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Investors Shift Focus: Canadian Mutual Funds and ETFs in the High-Interest Rate Era

 

Amid high interest rates and market volatility, Canadian investors have made significant adjustments to their investment portfolios. The spotlight is on both mutual funds and exchange-traded funds (ETFs) as they navigate this challenging landscape.

Over the past year, Canadian mutual funds experienced a rollercoaster of net redemptions. Investors pulled billions of dollars out, creating a trend that persisted for 11 consecutive months. The pattern began when the Bank of Canada initiated a series of interest rate hikes in March 2022. With short-term product rates reaching nearly six percent, many investors shifted toward more conservative investments. Additionally, market volatility played a role, affecting their willingness to invest in stock and bond funds.

Some notable net outflows from mutual funds include:

  • June 2022: A net withdrawal of $10.4 billion
  • September 2022: A net withdrawal of $9 billion
  • October 2023: A net withdrawal of $12.5 billion

In contrast to mutual funds, Canadian ETFs have maintained a more stable trajectory. While sales of ETFs have also slowed during this interest rate cycle, they have remained net positive. In 2023, ETFs saw net sales of $37.6 billion, slightly up from 2022 but down from their peak of $58.3 billion in 2021. These figures come from the Investment Funds Institute of Canada’s 2023 investment funds report.

The move from mutual funds to ETFs reflects a broader trend seen not only in Canada but also in the United States. Investors are shifting from more expensive mutual funds to the cost-effective alternative of ETFs. The appeal lies in the efficiency and flexibility of ETFs, which offer exposure to a diversified portfolio of assets at a lower cost.

As the high-interest rate era continues, investors will likely keep adjusting their strategies. The rise of ETFs and their ability to provide cost-effective diversification will remain a key factor in shaping the investment landscape.


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