Many economists believe that business and consumer confidence have been extremely low during the pandemic, as we can see from the slow velocity of money circulating the economy. However, the driving demand towards Canada’s top 5 discount brokerages suggest otherwise.
Whilst demand has fallen and the saving rate has increased, this can be put down to the constraints of lockdown measures – it’s literally been difficult to spend our disposable income with many places closed, such as sports events, casinos, nightclubs, and so on.
However, we can see that this isn’t necessarily due to low confidence because much of the public has instead turned to trading and high-risk investing. Inexperienced people with spare money, spare time, and an appetite for spending/risk can account for this influx of retail investors. There’s plenty of evidence for this.
This isn’t about gatekeeping casuals out of investing, it’s just important to identify what is going on. Particularly so for Canadian discount brokers who are seeing Canadian traders sign up in large waves.
It does appear that there is a newfound confidence in people to manage their own investing. We can see this appetite for risk when we view the behavior of the market and just how much it’s affected by new retail investors.
Retail trading accounted for around 15% of all US equity trading volume from 2014 to 2019 – it was extremely consistent. From 2019 to 2021, this has exploded to around 23% – now above Quant Hedge Funds. In fact, Quant Hedge Funds volume has decreased since 2018, suggesting that even some of this retail investing could have been from those previously using funds.
This rise in retail investing is essentially a shift in power – everyday investors now control the market more than they did two years ago. This is extremely evident with the GameStop scenario, in which Reddit and other social media platforms drove a profound price surge and held it for months in an attempt to save GME from being shortened by “the big guys”.
The real value of GME never changed – their financials, operations, staff… Nothing had changed to the underlying value of the company, yet retail traders had increased the market cap from $0.26bn to $22.59bn in a matter of a month or two. Even today, six months after this frenzy, the market cap remains to be held at around $12.26bn.
This shows the confidence in many retail investors and the willingness to participate in social trading – or meme trading as some have dubbed it. It also has effects in other areas too, with fan-favorite firms like Tesla getting particular attention and priced highly.
Whilst Robinhood and a few other US brokers have seen the most amount of sign-ups, there are many brokers in Canada that are trying to compete for the business of Canadians.
Only recently, InvestorLine of BMO bank revealed new commission-free access to over 80 ETFs in an attempt to get the business of DIY investors. This is a very recent reduction that is clearly a response to the “commission-free” trading platforms that are essentially gaining signups under the precedent of being free of fees – something highly attractive to retail investors that are prioritized above speed, UI, charting capabilities, research tools, and so on.
“The Canadian ETF industry continues to expand and diversify as providers innovate in response to investor demand,” stated Silvio Stroescu, the head of InvestorLine.
Whilst it may appear that retail investors are recklessly betting on individual firms, that would be an unfair reputation. Many are simply better educated on the stock market than retail investors used to be, and live by the philosophy of “time in the market beats timing the market”.
The accompanying investment strategy of this mantra is thus to invest in well-diversified ETFs that capture the average market returns whilst mitigating risk – something that Warren Buffet certainly approves of. Not only are retail investors, therefore, capturing average market returns (which is more than many active funds can provide), but ETFs are cheap, as we have seen with BMO’s InvestorLine – and low-cost investing is important.
InvestorLine isn’t the first, and certainly won’t be the last, to offer commission-free trading possibilities to Canadians. For example, Toronto-based QuestTrade already offers free ETFs on all available ETFs, as well as no account fees and low trade costs elsewhere.
US discount brokers are looking relatively unstoppable right now, and many offer the lowest fees on the market for Canadians. However, the low fees of BMO and QuestTrade could certainly be enough to persuade many Canadians, seeing as there are benefits to using brokers from your own country.
The benefits include denominating your money in your domestic currency to avoid currency risk, along with avoiding any foreign withholding of tax on dividends – as this is considered to be overseas income. For Canadians wishing to purchase US stocks, it’s relatively easy to use a money transfer company to exchange the funds prior to depositing them into a Canadian broker like QuestTrade. This way forex fees are kept to a minimum and users are highly aware and involved in the exchange process, which is a healthy reminder of the currency risk they’re exposed to.
Canadian stock brokers will simply be more helpful and effective in solving issues for local customers too, with no extra legal steps and administration to take. We certainly won’t see US brokers slow down anytime soon, but once Canadian stock brokers are offering commission-free trading too (some already are) along with similar markets and products, then the choice will be much easier to use domestic brokers.
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