GUEST EXPERT. The first modern-day exchange-traded fund (ETF) was established in Canada in 1990! Since then, these open-ended funds traded on the main stock exchanges have experienced tremendous growth. Today, $ 6 trillion is invested in ETFs. Introduced in Canada in 2018, index ETFs with asset allocation are particularly popular. But why such a craze? Do they really represent added value? How can investors benefit from this?

Let’s talk a bit about ETFs first. Although there are actively, semi-actively and passively managed ETFs, in developed economies ETFs predominantly offer passive management, which means very low annual management fees. This is one of the main attractions of ETFs. Thus, ETFs have a management expense ratio (MER) that can be up to 10 times lower than that of an equivalent mutual fund (FCP).

According to Morningstar, a firm specializing in the analysis of various financial products, the average MER of an equity mutual fund is 2.23% in Canada. Thus, for an investment of $ 100,000, the investor incurs fees amounting to $ 2,230 per year. For an ETF, the average fee is 0.31%.

There are a lot of costs and challenges involved in actively managing a portfolio of individual stocks. You have to choose the right stocks at the right time, then you have to watch them, then sell them at the right time.

On the other hand, there are ETFs that will do all of the above, at only a fraction of the costs associated with most actively managed mutual funds.

But the biggest issue for investors when buying ETFs remains stock selection as well as portfolio rebalancing. With an actively managed ETF, the manager chooses and with a passive / index ETF, the index.

Index ETF with asset allocation

Since 2018, index ETFs with asset allocation, often referred to as “all-in-one” ETFs, have grown in popularity. With an index ETF, the investor must choose for himself the asset class in which to invest. For example, it will decide the percentage to put in the Canadian market and the percentage to put in Canadian bonds. Each passively managed index ETF invests in one asset class at a time, which is different from asset allocation ETFs. Index ETFs with asset allocation aim to offer certain advantages over traditional ETFs:

  1. Efficiency and convenience for investors: The all-in-one ETF allows investors to choose an ETF based on their investor profile that encompasses different asset classes. For example, an investor with a balanced profile might choose an ETF that contains 60% stocks and 40% fixed income.
  2. Portfolio rebalancing: like an FCP portfolio, the all-in-one ETF rebalances itself automatically to respect the benchmark asset allocation.
  3. The median MER of FCP portfolios in Canada is 1.97%. These ETF portfolios have a significantly lower cost (0.20% on average for a balanced ETF portfolio) to investors. Keep in mind that the components of the All-in-One ETF are index funds, and the returns obtained will be similar to those of an index, which can be a good thing, as they will simply follow the evolution. of the stock market

Thus, for an investment of $ 100,000, an investor could benefit from a gain of $ 1,700 just with the saving in management fees.

You can invest in ETF portfolios with a conservative, balanced or growth investor profile.

At the same time, with advantages also come certain constraints:

  1. No Advice: These ETFs are intended for independent investors who may not be looking for advice. Buying and selling is like buying or selling a stock in a brokerage account.
  2. Managing Emotions: As a self-directed investor, it’s easier to buy and sell ETFs when under the pressure of bad financial news. Wanting to “market timing”, that is, trying to buy low and sell high, can adversely affect the overall performance of an investor’s portfolio over the long term.
  3. Goals and Investments: While it can be beneficial to invest in an ETF portfolio, the link to financial goals such as retirement planning is more difficult to make when the investor is independent. The advice and recommendations of a financial planner will be necessary to optimize the situation.

ETF portfolios allow for sustained, sustainable asset allocation that respects the investor’s profile, but this is not the silver bullet and the constraints of this type of financial product must also be considered.