Record ETF flows mask true institutional conviction: experts

Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on ETFs, how pensions are using them and the role it plays in institutional portfolios. 

Canadian ETFs are on pace for another record year, but three industry leaders caution that the headline numbers may obscure more than they reveal about where institutional conviction sits.

Alan Green, vice president and head of ETFs at Scotiabank Global Asset Management, pointed to a recent Crisil Coalition Greenwich survey showing 60 per cent of North American institutions now use ETFs, and of Canada's roughly $1 trillion in ETF assets, an estimated 20 to 25 per cent is institutional.

Moreover, through the first half of 2026, Canadian-listed ETFs pulled in more than $100 billion in net flows, with July alone adding another $18 billion.

What ETF flows tell institutional allocators

Still, Green said ETF flows "are a measure of activity, not necessarily intent," adding institutions routinely swap between futures and ETFs based on cost efficiency, use ETFs as parking vehicles during manager transitions, and execute derivatives trades with ETFs as the underlying - all of which can create the appearance of a directional bet when none exists.

Additionally, a hedging trade through an ETF, for instance, may signal the opposite of what the flow data suggests on the surface. That said, Green acknowledged that with roughly 70 per cent of the ETF market driven by advisors and retail investors, aggregate flows do offer a useful gauge on broader sentiment.

While the current tilt toward international equities, driven by US concentration risk and stretched valuations, tracks with fundamentals, he cautioned against “seeing individual big-ticket trades and suggesting that really does express sentiment," he said.

ETFs are a vehicle, not investment strategy

"The biggest thing that I see and the biggest mistake, if I can, that I see that the industry is shifting is the conviction that ETFs are the right way to invest. It's not. It's the vehicle," said Sal Ammirato, head of retail distribution and channel distribution at Sun Life.

"I think it's actually a big mistake to assume that flows equate conviction," he added, emphasizing large flows can represent rebalancing, cash equitization, liquidity management, or model portfolio adjustments - none of which indicate a durable investment view.

He believes the industry is devoting too much attention to the wrapper and not enough to the underlying strategy and investment outcome that allocators are trying to achieve.

To that end, Ammirato challenged the assumption that ETFs are low cost by nature. While the vehicle carries that perception, many ETFs still charge management expense ratios well above 1 per cent.

"It's the vehicle that is giving the perception that it's low cost," he said.

The active vs. passive debate in ETFs

The more productive question for institutional investors, he argued, is whether a given market is efficient enough to warrant passive exposure over active management - and whether swapping one for the other can reduce fees without sacrificing outcomes.

He draws a clear line between passive and active ETFs. For Ammirato, passive means low-cost index replication, where fee compression continues to push pricing toward zero. Active ETFs, by contrast, are gaining ground in markets where achieving the right exposure is harder.

"If we think about emerging market exposure, international, or global equity exposure coupled with fixed income ETF exposure, that's where we're seeing the growth of the active ETF component because it's different and more challenging to get the right exposure and investment outcome that either retail and/or institutional investor is looking for," he explained.

According to Ammirato, passive ETF growth took root in the aftermath of the financial crisis, when advisors needed an alternative to what they had been doing. The 16 years since have seen the market evolve from a passive-first landscape into one where active and passive strategies sit side by side, a dynamic he said is far more pronounced in Canada than elsewhere.

"Around the world, investors and institutional investors are going for low-cost passive and they’re looking at it as bulk beta. In Canada, we're still blending active and passive," he explained, noting that Canadian active ETF AUM is higher than global norms.

He attributed that gap to vehicle preference rather than any distinct investment thesis. Where passive adoption tends to make sense in efficient markets where investors want execution, liquidity, and cost reduction, active ETFs, meanwhile, have gone through rapid iterations - from smart beta to traditional active strategies packaged in ETF form to the current wave.

“The continued evolution of that is now factor exposure, sector tilts, systematic trading, which is now introducing itself into institutional investors. And that's how they're beginning to allocate on the equity side of positions,” explained Ammirato.

Equity ETFs drive record flows

Equity ETFs have captured over 60 per cent of 2026 flows, according to Green. International equity ETFs are leading the charge, with Bobby Eng, head of institutional ETF distribution at Franklin Templeton estimating roughly $38 billion flowing into international strategies year to date.

"We're seeing that shift away from not necessarily Canada, but certainly away from US markets," he said, adding concentration risk in US tech and AI names is pushing capital into Europe, Asia, and Latin America.

Ammirato frames the equity ETF story less as a structural shift and more as a maturing of how institutions think about portfolio construction.

"Originally they were viewed as short-term trading. Today they're viewed more in terms of long-term allocation and a significant staple, if you will, within the constructs of a portfolio," he said.

Eng disagrees that asset allocation itself has changed, noting the total allocation between equity, fixed income and alternatives have remained steady over the past few years.

“It's really a shift between what vehicles they're using and what part of the equity market that’s being invested in," he said.

Green offered a concrete example of why ETF flows can mislead, underscoring that institutions will regularly swap between futures positions and ETFs based on roll costs and management fees.

"You might see what looks like a massive allocation to international ETFs, but really it's just maintaining a position. So they've just flipped from a future into the ETF and then they might flip back next month," he said.

ETFs are no longer short-term tactical tools

Green ultimately expects 2026 to be a record-breaking year for Canadian ETFs by a wide margin, with net assets closing in on $1 trillion after already surpassing that mark on a gross basis. He sees the US market heading for a record year as well.

The bigger story, in his view, is that institutions are beginning to move beyond treating ETFs as short-term tactical tools.

"I think it's that structural shift to using ETFs for different and long-term allocations that institutions maybe have undervalued," he said, pointing to the pace of industry growth as evidence that adoption is accelerating - the first trillion in Canadian ETF assets took decades to accumulate, but the next trillion could arrive in a fraction of that time.

For institutions moving large amounts of capital, a deeper and more liquid ETF market “is really beneficial," he said.