By Tom Bradley

This week the 2011 sales numbers came out for Canadian ETFs (exchange traded funds). For the year, $7.6 billion flowed into ETFs (net of outflows) and total assets in the 200 plus funds finished at $43 billion.

While the number of funds exploded in 2011, the ten largest still accounted for 87% of net sales. Seven of the top ten best sellers had an income orientation, including bonds, preferred shares and covered call strategies. Under that theme, the BMO Covered Call Canadian Bank ETF, which was new in 2011, garnered the second most dollars overall ($708 million).

To put these numbers in context, net sales of mutual funds in 2011 totaled about $20 billion. There would have also been money flowing into individual securities and investment counseling firms.

To me, the EFT sales numbers are both underwhelming and disappointing.

They’re underwhelming because ETFs have been the rage over the last few years. There has been a constant flow of new products and the media and bloggers have written about ETFs extensively and positively. In the context of a wealth management industry with over $1 trillion in client assets, $7 billion doesn’t represent much of a market share swing.

There are some reasons why ETFs are gaining ground more slowly than I expected. First of all, it was generally a tough year for new flows. Weak stock markets caused investors to park more of their assets in GICs and high-interest savings accounts.

The second reason is structural. In Canada, the bank branches don’t sell ETFs directly. This leaves the ETF firms on the outside looking in at a large and growing part of the market. As a result of this, the sales numbers understate the rate of ETF growth in the distribution channels where they are available.

I’m also disappointed because when I strip out the flows (and assets) related to professional investors – institutional managers using ETFs for asset mix shifts and liquidity; hedge funds and market timers actively trading them – I have to wonder what portion is being used by individual investors to implement low-cost, long-term strategies. I don’t know the number, but suspect it pales in comparison to the money that’s going into high-cost, index-like structured products.

I also find the numbers disappointing because it appears there was some serious performance chasing going on. I recognize that fixed income ETFs are an improvement over most other pooled products, but the assets in this category increased 44% in 2011, a year when the bond market was up 10%.

At Steadyhand, we compete actively against ETFs (we recently published a report comparing Steadyhand clients to ETF investors), but I still want these simple, low-cost products to have a bigger impact on the industry landscape. The wealth management industry is making too much money off the backs of Canadian investors. I expect and hope that better equity markets, along with Vanguard’s entry into the market, will amp up these numbers in the years to come.