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ETFs giving consumers what they want in uncertain times

By Andrew Rickard | July 29 2016 01:22PM

A report published by BMO Global Asset Management suggests that global economic uncertainty will encourage more investors to put their money into exchange-traded funds (ETFs).

The BMO report, which was published on July 28, notes that ETFs have gathered a record $10.6 billion in Canada so far this year, and that worldwide ETF assets under management have surpassed the $100 billion (CDN) mark and are now twice what they were just four years ago.

Sector specific ETFs

After the Brexit vote, the study points out that UK equities dropped by 10% over two days. In volatile times like these, BMO says investors are using to smart-beta ETFs which stay away from high-risk investments and can mitigate market downturns. Investors are also more interested in sector specific ETFs, since they can both capture market growth or be used to invest in defensive sectors such as consumer stocks and utilities.

BMO predicts that the growth of fixed income ETFs will outpace that of equity ETFs this year because both large institutions and individuals are finding it difficult to source and trade bonds. "While the liquidity of the ETFs is tied to the underlying asset class, exchange trading between buyers and sellers of mature ETFs adds an effective layer of liquidity," concludes the report.

Interest rates at persistently low levels

What's more, with interest rates at persistently low levels, investors are having a hard time generating sufficient yield. The report says that income-oriented buyers are opting for higher-yielding dividend ETFs and specialty ETFs to meet their cash flow requirements.

Finally, BMO says that investors are switching to ETFs because they allow them to manage their currency exposure. "With both hedged and unhedged ETFs available, investors can easily switch currency exposures while maintaining or shifting underlying portfolio exposures with a simple trade," reads the report. "Following Brexit, we saw the most immediate trading occur in favour of hedged international ETFs."

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