Not surprisingly, the ETF industry in Canada has seen its assets under management grow to more than $156 billion as of the end of 2018, and Canadian ETFs outsold mutual funds last year for the first time since 2009 (Sources: National Bank of Canada and Bloomberg).
A diversification tool
However, the use of ETFs in portfolio management provides much more than a simple saving in management fees. Indeed, investors that are too concentrated in the energy and materials sector could improve the diversification of their portfolio by using sector ETFs. For example, one could add in a single transaction a portion in fixed income, US equity or any other asset class. The use of ETFs in the portfolio design simplifies the selection process.
A way to overexpose one’s portfolio
ETFs can also be used to overexpose one’s portfolio in the short term in sectors of the economy or geographic areas. For example, an investor who wishes to overweight himself in the banking sector via stocks and who has difficulty in choosing which security to buy, could decide instead to opt for an ETF consisting solely of large banks. ETFs allow us to make tactical deviation in a simple, efficient and inexpensive way.
The different management styles
Traditionally comprised of passively managed funds, the Canadian ETF sector has, in recent years, added new offerings that feature an active management style and smart beta strategies. The industry now has over 30 providers who offer a broad range of products, including the National Bank which launched 4 actively managed ETFs earlier this month.
Here is a brief description that describes these different types of ETFs:
- Passive Management: The fund seeks to replicate the performance of
an index, sub-index or commodity. The best known is the iShares S
& P / TSX 60 ETF Index (XIU), which is designed to replicate the
performance of the S&P TSX's 60 largest market capitalizations.
It is in this type of management that one finds the lowest
- Active Management: The fund is managed by a team of managers
which involves slightly higher management fees.
- Smart Beta or Low Volatility: Passive ETFs with risk mitigation mechanisms. For example, the BMO Canadian Low Volatility Equity ETF (ZLB) uses a rule-based method to select stocks with the lowest five-year beta sensitivity. They will choose the 40 stocks that demonstrate the lowest sensitivity amongst 100 of the largest and most liquid Canadian stocks. The underlying portfolio is rebalanced in June and reconstructed in December.
How to search for ETF types
In order to get to know the wide range of products available and make informed investment choices, we invite you to use our ETF center on our transactional site. It will allow you to select and discover the ETF that best meets your needs. You will be able to select criteria such as: management style, asset class, management fees, etc.
To find out more about ETFs, we invite you to visit our educational center or register for one of our free events on the subject. Finally, it is important to note that investing in ETFs also involves risks. It is the responsibility of the investor to ensure that the product meets their profile and needs by consulting the prospectuses.