Despite being the foundation of cost-conscious investor portfolios since the world’s first ETF was launched here in 1993, ETF awareness has grown incrementally among Canadian investors. But the latest investment stats show these quiet workhorses are finally reaching a tipping point.
Investor education has provided decided impetus, due, in part, to a growing number of ETF industry voices contributing to conversations, says Pat Dunwoody, executive director of the Canadian ETF Association (CETFA). “When I started in this sector, there were seven providers,” she says. “There are now 35.”
Among them are the mutual fund companies that were initially viewed as the competition. “Everyone is finally seeing that the ETF framework just makes sense,” says Ms. Dunwoody.
Demand across generations has led to the introduction of ETF products in all sectors, regions and price points, from fundamentally managed active solutions all the way to the plain vanilla index-type solutions.
For investors, necessity is another primary driver, she says. “One of the biggest new investment cohorts we saw last year was people over 65. Whether they’re working with an adviser or are self-managing their investments, they’re very conscious of longer life expectancy, and they often haven’t accumulated as much money as they’d planned. They’re asking how to extend their retirement funds, and one way is to look very closely at the fees they’re paying.”
While most financial advisers agree there is a place for professionally managed funds, there is also broad agreement that passive funds are an effective way to lower costs, especially in the core portfolio. While traditionalists may argue that the combined costs of ETF management fees and fee-based adviser costs are close to equivalent to mutual fund fees that include adviser commissions, paying adviser fees outside of the portfolio has undeniable advantages, says Ms. Dunwoody. “There is no compounding effect, which can have a huge impact when you’re trying to make your money go further.”
On the other end of the lifecycle, the other leading new ETF investor cohort is 25- to 35-year-olds, CETFA reports. “They’re starting their careers, and while they may not have a huge amount to invest, when they do, it has to be on an app. It has to be easy. That is where robo-advisers are making inroads. You can have an account in 10 minutes, with $50 or $100 going into it each time you get paid. You’re done. And if you have a question, there is a portfolio manager you can speak to.”
Tyler Mordy, president and CIO of Forstrong Global Asset Management, says, “There were many early converts attracted by the low costs, liquidity, tax efficiency and so forth. The phase we’re in now is all about, ‘We have this very expansive and far-reaching global toolset – what do we do with it? What’s the investment process?’”
In terms of investment valuations, the global outlook is “pretty lopsided,” Mr. Mordy adds. “In the major asset classes, cash and bonds are very expensive, commodities are so-so, and stocks in the U.S. are expensive. That leads value-conscious investors toward more attractive valuations in international and emerging markets.”
As a global asset manager, Mr. Mordy urges investors to think about their income-earning potential along with their investment goals. “You want to diversify away from the industry and region in which you work. When you have a recession, you don’t want to lose your job at the same time your portfolio value goes down.”
The world’s major Western economies are now in a slow-growth, lower-return stage, with aging populations, higher debt levels, lower interest rates and higher asset valuations, he says. “It’s essential to include some exposure to emerging markets, where most of global growth will be over the next 20 to 30 years.
“ETFs are a financial technology that makes it possible to build more globalized, diverse and robust portfolios. Am I going to overweight Chinese equities by trying to pick the right stocks? Or will I take a more diversified approach? Buying ETFs has become a no-brainer.”
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