Daniel Straus, director of ETF research, National Bank of Canada Financial Markets

FOCUS: ETFs and financial products

MARKET OUTLOOK:

The last time National Bank’s ETF research analyst appeared on Market Call was Jan. 22, 2020, three days before the first presumptive case of COVID-19 was reported in Toronto. A simpler, more innocent age? Not really—while we might gaze back on the “before times” with a fond sense of nostalgia, the world then was as complicated as it is now, with the seeds of the coming turmoil already sprouting from the surface. Including coronavirus cases overseas, border disputes in Eastern Europe as well as wild and wacky news on social media growing stranger by the day.

Nearly three years later, the Canadian ETF market has grown from $200 billion to over $300 billion across 42 providers. 1,296 ETFs now find their home in Canada after 146 new products launched year-to-date. While 2021 was a record-breaking inflow year of $52 billion inflows, 2022’s heightened volatility and precipitous drawdowns mean that year-to-date, “only” $28 billion of new money has flowed into the Canadian ETF landscape, evenly split between fixed income and equities.

National Bank’s economists and strategists have been positioned for a “stagflation” environment all year, with a bias towards inflation-resistant markets like Canada, but more recently they have reduced equity allocations overall given the dramatic market rebound since October. In geographical terms, within equities, they’ve trimmed emerging markets in favour of the United States and EAFE regions, while maintaining their Canadian equity overweight. There is a renewed likelihood that we’re closer to the end of the U.S. Federal Reserve’s hiking cycle than the beginning. Measures of all-item inflation may return to target levels as early as mid-2023, leaving room for central banks to cut rates in the third quarter of next year. For now, our strategists assign a 50 per cent probability to the base-case scenario, economic stagnation with slowing inflation.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS

Purpose Core Dividend ETF (PDF TSX)

This ETF follows a fundamental dividend analysis approach incorporating quality criteria and ESG considerations, sub-advised by Neuberger Berman. At 0.63 per cent in MER, it’s not the cheapest dividend ETF in Canada, but it’s one of the few that offer exposure to a mix of Canada and the U.S. in one fund. Because it is structured under Purposes’ mutual fund corporation, it is able to pay out its distributions as Canadian-eligible dividends.

Horizons Resolve Adaptive Asset Allocation ETF (HRAA TSX)

This ETF comes from the growing category of “alternative” products, designed to complement a diversified portfolio of equities and bonds. There are many new ETFs in the marketplace that cater to this segment, some using hedge fund “replication,” market-neutral long and short positions, or a combination of quantitative strategies. HRAA actively combines a systematic risk parity model with long and short global macro and dynamic tail protection. This ETF may not be for everybody, but for those investors seeking a small position that can complement a traditional balanced portfolio, it’s worth investigating. MER is 3.2 per cent because of an embedded (hedge-fund-like) performance fee.

BMO Discount Bond Index ETF (ZDB TSX)

Aggregate bonds have had the worst year since the launch of the first ever bond ETF in Canada 22 years ago. ZDB offers very similar exposure to mainstream benchmark indices, but it selects those bonds with comparatively low coupons (and market prices) for tax efficiency. Considering its effective duration of 7.5 years, ETFs like this have borne the brunt of the rate risk that up-ended bond markets in 2022, but aggregate bond ETFs still form the core of many client portfolios. MER is 0.10 per cent, among the lowest on the market.

PAST PICKS: January 22, 2020

CI Morningstar Canada Value Index ETF (FXM TSX)

• Then: $15.33
• Now: $20.86
• Return: 36%
• Total Return: 46%

Vanguard FTSE Emerging Markets Index ETF (VEE TSX)

• Then: $35.59
• Now: $32.75
• Return: -8%
• Total Return: -2%

iShares Canadian Short Term Bond Index ETF (XSB TSX)

• Then: $27.60
• Now: $25.82
• Return: -6%
• Total Return: -1%

Total Return Average: 14%