Has choosing an exchange-traded fund (ETF) become as difficult as picking individual stocks on the market?
With over 1,400 ETFs available in the country from around forty manufacturers, the novice can certainly be intimidated at first glance.
“A decade ago, there were only 275 ETFs and six providers. That gives you an idea of how the industry has evolved over the last decade,” Erika Toth, head of ETFs at BMO Global Asset Management, said in an interview.
Issuers are becoming increasingly creative in finding new users and new uses for their products, CIBC analyst Ian de Verteuil said in a report released earlier this summer.
What is an ETF?
An exchange-traded fund (ETF) is an investment fund whose securities are traded on a stock exchange like company stocks.
Index ETFs are considered passive funds because they usually follow a benchmark index. In contrast, active ETFs have portfolio managers who make investment decisions with the goal of generating a higher return than the market. The manager who manages the ETF therefore tries to achieve a higher return than a benchmark index and the Quebec stock market regulator points out that the fees for these ETFs can be higher than those that simply aim to replicate an index.
Some ETFs don’t necessarily track stock indices. They can also track commodity prices (oil and gas, for example). They can also track currencies and thus move with exchange rate fluctuations, or track indices of bonds, precious metals, commodities, etc.
“It’s hard to be negative when talking about the growth of ETFs. It’s been a flagship product for several years. There’s growth in all distribution channels,” said Jean-François Girard, director of development and investment fund management at Desjardins, during a conference organized in June by the Cercle Finance du Québec.
“The year 2024 is shaping up to be one of the record years for ETFs,” added Laurent Boukobza, vice-president and ETF strategist at Mackenzie Investments, during the same conference.
For the vice-president of business development at Global X, Marie-Chantal Lauzon, the success of these investment vehicles in the country is linked to the low management fees associated with passive (index) ETFs.
“It is very difficult for an active manager over 10 years or more to outperform an index like the S&P 500. This is one of the reasons why ETFs are popular,” she stressed at the conference.
As of early June, assets under management in the Canadian exchange-traded fund (ETF) industry stood at $470 billion.
How to choose ?
Most assets remain concentrated in the largest firms. The Ishares (BlackRock/RBC), Vanguard and BMO ETF families share almost 70% of the ETF market share in the country.
For index ETFs – those that track an index – and asset allocation ETFs (commonly referred to as all-in-ones), the products offered by the big three providers are “very similar” in terms of fees, liquidity and exposure, says Erika Toth.
Exposure means content, whether geographic, sectoral, etc.
The choice of an ETF (and therefore of its manufacturer) by an investor, according to Erika Toth, will often be linked to the ease with which the investor finds the information he wishes to unearth.
Several ETF manufacturers offer tools to compare products. Fees, performance and exposures are all important points to consider when analyzing potential products for a portfolio, notes Erika Toth.
How to buy it?
To buy and sell ETFs – which fit into registered accounts like a TFSA, RRSP, RESP, etc. – an investor can open an online brokerage account with a major bank, with Desjardins or with independent firms like Wealthsimple and Questrade.
An index ETF like the S&P 500 ETF may be appropriate for one investor, but less so for another.
“That exposure is good for an investor with a 20-year horizon because the S&P 500 is a very difficult index to beat over the long term,” Toth says. “But it’s not as good for someone with a shorter horizon or who will need to draw income from their portfolio because if there’s a market pullback, they won’t be able to regain the value.”
If an investor is in or near retirement, an ETF that tracks the S&P 500 may not be the best investment vehicle. “That investor might want to consider a dividend ETF, a low-volatility ETF, or other strategies to protect capital rather than an index approach,” Toth says.
It’s relatively simple to look at the major ETFs that cover the major stock and bond markets, according to Idema Investments President Ian Gascon.
“In the end, an all-in-one ETF is relatively easy to choose. There are many, but if you stick with the largest in terms of assets, the risks of making a mistake are relatively low for basic exposure,” he believes.
“Where it gets complicated,” says Ian Gascon, “is when you want to go further and build a different portfolio. You have to know a little more about what you’re doing.”
Very popular, asset allocation ETFs can contain Canadian, American or foreign bonds as well as stocks. This is why our colleague and author of two books on investment Nicolas Bérubé calls them the “real Swiss army knives of investment”.
Younger investors may want to consider a growth-oriented portfolio of 80% stocks and 20% bonds. Examples of such ETFs from major providers include BlackRock’s XGRO, BMO’s ZGRO, and Vanguard’s VGRO.
An investor closer to retirement may prefer a more balanced allocation with 60% stocks and 40% bonds. Again, among the three major manufacturers, ETFs of this style are XBAL at BlackRock, ZBAL at BMO, and VBAL, from Vanguard. Even more conservative variations are offered in the form of 40% stocks and 60% bonds (XCNS, ZCON and VCNS).