As of December, there were almost 12.7 million accounts in the online brokerage channel in Canada.Daniel Balakov/iStockPhoto / Getty Images
Five years after the onset of the COVID-19 pandemic, Globe Advisor is looking back at how the wealth management industry responded and how it has changed. Read the first article in our series here, the second article here, the third article here, and the fourth article here.
Half a decade after the first COVID-19 lockdowns hit, the wave of do-it-yourself (DIY) investors using low-cost discount brokerages has become a force in financial markets, influencing how investment fund companies design and market their products.
DIY investors hold approximately half of all assets under management (AUM) in Canadian exchange-traded funds, according to Toronto-based Investor Economics, an ISS Market Intelligence business. As of December, there were almost 12.7 million accounts in the online brokerage channel in Canada, up from 5.9 million in December, 2019.
For asset managers operating in Canada, the growth of the self-directed channel has flipped a distribution model that relied heavily on advisors before the pandemic on its head, triggering deeper efforts to appeal directly to end investors.
Raj Lala, president and chief executive officer of Evolve Funds Group Inc. in Toronto, says before the pandemic, 90 per cent of his firm’s distribution efforts came from face-to-face meetings with advisors.
“It was a complete shift in the way our entire distribution took place,” he says of the COVID-19 lockdowns in 2020. “And then we saw this DIY phenomenon start to explode.”
Rohit Mehta, president and CEO of Global X Investments Canada Inc., attributes the rise in DIY investing to the extra time people suddenly had when stuck in their homes five years ago, which led to more engagement with their investments.
“It’s become so important to meet investors where they are, where they want to consume information and how they want to consume it,” he says.
Both executives cite the pandemic as being directly responsible for the hundreds of thousands of Canadian investors who may otherwise have never become ETF buyers on their own.
Market gap
Evolve has benefited from the shifting market dynamics.
“The gap in the market when we entered it, in our view, was around thematic ETFs, focusing on long-term investment themes that were hopefully not going to be viewed as fads but had a really solid investment thesis attached to them,” Mr. Lala says.
Evolve created baskets that track cybersecurity stocks, equities with exposures to e-gaming and cloud computing, and electric vehicles.
“During COVID-19, all of these themes started to become very dominant in the news – and within social media, as well,” Mr. Lala says.
In turn, Evolve’s AUM has grown dramatically, to more than $7.5-billion today from roughly $500-million in 2019. Parsing the data to source whether those assets are held in discount brokerages or through advisors can be difficult, Mr. Lala says, but he adds more than one-third of AUM is now from the direct channel, a figure Mr. Mehta cites as well for Global X.
It’s meant many more marketing dollars and distribution efforts are being steered toward meeting individual investors where they are – on social media platforms such as YouTube and Reddit. Evolve allocates approximately half of its promotional budget to the direct investing channel now, according to Mr. Lala.
In October, Global X partnered with former BNN Bloomberg news anchor Jon Erlichman to launch a financial literacy YouTube channel to appeal to the DIY crowd.
Companies have also developed products to appeal to direct investors. Evolve continues to roll out thematic ETFs in areas such as artificial intelligence and cryptocurrencies.
As soaring inflation disrupted markets in 2022, many Canadian asset managers introduced income-oriented call-option strategies, which have become some of the most popular vehicles among DIY investors, Mr. Lala says.
These strategies are a clear sign of the focus fund providers are putting on the segment, Mr. Mehta says, noting segmentation extends even into broad-market index funds.
“How an institution will want [a broad index exposure], which is going to generally be benchmark replication, will be different than an end investor, who may want benchmark replication but with a covered-call overlay to generate monthly cash flow, or an exposure that is lightly levered,” he says.
“So, we seek to allow those different groups to own the underlying exposure but to meet their needs as efficiently as possible through that customization.”