Investors could learn a thing or two from the ice cream business. Since 1945, Baskin-Robbins has released more than 1,300 flavours. Yet most of us opt for one of just a handful of classics, including chocolate, mint chocolate chip and pralines and cream. The single most popular flavour hands down? You guessed it. Vanilla.
A quarter century since exchange-traded funds arrived in Canada, there are more than 400 ETFs trading on the Toronto Stock Exchange alone, and at least 2,000 trading on stock exchanges around the world. Most will appeal to just a tiny percentage of investing palettes. Which is why our ETF All-Stars, now in its fourth edition, continues to shine a spotlight on old-fashioned, low-cost, broadly diversified ETFs—the crowd-pleasing vanillas of the investing landscape.
Because ETFs passively track major stock indexes, our selection process is different from that of actively managed funds, where the focus is on overall performance. We’ve aimed to identify the funds most likely to harness the returns they track—primarily the traditional major equity markets of Canada, the United States and the world, plus fixed income—in the most efficient manner possible. The idea is to create an investible portfolio readers can buy and hold for the long run: broadly diversified, highly tax-efficient and, of course, at the lowest possible cost. If you subscribe to the “Couch Potato” philosophy of index investing, all you arguably need is one ETF in each of our four categories.
Our expert panel, which you’ll find on is nearly identical to last year’s. Joining for 2016 is Yves Rebetez, editor of the website ETF Insight. All were instructed to focus only on ETFs that trade on the Toronto Stock Exchange, which simplifies currency issues that arise when Canadians buy products that trade on foreign exchanges. We use management fees, rather than the slightly higher management expense ratios (MER), for ease of comparison. (The latter figure includes taxes and other incidental costs, but can’t be calculated until a fund has had a full 12 months on the market.)
Looking at the table, you may notice that 10 of last year’s 12 picks are back. This is no accident. The panel isn’t inclined to seek change for change’s sake, as frequent fund switches add trading costs and may cause investors to get whipsawed by futile attempts to pick narrow regional or sector funds. This year, our panel added two new All-Stars for a total of 14 picks.
If you’ve already built an ETF portfolio, it may not be worth incurring transaction costs solely to gain a few basis points of cost advantage. If you’re building a portfolio, you should understand that while not every pick was unanimous, all of them reflect a consensus among the panel. Any one of these funds would make a smart component of your long-term, tinker-free strategy.