ETF News

Despite being smaller than its U.S. counterpart, the Canadian ETF industry is no stranger to first-mover advantages and constant innovation. For instance, the highly popular and liquid iShares S&P/TSX 60 Index ETF (XIU) started trading in 1990, making it the oldest ETF in the world. 

For a more recent example, consider Purpose Investment's recent launch of the first single-stock, yield-enhanced ETFs. Despite having lower assets under management (AUM) compared to the U.S. industry, the Canadian ETF industry is clearly capable of punching above its weight.

Another innovative ETF lineup worth highlighting is Evermore's lineup of target date ETFs, the first of their kind in Canada. While target-date mutual funds are popular in Canada and the U.S., they haven't been replicated in an ETF structure, until now that is. Let's break down how they work. 

What is a target-date fund?

A target-date fund is an all-in-one investment that provides investors with an automated portfolio of stocks, bonds, and cash. A great way to think of them is as an asset allocation ETF that will automatically adjust its holdings over time to become more conservative.

Target-date funds are named according to the year its investors are anticipated to retire, which makes selecting them simple. For example, if I wanted to retire at age 60 in 34 years, I would buy the hypothetical "Acme Investments 2056 target-date fund".

In 2023, this target-date fund might consist of a fairly aggressive allocation of say, 89% stocks, 10% bonds, and 1% cash. As I grow older, my time horizon will shrink, and my risk tolerance will too. Therefore, this target-date fund will gradually decrease its stock allocation and increase its bond and cash allocation to become more conservative on a "glide path." 

The main benefit of a target-date fund is its automated nature. Even with asset allocation ETFs, investors will need to manually buy lower-risk ones as they get older or add additional bond ETFs. With a target-date fund, investors can truly sit back and relax. The fund manager handles all the rebalancing. 

Target-date ETFs

I'm very surprised that it took this long for an ETF manager to launch a target-date fund in ETF form. The ETF structure provides multiple benefits over the mutual fund one, namely better tax-efficiency, transparency, and liquidity. 

Evermore currently offers a suite of eight target-date ETFs in five-year increments: 

1. Evermore Retirement 2025 ETF (ERCV)
2. Evermore Retirement 2030 ETF (ERDO)
3. Evermore Retirement 2035 ETF (ERDV)
4. Evermore Retirement 2040 ETF (EREO)
5. Evermore Retirement 2045 ETF (EREV)
6. Evermore Retirement 2050 ETF (ERFO)
7. Evermore Retirement 2055 ETF (ERFV)
8. Evermore Retirement 2060 ETF (ERGO)

All eight ETFs charge a 0.35% management fee and have a target management expense ratio (MER) of 0.45%, which is much lower than equivalent target-date mutual funds found in group retirement plans.

I took a look under the hood of ERGO, the target-date ETF suitable for investors retiring around 2060. Currently, ERGO is around 95% stocks and 5% bonds, which is suitable for young investors. 

ERGO uses a common "fund of funds" structure that allocates to various low-cost, passively managed index ETFs. It's diversified worldwide, with U.S., Canadian, developed, and emerging market stocks and bonds according to their market-cap weights with a Canadian home-country bias. 

Overall, I really like what I see. I think these ETFs are ideal for set-it-and-forget-it investors who aren't too enthusiastic about rebalancing different ETFs or swapping out asset allocation ETFs. As John Bogle said: "The five ascending levels of intellect are: smart, intelligent, brilliant, genius, simple."

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.