Getting Cheap "Dumb" and "Smart" Beta Exposure with Cboe Canada Listed ETFs
Investing in equities doesn't have to cost an arm and a leg. Here are two ETF lineups that promise affordability and diversification across broad and narrow equity exposure.
The returns an investor realizes from an equity fund generally originate from two primary sources: market risk and factor targeting, often referred to as "dumb beta" and "smart beta," respectively.
"Dumb beta" refers to the return one gains simply by being exposed to the market. This can be achieved by selecting a broad array of stocks, thereby tapping into the general market's movements and trends.
On the other hand, "smart beta" involves a more nuanced strategy. It seeks to enhance returns or minimize risk compared to the market, by targeting specific investment factors. These factors, such as low volatility, value, quality, and momentum, have been identified through research as contributing to historical outperformance.
Regardless of the approach, the key is to avoid overpaying for exposure. High fees can significantly erode returns over time. Understanding this, we turn our attention to two ETF lineups listed on Cboe Canada by Scotia and CIBC.
These lineups offer investors access to both "dumb" and "smart" beta exposure, respectively, without the burden of high expense ratios. This promise of affordability and diversification is crucial for investors aiming to maximize their equity investments efficiently.
Dumb beta with Scotia ETFs
Scotia's ETF lineup showcases a comprehensive approach to "dumb beta" investing through four passive ETFs: the Scotia US Equity Index Tracker ETF (SITU), the Scotia Canadian Large-Cap Equity Index Tracker ETF (SITC), the Scotia Emerging Markets Equity Index Tracker ETF (SITE), and the Scotia International Equity Index Tracker ETF (SITI).
These ETFs are designed to provide broad market exposure with remarkably low expense ratios: 0.09% for SITU, 0.06% for SITC, 0.22% for SITE, and 0.34% for SITI. The reason behind the varying expense ratios is primarily the cost associated with managing and accessing diverse markets.
The U.S. and Canadian markets, where SITU and SITC invest, are generally more accessible and cheaper to operate within due to their highly liquid and developed nature. On the other hand, international and emerging markets (targeted by SITI and SITE, respectively) often involve higher operational costs, including research, compliance, and transaction fees, reflecting slightly higher expense ratios.
All four ETFs are linked to indexes provided by Solactive, utilizing a broad-based methodology to select the largest stocks by market capitalization within their respective regions, typically focusing on large and mid-cap companies.
This strategy ensures very low turnover and a comprehensive number of holdings, enhancing diversification and reducing the impact of individual stock volatility on the portfolio.
Investors also have the flexibility to mix and match these ETFs to align with their investment goals and risk tolerance. A popular strategy involves allocating assets in a manner that mirrors world market capitalization proportions while incorporating a Canadian home country bias.
For instance, an allocation of 50% in SITU, 20% in SITC, 20% in SITI, and 10% in SITE could approximate such a strategy.
Smart beta with CIBC ETFs
In today's market, with valuations stretched and a notable concentration in market-cap weighted indexes around a few large tech companies, investors may feel a sense of unease. This concentration risk can make portfolios vulnerable to significant fluctuations based on the performance of these tech giants.
However, adopting a defensive investment strategy doesn't necessarily mean reverting to the sidelines with cash holdings. There are strategic methods to mitigate risk while staying active in the equity markets.
One effective approach is to focus on "smart beta," particularly through low volatility strategies. Low volatility investing involves selecting stocks that have historically shown lower volatility in terms of both standard deviation and beta.
In practice, this means these companies tend to exhibit less dramatic price swings and, theoretically, offer a smoother investment ride. By focusing on low volatility, investors can potentially reduce the impact of market downturns on their portfolio, without exiting the equity market entirely.
CIBC caters to investors looking for this type of strategy with its lineup of low volatility ETFs, offering targeted exposure with an added focus on dividends.
These ETFs are the CIBC Qx U.S. Low Volatility Dividend ETF (CQLU) with a 0.34% expense ratio, the CIBC Qx Canadian Low Volatility Dividend ETF (CQLC) also with a 0.34% expense ratio, and the CIBC Qx International Low Volatility Dividend ETF (CQLI) with a 0.46% expense ratio.
This suite of products enables investors to adopt a defensive posture across Canadian, U.S., and international markets, providing a risk mitigation strategy while staying engaged in the equity landscape.
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.
