Views from the ETF Trading Desk July 2024

While the dog days of summer can sometimes lead to anemic ETF flows, July 2024 builds on the record-setting hot streak for the Canadian ETF industry and brought on yet another strong month of fund flows. July saw nearly $7 billion of net new money enter Canadian ETFs, well-above the monthly run rate this year of ~$5.5 billion. For a brief period towards the end of the month, AUM across all Canadian ETFs surpassed the $500 billion mark – an impressive figure, representing a doubling of assets in the ETF wrapper in less than four years.

This past month, Canadian investors continued to tilt away from domestic equities and put their money to work buying US equities. ETFs holding US equities accounted for roughly a third of all ETF flows this month and reinforces the dominate theme of the year – a strong gravitational pull into the dominant market-cap weighted S&P 500 funds. That said, the S&P 500 underperformed both the TSX Composite and TSX60 in July. Net flows into Canadian equities were negative, however, some of the largest Canadian-focused ETFs had inflows in July.

From a factor perspective, there was a noticeable shift back towards Small Cap funds, with ETFs focused on smaller companies and acting as a counterpoint to the Mega Cap Mag 7 trade, seeing inflows. Quality Factor and Dividend ETFs also saw net inflows in July. Previous sector ETF darlings like Tech and Financials were more geared towards outflows in July, likely signaling investors are either profit-taking, or trying to reposition ahead of an expected market rotation or shift in market leadership. Another evident sea change was significant recent inflows into both Gold Bullion and Gold Miners ETFs, as the precious metal hit a brand new all-time high.

Despite the Bank of Canada cutting interest rates for the second consecutive month, investors continued to seek exposure in the shorter end of the curve – with ETFs holding Ultra Short and Short duration bonds netting decent inflows. Canadian Aggregate bond ETFs with duration periods closer to the intermediate range (3-7 years) also saw strong flows this past month as they rallied roughly ~2%, the biggest monthly move higher for this asset class in over a year.

Here are three things to consider when trading ETFs:

1. Order Types

Because ETFs can hold securities that trade in different jurisdictions or more alternative products like derivatives built into a Covered Call ETF, some consider a limit order when placing an ETF trade so that there may be greater control over execution price, although there may be a chance that your order won’t be filled if the ETF doesn’t hit the target price. Other order types include a market order, where the order is filled quickly at the best available current price, and stop or stop-limit orders, where the order is activated when the ETF reaches a certain trigger price. 

2. Underlying Liquidity

Often investors will look at the Average Daily Volume (ADV) and may conclude that the ETF does not have much liquidity. This may not be the case, as with the ETF creation/ redemption mechanism and ETF market makers, ETFs are mostly as liquid as the underlying holdings.

3. Spreads on the Underlying Securities 

   Since an ETF is essentially a basket of securities, the spread on the ETF will mostly reflect the spread on the underlying securities. If the underlying securities themselves are very liquid, the ETF should also be very liquid, and therefore have a small spread. An example of this could be large-cap U.S. stocks, which generally have high trading volumes and very narrow spreads. Asset classes that are not as liquid may have wider spreads.