ETFs and Mutual Funds – What are fund flows telling us?

Logo for The Advantaged Investor

ETF & Mutual Fund Specialist Luke Kahnert joins the Advantaged Investor to discuss ETF and mutual fund flows and looks at what trends in the industry and what they may be telling us about the mindset of investors, including:

  1. Why look at ETF and mutual fund flows?
  2. Review of the first half of 2023 in mutual fund and ETF flows?
  3. Trends in the growing Canadian ETF space
  4. HISA ETFs are a popular topic today – can you briefly touch on some of the updates regarding this ETF structure?
  5. Money market ETF structures that have been generating investor demand
  6. Trends in new product launches

Follow the podcast on LinkedIn: The Advantaged Investor

Please subscribe, rate and review. Reach out at

Listen to Advantaged Investor on Apple Podcasts  Listen to Advantaged Investor on Apple Podcasts




Chris Cooksey: Hello and welcome to the Advantaged Investor, a Raymond James Limited podcast. A podcast that provides perspective for Canadian investors who want to remain knowledgeable, informed, and focused on long-term success. We are recording this on August 14, 2023. I'm Chris Cooksey from the Raymond James Corporate Communications and Marketing Department today, mutual fund and ETF specialist Luke Kahnert makes his first appearance on the podcast, Luke and I will be discussing trends in the industry and how investors are using mutual funds and ETFs to grow their investments. Welcome to the Advantaged Investor, Luke. I hope you had a great weekend.

Luke Kahnert: It was a great weekend. Thanks for having me, Chris.

Chris Cooksey: Good to hear. Mutual fund and ETFs have been a part of portfolios that investors have used to grow and save their money for a long time now, so I'm looking forward to hearing what's new in the business and some of the trends. Does that sound good to you?

Luke Kahnert: Absolutely. Happy to be here. Thanks again.

Chris Cooksey: All right. Let's jump in. Maybe we should start off with why does one look at ETF or mutual fund flows?

Luke Kahnert: Yeah, flows, it's a great question. By analyzing ETF flows and mutual fund flows we can gain a better sense of market sentiment and further analyze which asset classes are currently popular, and how investors are just positioning their investments on go forward basis.

So, for instance, to give you an example, this year, back in March, we saw a ton of volatility in the financial services sector given Silicon Valley Bank, Credit Suisse, et cetera. What was really interesting was during the end of March we saw some significant positive flows into financial sector ETFs such as the equal way Canadian banks ETFs that are out there.

Which just shows that despite the volatility, investors were still saw the sector to be attractive and welcomed the idea of taking advantage of the volatility. And this is just one example of how analyzing flows can provide a better overall sense of investor sentiment.

Chris Cooksey: Okay. Now I used to work for one of bank mutual fund companies in the country, and monthly we'd get our email telling us our, our flows and the trends. And obviously when things were going very well there was a lot of positive flows and then when things weren't as well, there might've been a net redemption or two in there. So maybe you can just go over what has happened in the first half of 2023 in terms of mutual fund and ETF flows.

Luke Kahnert: Yeah, absolutely Chris. So it's a great question. Just taking a step back, if you look at the two investment vehicles between mutual funds and ETFs during the first half of 2023, overall Canadian mutual funds reported around $13 billion of net redemptions, this was driven primarily by net flows, out of balance and equity focused mutual fund categories, such as US equity, to give you an example there.

On the other hand, Canadian ETFs reported around 22 billion of net creations with fixed income ETFs capturing around $12.4, $12.5 billion of these flows between the two investment vehicles, mutual funds and ETFs were fairly aligned with both fixed income categories leading the charge for both. Where we've seen a difference is in terms of total flows between the two, with ETFs receiving more demand than mutual funds. This theme continues to carry out from last year. As you know, ETFs continue to experience rapid growth as a convenient investment vehicle for investors.

But in terms of AUM, even though ETFs are growing rapidly, the mutual fund market still occupies a total $1.9 trillion in AUM in Canada versus ETFs of $360 billion. So the ETF marketplace still has some catch up to do when compared to mutual funds on an AUM basis.

Chris Cooksey: That's an interesting trend, so maybe we could talk about some of the other trends you're seeing in this Canadian ETF space.

Luke Kahnert: Absolutely. So to answer simply, we continue to see a growing trend in cash-like ETFs. It's not the most exciting asset class to talk about, but when you have such strong demand in cash like ETFs, it really provides an indication of the cautious investor sentiment we're seeing in the market today. I was listening to your recent podcast with our Head Investment Strategist, Neil Lindsell discussing the R word, recession, and I believe that with the rise in interest rates, combined with the continued uncertainty we see in the market environment, naturally we've seen investor demand in money market and safe haven instruments such as these money market ETFs. So they continue to rake in positive flows month over month. And it's not surprising. I mean, some of these ETFs are yielding more than 5%, so it makes sense. We're seeing such strong demand here.

Chris Cooksey: So people are basically parking their money on the sidelines because they're not confident or they're saving for something specifically short term or they're not confident in the long-term perspectives right now.

Luke Kahnert: Yeah, absolutely. I mean, when you look past flows and just look at the ETF providers as well, we're seeing strong product development across money market. The money market category within ETFs specifically. So year to date, we have already seen nine new money market ETFs launch. And this will include HISA, ETFs, short term T-bill ETFs, and just the traditional money market. You know, strategies that have always been around in the marketplace. So right now there appears to be investor appetite for different money market flavours, for lack of better words.

Chris Cooksey: Okay. Now you mentioned HISA or high interest savings accounts. That product itself is not all that ancient when it comes to things. But my understanding is HISA ETFs are one of the more popular things you deal with at this stage of the game. So maybe just touch on some of the updates regarding that sort of structure within the ETF world.

Luke Kahnert: Sure. The HISA ETFs have been such a popular topic for the last year and a bit, I'd say. So to explain to our listeners, a high interest savings ETF or HISA ETF is like a savings account that trades on the stock market. These products are basically savings accounts available in ETF form, and the assets are comprised of deposits of high interest savings accounts placed with schedule one Canadian banks.

Not to go too deep into the weeds here, but the yields will move in lockstep with the Bank of Canada's interest rate policy and typically will provide a rate that is a bit higher than what you'd find in a standard savings account at a nearby bank branch. As a result of the rapid interest rate increases we've seen, this ETF structure received explosive demand throughout 2022, and we continue to see it in 2023.

Chris Cooksey: All right. In addition to these HISA ETFs, are there any other money market ETFs that are generating investor demand?

Luke Kahnert: Yes, and before I get into that, I should mention regarding HISA ETF that recently the Office of the Superintendent of Financial Institutions, also known as OSFI, the regulator of the Canadian banks, announced the review of the liquidity adequacy requirements for high interest savings account ETFs. So an update is expected to be provided in the fall, whether or not OSFI determines that these deposits need to be reclassified. To summarize, the review's still ongoing and the results of this review might impact these ETF products after it's completed, but for any investors who are interested in further discussing the topic I'd encourage them reach out to their Raymond James advisor.

Chris Cooksey: Makes sense. And obviously the reason why the regulator's doing this is to make sure that if someone withdraws their money, there's actually money to hand over.

Luke Kahnert: Exactly. I'll just say we're lucky in Canada that our industry is supported by a robust regulatory framework that is strong, but also flexible. So right now, ETF providers of HISA ETFs are working very closely with OSFI as they roll out this review. And I think this open structure is a key characteristic that allows our ETF industry to continue to innovate and grow as it's done in the past.

Chris Cooksey: Great. Alright. Let's hit on some of those other money market ETF structures.

Luke Kahnert: Sure, like I mentioned before, there's been nine new money market ETFs launches year. Some of these include traditional money market strategies available in ETF vehicle. These would invest in the combination of T-bills, bankers acceptances, commercial paper. Some are short-term T-bill ETFs that provide pure exposure to zero to three month US and Canadian T-bills. In a nutshell, within the money market category, there will be some slight differences in exposure. Providing an opportunity for investors to find a suitable money market strategy that fits their own risk profile. And if you look at the flows, this just an interesting stat, if you look at the month of July alone, there was nearly $3 billion that flowed into Canadian ETFs.

Overall, when you dig deeper within that number, money market ETFs lead flows with $875 million. So it's pretty significant when you think about it.

Chris Cooksey: Like a third then, right?

Luke Kahnert: Yeah, basically

Chris Cooksey: For an English major, Luke, that's good, man.

Luke Kahnert: A third going into cash like ETFs. So cash is very attractive and has been in demand by investors and it's exciting again, cash. Who knew? It's amazing what a few interest rate hikes can do, right?

Chris Cooksey: So, I mean, for the first time in your career, cash is exciting, right? Because when you came out of school, it was all equity.

Luke Kahnert: Yes, exactly. It's been a while since we've seen rates as high for a lot of people and it's certainly interesting to see when you look at ETF flows.

Chris Cooksey: Well, let's just finish off here then, as you mentioned, a lot of new ETFs have been launched in the category of money market. Maybe touch on the trends you're seeing in regards to new product launches.

Luke Kahnert: Perfect. Great question. Yeah, so I already mentioned the first theme is the money market and short-term fixed income category given the accelerated path of rising interest rates. So that has been huge. Number two, though, the second theme that, that we're seeing is a rise in the cover call ETF space. These strategies provide investors a potential enhanced yield using an options-based strategy. And in general, they tend to outperform their underlying holdings in sideways markets, when markets are volatile and the cover call strategy is able to generate a higher yield in these sort of environments and they will typically underperform in periods of rising markets.

Now what I find interesting about these product launches in both money market and cover call ETFs is that I like to think that ETF providers are always trying to forecast potential future investor needs down the road. Who knows what sort of market environment is in store for us, but I'd imagine ETF providers are always thinking and they want to ensure that they have solutions readily available in all sorts of different environments. On that note, the fact that we are currently seeing more money market ETFs and cover call ETFs launched this year, rather than your traditional equity ETFs may be an indication as well that our Canadian ETF providers are more focused on having those defensive strategies ready on their product shelf. Which is interesting to think, that our ETF partners want to make sure that they're focused more on the conservative and cautious strategies.

Chris Cooksey: Just because of the environment that's going on right now. I imagine.

Luke Kahnert: Yes.

Chris Cooksey: Right, makes sense. Well, Luke, that's a lot of great information. Really appreciate you taking the time out of your busy schedule to talk with us and I hope you'll join us again.

Luke Kahnert: Absolutely. Happy to, to join the call Chris, thanks so much for having me.

Chris Cooksey: Reach out to us at the Advantage Investor Subscribe to the Advantage Investor on Apple, Spotify, or wherever you get your podcast. Please contact your advisor with any questions you have. On behalf of Raymond James and the Advantaged Investor, thank you for taking the time to listen today. Until next time, well.

This podcast is for informational purposes only. Statistics and factual data and other information are from sources. Raymond James Limited believes to be reliable, but their accuracy cannot be guaranteed. Information is furnished on the basis and understanding that Raymond James Limited. Is to be under no liability whatsoever, in respect thereof, it is provided as a general source of information and should not be construed as an offer or solicitation for the sale or purchase of any product and should not be considered tax advice. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax related matters. Securities related products and services are offered through Raymond James Limited member of the Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Limited, which is not a member of Canadian Investor Protection Fund.