexes that have cropped up recently include marijuana, eSports and liquid
Other market themes covered by indexes include factor-based
concepts, such as momentum or low-volatility, and alternative weighting
indexes, such as equal-weighted indexes or dividend-weighted.
ETF providers seek indexes that best suit their
requirements. According to Vanguard Canada, choosing the right benchmark for
their ETF products is a vital part of the process: “Index providers’
methodologies vary, so two benchmarks tracking the same market segment may
deliver very different results. We believe that selecting an appropriate
benchmark is crucial to providing a best-in-class ETF.”
With such a range of indexing options available to
investors, advisors have a unique opportunity to expand their knowledge in
order to utilize the most appropriate tools to meet their clients’ needs.
Staying ahead of the curve
Canadian-listed ETFs surpassed $200 billion in assets last
year, clearing $204.8 billion before the New Year’s Eve countdown was complete.
It was an historic milestone, absolutely, but less so because of the assets and
more because of how quickly they accumulated. It took 26 years (from the 1990
launch of that first ETF in Toronto) to reach the $100 billion mark in May
2016. But the next $100 billion took just a little over three years. In that
same time period (May 2016 to December 2019), ETFs share of total investment
fund assets in Canada jumped from 7.3% to 11.2%.
With investor demand for ETFs showing no signs of slowing
and Canadians more educated about the role indexing plays in their portfolios,
advisors can differentiate themselves in the marketplace by better meeting the
demands their clients — especially where new and innovative index-based
strategies are concerned.
Steve Hawkins is chair of the Canadian ETF Association
(CETFA) and CEO of Horizons ETFs Management (Canada) Inc.
here for the original article.