ETF Investing

Where to get guidance, free of charge, on asset mixes and specific holdings
By Rudy Luukko | 12/12/17

So many choices, so little guidance. Managers of exchange-traded funds in Canada are prolific product creators. Collectively, they now sponsor more than 550 ETFs in a multitude of core and specialty categories.

About the Author
Rudy Luukko is editor, investment and personal finance, at Morningstar Canada. Before joining Morningstar in 2004, he worked as an editor and writer for various general, specialty and institutional media. He holds a Canadian Investment Manager (CIM) designation and a Bachelor of Journalism degree from Carleton University. A former chair and founding member of the Canadian Investment Funds Standards Committee (CIFSC), he has also co-authored courses for the Canadian Securities Institute. He welcomes your comments at rudy.luukko@morningstar.com but cannot provide individual advice. Follow Rudy on Twitter: @RudyLuukko

Yet most ETF providers don't provide specific suggestions on how to combine ETFs in a suitable diversified portfolio. In fairness, that's not really their job. This crucial task is left to professional advisors, either traditional full-service or online robo-advisors, or for investors to figure out themselves.

Even so, if you know where to look, there are some exceptions to be found on ETF manager websites. Some robo-advisors may also be a source of online tips, even if you are not a client. Model portfolios can help steer you in the right direction in making your own decisions, or else help you to be a more informed investor in dealing with a financial advisor.

First things first: You need to determine a basic asset mix that is compatible with your investment objectives, risk tolerance and time horizon. Let's start with Vanguard Investments Canada's investor questionnaire. It consists of 11 simple multiple-choice questions, some of which are designed to assess your investor personality and attitudes toward risk.

For example, one question asks what you'd do if you owned a stock investment that lost 30% of its value over a short period. Would you sell all of it? Some of it? Hold and do nothing? Or buy more?

Once you've answered the questions, click on the "Get results" button to obtain Vanguard's suggested asset mix. The results are very generic, giving a split only between the two very broad asset classes of stocks and bonds. There are appropriate disclaimers that caution you to do more research to determine what's right for your personal circumstances.

Vanguard publishes model portfolios of its ETFs, but provides them only to advisors. For specific suggestions on portfolio holdings and weightings, investors need to look elsewhere.

Assuming that you have a good idea of what your split between equities and fixed income should be, one helpful source of ideas for portfolio building is the ETF market-share leader BlackRock Asset Management Canada, sponsor of the iShares family. Investors can view sample portfolios of iShares Core ETFs, covering major asset classes, for five different levels of risk. The asset mixes range from 74% in fixed income and 26% in equities in the Defensive portfolio, to 100% in equities in the Maximum Growth portfolio.

Within the same risk level, BlackRock also differentiates between accounts of $50,000 or less, and larger accounts, with the latter holding a greater number of ETFs. For example, the Balanced portfolio (56% equities, 44% fixed income) consists of five ETFs for smaller accounts, and seven ETFs for accounts larger than $50,000. For each of the portfolios, BlackRock suggests specific iShares ETFs and their weightings. There is no mention of ETFs sponsored by competitors.

A variation on the portfolio-building theme is the series of Horizons model portfolios. Horizons ETFs Management hired PUR Investing Inc., a Toronto research and consulting firm headed by Mark Yamada, to design the portfolios for illustrative purposes. Assuming an account size of $100,000, the portfolios of Horizons ETFs are rebalanced quarterly. Investors who want to be notified of the results of rebalancing can sign up for email alerts.

Differentiating the six Horizons portfolios from those of iShares is the presence in some Horizons portfolios of non-core asset classes such as gold, hedge funds and managed futures. In fact, the Alternatives portfolio is solely designed for investors who are seeking a complement to their core holdings.

The other five illustrative portfolios are more broadly positioned. For instance, the Diversified Income model portfolio consists of a total of nine Horizons ETFs, with a target asset mix up of 29% equities, 27% bonds, 8% preferred shares, and the largest weighting which is 36% in covered-call equities. The latter are active strategies in which the managers write covered-call options against stock holdings. This generates option premium income but limits the potential for capital gains on the stocks.

Elsewhere, robo-advisors generally avoid posting their model portfolios publicly. This is understandable, since some potential clients would be inclined to replicate the strategy on their own, getting a free ride. But while robo-advisors might not disclose their specific picks to non-clients, there are some asset-allocation models that you can view without signing up for an account.

Robo-advisor Wealthsimple displays three portfolios -- Conservative, Balanced and Growth -- consisting of six to nine asset classes. Each of the portfolios shows weightings by asset class.

The Growth portfolio, for instance, has weightings of 22.5% in Canadian stocks, 32.5% in U.S., 15% in other developed markets and 10% in emerging markets. The remaining 20% is in a combination of longer-term and short-term bonds.

A competing robo-advisor, BMO Nesbitt Burns' SmartFolio, provides partial disclosure to non-clients of its five model portfolios. Each of the Capital Preservation, Income, Balanced and Equity Growth portfolios has five asset classes, while the Long Term Growth portfolio has six components. At a glance, prospective SmartFolio clients can view a list of the component asset classes and their weights.

There are limitations to the information that the ETF managers and the robo-advisors are willing to provide free of charge. The portfolios shown on the ETF managers' websites give specific names as well as weights, but only of the ETFs they manage. Those of the robo-advisors give useful information on asset classes along with weights, but don't name specific ETFs.

To overcome these limitations, check out the Morningstar.ca ETF Finder, an interactive selection tool that provides a wealth of information on Canadian-listed and U.S.-listed ETFs.

Among other things, investors can select by category, and rank ETFs within a category according to several standard measurement periods, the three-year standard deviation of returns, their management fees and their management-expense ratios.

Also shown on ETF Finder are Morningstar Ratings, based on risk-adjusted returns, for ETFs with at least three years of history, and Analyst Ratings for the much smaller number of ETFs that are currently under analyst coverage.

Similar information on returns, risks, costs and holdings are available to users of the Morningstar.ca Fund Finder, which covers mutual funds available to Canadian retail investors. If you are a devotee of passive investing, ETFs should be able to meet all your needs. For a fuller range of strategies to choose from, check out the mutual-fund universe as part of your research into potential picks for your portfolio.

Building your own portfolio of ETFs and/or mutual funds can result in considerable savings in ownership costs, but it's not cost-free. You'll need to pay commissions on buys and sells, especially for ETFs.

This is not much of a deterrent, however, since discount brokerage commissions are typically only about $10 a trade. If you made 10 trades a year, that would add only 10 basis points (0.1%) to the annual costs of owning a $100,000 portfolio.

Self-directed investing isn't as convenient as going with a traditional full-service advisor or a robo-advisor. And you'll have no one to blame but yourself if you don't like the results. But if you are willing to devote the time and effort needed to research, monitor and rebalance your portfolio, it's definitely a lot cheaper. And there is guidance available online for free, including from Morningstar, to help you go about it.

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