Canadian investors are putting more of their money into exchange-traded funds (ETFs), according to recent data, even as the U.S.-led trade war rocks global stock markets, and some experts say rookie retail investors are at higher risk.
Net sales of exchange-traded funds — a basket of stocks that can be bought and sold throughout the trading day — are outpacing those of mutual funds in Canada, especially among retail investors, according to a CIBC report published earlier this month.
Mutual funds, which are sturdier investment products that have more embedded fees and fewer tax advantages, still make up a larger portion of Canadian investment portfolios. They’re usually actively managed by a professional and are exposed to fewer intraday market swings because they’re traded once per day after market close.
Yet ETFs have grown at three times the rate of their older cousins in the last five years, signalling a shift in how both retail investors and professionals are approaching their investment strategies. Sales for both dropped dramatically in 2022, at the onset of the inflation crisis.
“People have been disappointed with [mutual fund] performance for a long time, and historically, most people have had more investments in mutual funds than in ETFs,” said Dan Hallett, a Windsor, Ont.,-based vice president of research for Highview Financial Group.
“More people are paying attention to the costs that are embedded in their investments and the ETF structure is generally a lower-cost vehicle than a mutual fund, particularly on the retail side,” he said. “But it’s also happening at the advisory level.”
In fact, ETF assets (the value of all the equities and cash held in the funds) reached an all-time high of $518 billion in 2024, a report from the Investment Funds Institute of Canada shows. Those assets have ballooned by nearly seven times in the last decade.
Retail investors are contributing heavily to that growth, both reports say, as more people opt to take their investments into their own hands rather than pay a professional financial adviser the fees to manage their portfolios.
But there are concerns about risk. South Korea, worried about rookie retail investors who are buying exchange-traded products (including ETFs) by leveraging debt, has introduced a one-hour mandated training for those who manage their own investments.
In the U.S., investment management company Vanguard’s VOO has become one of the world’s best-selling ETFs by bundling the highest performing stocks from the S&P 500 index.
The company’s own risk scale, which measures the likelihood of losing money on an investment, puts the VOO at a risk level of four out of five, for products that are “broadly diversified but are subject to wide fluctuations in share prices.” It recommends it for long-term investors.
Sal D’Angelo, the head of product at Vanguard Canada, says there are a few reasons why ETF uptake has grown substantially in the last several years.
Both retail investors and professional portfolio managers are moving to lower-cost options; There’s more interest in indexing, which is a passive investment strategy that matches an index’s best-performing stocks, rather than trying to beat the index’s growth; and there are more retail investors buying ETFs in general.
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Vanguard Canada’s version of the S&P 500 ETF is listed on the Toronto Stock Exchange under the VFV ticker. It boasted an annual return of 35.24 per cent last year and 23.3 per cent in 2023. This year, in the wake of a tariff-induced roller-coaster market environment, the ETF is showing a year-to-date loss of -3.07 per cent.
D’Angelo argues that ETFs work well in these conditions because of their flexibility. “ETFs as a vehicle, I think, work really well in volatile markets because they have that immediate liquidity if you do want to trade,” he said.
Others say that the influx of investors buying ETFs under volatile market conditions poses some concerns.
“It’s concerning to me in terms of the impact on investor outcomes,” said Hallett. He thinks the same factors that left some investors disappointed in mutual funds could eventually afflict ETFs, too.
“When you have investors that are trying to build a portfolio and they’re bombarded with almost a dizzying array of choices, only the most disciplined and knowledgeable investors will benefit from that and can easily sift through it,” he said.
“Everybody else is going to get very distracted,” Hallett said, “and that’s where you end up with a disappointing performance.”
The data comes as a new generation of investors have game-ified day trading, buying and sell stocks at the drop of a hat from their phones and tablets.
Automated tools — which let investors set trading parameters that are then executed by a bot, like selling a stock when it hits a certain price — are also seeing more frequent use.
Tradeweb, a company which operates marketplaces for traders, saw an 83 per cent jump in the number of retail investors using automated tools to make trades in April compared to the same month a year earlier.
“Something we haven’t seen so prolifically in previous periods of market volatility is an increase in clients turning to automation,” wrote Adam Gould, the global head of equities at Tradeweb.
“However, in April, we saw investors using automated tools [to] enhance reactivity to a challenging trading landscape with greater speed of execution.”
Marius Zoican, an associate professor of finance at the University of Calgary, studies the gameification of investing and monitors retail investor behaviour.
“If the market goes up five per cent within a day or drops five per cent intraday, and if you are holding ETFs and you are receiving these notifications, it’s very tempting to act on them, even though those are about past performance,” he said.
“Once you’re sort of nudged … into this idea that the market is going down, you’re likely to just go on your phone and and sell. And that’s perhaps not [the] optimal behaviour.”
He added that during highly volatile times, like the period we’re currently in, ETFs can face a liquidity rush if too many people try to sell at the same time.
“That might create a divergence between the price of the ETF and the price of the underlying basket,” he explained, whereas mutual funds managed by a professional have more guardrails against impulsive investment behaviour.
“When there’s a lot of volatility, there are always additional risks for retail [investors], for small investors who may act impulsively.”
