All-Weather ETFs for Canadians
ETFs have democratized investing for Canadians. Here we take a look at a selection of ‘all-weather’ ETFs for a diversified portfolio.
Most personal investors do not want to spend considerable time analyzing stocks and bonds, but still hope to earn a reasonable rate of return from their investments. As a result, mutual funds – collective investment schemes managed by fund professionals – rose to prominence in Canada, with virtually every retail bank offering them alongside their everyday banking services. These products helped Canadians to benefit from the growth potential of the stock market without needing an in-depth knowledge of financial markets. But while mutual funds may still have a place in a well-diversified portfolio, their structure – not least their generally higher fees (around 2% expense ratios) – may not be optimal for all investors.
The surging adoption of Exchange Traded Funds (ETFs) points to a more democratized financial market where both professional and “less sophisticated” investors alike can gain access to a multitude of investment opportunities and strategies. Their lower cost fee structure – combined with strong liquidity, transparency and diversification characteristics – provide investors with a simple way to capture the returns of some of the world’s leading equity and bond markets without the need for in-depth research or daily monitoring.
However, as with any investment, when selecting an ETF it is essential that investors do their due diligence, choosing a well-diversified fund that best meets their objectives in terms of time horizon and risk tolerance.
Importance of a well-diversified ETF
“Don’t put all your eggs in one basket” is the entire premise of diversification captured in one line. However, it can be a significant task to identify, and then manage, all those different baskets. In other words, most investors do not want to spend their time, nor have the expertise, to seek out a range of suitable securities to invest in. With a single well-diversified ETF, investors are able to effectively invest in one basket that automatically spreads their ‘eggs’ for them.
But here’s the rub. As innovation in the ETF market grows - and moves away from its traditional, index-tracking roots - not every ETF is going to be inherently well-diversified. ETFs that provide exposure to certain asset classes and sectors may be more concentrated than expected – not to mention the introduction of single-stock ETFs which appeared on the market last year. So how can an investor find a balanced ETF? NEO’s ETF screener offers a simple way to find funds that provide diversified exposure by filtering for “multi-asset classes.”
Alternatively there are various diversified, all-weather ETFs that Canadians can gain exposure to, depending on their objectives.
Examples of “all-weather” ETFs
Canadian growth investors could consider the Vanguard Growth ETF Portfolio (VGRO) a diversified ETF with an expense ratio of 0.24%, significantly lower than the ~2.0% expense ratio that mutual funds charge.
This ETF invests in both stocks and bonds with the objective of long-term capital growth. Because it is a growth ETF, it is more heavily weighted towards stocks (~80%), with the remaining allocated to bonds (~20%). It would be more suitable for Canadian investors with higher risk tolerance and a longer-term investment horizon.
Balanced, income investors may wish to invest in the iShares Balanced Income CorePortfolio Index ETF (XBAL). A diversified ETF with an expense ratio of only 0.20%.
While this ETF also invests in both stocks and bonds it has a tilt toward income-generating investments. This includes stocks (within the US, Canada and internationally), corporate bonds and treasury bonds. This ETF has the potential for capital appreciation however it is more heavily protected from downside risk. It would be more suitable for Canadians with a medium-level of risk tolerance and medium-term investment horizon.
For a conservative investor, Canadians could consider the Vanguard Conservative ETF Portfolio (VCNS). This ETF is well-diversified and maintains an expense ratio of 0.24%.
This ETF is more heavily weighted toward bonds, with ~60% allocated towards bonds and ~40% allocated toward stocks. This ETF also has local and international exposure, investing in Canadian, US and international bonds and stocks.
Please note this article is for information purposes only and does not constitute investment advice. It is strongly recommended that you seek investment advice from a registered financial professional prior to making any investment decision.
