Two Thematic ETF Types I'd Like to See Launch in Canada

Canada's ETF industry has a history of firsts. The world's first exchange-traded fund originated here in 1990 as the Toronto Index Participation Shares (TIPs), which eventually evolved into the iShares S&P/TSX 60 Index ETF (XIU). Canada also beat the U.S. to market with spot cryptocurrency ETFs.

Another Canadian specialty is high-interest savings account ETFs (HISA ETFs), which offer a liquid alternative to traditional savings accounts, with competitive monthly interest income linked to prevailing deposit rates. While these funds aren't deposit-insured and their principal isn't guaranteed, they've become a distinctive part of Canada's cash-management ETF landscape.

Today, according to Cboe Canada's ETF screener, Canadian investors have access to 2,133 ETFs. The market is strong in all-in-one asset allocation funds, covered-call ETFs, including lightly leveraged variants, and, more recently, single-stock ETFs, although I'm personally less enthusiastic about the latter.

However, the U.S. market remains considerably larger, with 5,803 ETFs listed according to ETF Central’s screening tool. In fact, the flagship Vanguard S&P 500 ETF (VOO) alone has surpassed US$1 trillion in assets, exceeding the size of Canada's entire ETF industry.

There's certainly merit in Canadian issuers continuing to build on products that have already resonated with investors. But I also think there's room for more unconventional strategies. ETF product development sometimes gets compared to throwing spaghetti at the wall and seeing what sticks.

Having reviewed hundreds of ETFs over the years and spoken with retail investors on both sides of the border, I figured I'd offer two informed thematic suggestions of my own today.

Critical Minerals ETFs

Canada has a strong materials sector, supported by a substantial mining industry with particular strengths in gold and base metals. Canadian investors have no shortage of ETFs targeting these industries, especially gold miners. Beyond conventional market-cap-weighted funds, there are ETFs focused on junior miners and even covered-call strategies.

One area I think remains underrepresented is critical minerals. These include resources such as lithium, uranium cobalt, nickel, graphite, rare earth elements and copper, which play important roles in everything from electric vehicles and battery storage to semiconductors, renewable energy infrastructure and defence technologies.

Within Canada's ETF market, lithium, copper, and uranium have received some attention, but the selection becomes thinner beyond those categories. That's surprising given Canada's ambitions to expand its domestic critical minerals supply chains and reduce dependence on foreign capacity.

What's even more interesting is that one of Canada's best-known resource investment managers, Sprott, already offers a much broader lineup south of the border. Alongside its gold and silver mining products, Sprott's U.S.-listed ETFs provide exposure to uranium and copper miners, including junior mining variants, as well as lithium and nickel.

On the Canadian side, however, Sprott's listed investment offerings remain much more concentrated in physical precious metals close-ended trusts. I have no issue with those vehicles, but would personally welcome a broader selection, particularly from a manager with Sprott's sector expertise.

An especially straightforward opportunity, in my view, would come from VanEck. In the U.S., the firm already offers the VanEck Rare Earth and Strategic Metals ETF (REMX), which has attracted approximately US$1.46 billion in assets under management.

Given VanEck's recent expansion into the Canadian ETF market, I think a TSX- or Cboe Canada-listed version of REMX could be a compelling addition. Rather than developing an entirely new strategy, VanEck could potentially offer a Canadian-listed wrapper around its established U.S. fund.

For Canadian investors interested in resource security, electrification and the diversification of critical mineral supply chains, I suspect such a product would find an audience. It's a relatively obvious gap in a market that already has extensive exposure to traditional mining industries.

International Defense ETFs

Once a relatively neglected corner of Canada's industry-specific ETF market, defense investing has suddenly moved into the spotlight. Canadian investors now have dedicated offerings from iShares, Global X and, more recently, Ninepoint Partners.

However, with the notable exception of Global X's offering, much of the selection remains heavily concentrated in U.S. aerospace and defense contractors. There's certainly nothing wrong with that. The American military-industrial complex dominates global defense spending and procurement.

But the U.S. is hardly the only country with a substantial defense industry, particularly as its allies prepare for a geopolitical environment in which they may need to assume greater responsibility for their own security. Europe is an obvious example.

NATO's push toward higher defense spending commitments, combined with efforts to rebuild domestic manufacturing capacity and reduce dependence on American suppliers, could create opportunities for European aerospace and defense companies. Some Canadian-listed defense ETFs offer international exposure, but it generally remains secondary to their U.S. holdings.

South of the border, however, more geographically specialized products have already attracted considerable investor interest. One example is the Select STOXX Europe Aerospace & Defense ETF (EUAD), which has US$904 million in assets under management and charges a 0.50% expense ratio. The fund holds 22 companies across Europe's defense ecosystem.

Admittedly, this is a niche strategy, and I wouldn't expect it to attract the same assets as a broad U.S. defense ETF. Geographic concentration also introduces additional risks, including currency exposure, political developments and dependence on regional procurement budgets.

Nevertheless, I think there's a case for bringing similar products to Canada. Under Prime Minister Mark Carney, the country has placed greater emphasis on diversifying its trade relationships, strengthening domestic defense capabilities and working more closely with partners beyond the United States.

That broader shift could also influence how Canadian investors approach defense investing. As countries increasingly pursue strategic autonomy and diversify their military suppliers, investors may become more interested in companies operating outside the traditional U.S. defense establishment.

A Canadian-listed European defense ETF or even a diversified international defense fund excluding the United States would help fill that gap. Given the direction of global defense spending and Canada's evolving relationships with its allies, I think these are niches worth exploring.