This sixth annual installment of the MoneySense ETF All-Stars should reassure long-time, passive, buy-and-hold investors as we largely have stayed the course, albeit with three additions and the creation of a new game-changing category.
Our expert panel is intact from last year, although we have added Karen Tsang from Forstrong for some overdue gender diversity. And all our 2017 picks have returned, which is as it should be. Even though the number of ETFs available on Canadian stock exchanges had surged to 583 by the end of February, the number of ETF All-Stars is at a manageable 20, up from 14 last year.
In 2018, more than $26-billion flowed into ETFs, up 56 per cent from the previous annual record set in 2016. And 11 new entrants joined the market, launching 60 new ETFs in 2017. By early 2018, assets in Canadian ETFs reached an all-time high of $129.53 billion, bringing the total number of providers to 24, according to the Canadian ETF Association (CETFA).
Each year, the MoneySense All-Stars panel’s challenge is to balance all this product innovation with our core principles of low costs, broad diversification and tax efficiency. When long-time MoneySense contributor, and now advisor, Dan Bortolotti and I first wrote up this package back in February 2013, the idea was to create a low-cost, “set it and forget it” portfolio of funds that only rarely needed to be tweaked. If you’re looking for flavour-of-the-month “hot” new ETFs covering faddish sectors like marijuana or blockchain technology, look elsewhere. Your exposure to them will be limited to whatever the index weightings in our model portfolio hold.
Even so, that doesn’t mean our seven panelists – including Dan’s colleague at PWL Capital, Justin Bender – agree on everything. After all, much has changed in the last six years: most notably the rise of robo-advisors that provide similar packages of ETFs, plus regular rebalancing. Of course, there is a cost for that: most robo services charge 0.5% a year on assets (this may decline with rising amounts), plus the underlying cost of the constituent ETFs.
With the ETF All-Stars, someone buying our picks through a discount broker would not have to pay that 0.5%. True, many of our readers will also prefer to keep using their own full-service fee-based advisor, who could be expected to tack on 1% or so on top of the ETF fees. Our ETF picks are meant to be a starting point for discussion with your advisor, although our bias –especially for taxable portfolios– is to keep trading and tax events to a minimum.
Just as we were debating possible changes to the previous lineup, Vanguard Canada made a quite significant announcement on February 1st of three asset allocation ETFs, one that several observers (including yours truly) dubbed “game changing.” This announcement certainly coloured the panel’s perspective on existing picks and we were unanimous in deciding to create a new All-Star category for these three asset-allocation ETFs.
It was tougher to decide on what to call this new category. Vanguard itself calls them “Multi-Asset” but we have settled on One-Decision Packages. Whatever the label, we think they form a good template for how a do-it-yourself investor or someone working with an advisor needs to look at global asset allocation and currency hedging. Some of the constituent Vanguard ETFs within the new asset-allocation ETFs are or have been All-Stars, while others are virtual clones with a slightly different composition and name.
“Some may not like the ultimate simplicity of these or their threatening price but I’d say this is a benchmark to keep the industry honest,” says panelist Yves Rebetez, managing director of ETF Insight.ca. Most ETF firms are going in the opposite direction of more complicated and expensive. “The value proposition of ETFs is at risk of being hijacked and fully perverted by the hyper activity that led in the first place to passive being the David-beating Goliath.”
All three Vanguard asset-allocation portfolios hold the same seven ETFs, but in different proportions. Take for example the biggest seller of the trio, Vanguard Growth ETF portfolio (VGRO/TSX), which is 80% in equities and 20% in fixed income. The U.S. and foreign equity exposure is not currency hedged but foreign fixed income is hedged back into the Canadian dollar. The equity mix is 29.9% U.S., 23.8% Canada, 19.9% global developed markets ex North America, and 6.1% Emerging Markets. The fixed income is 11.9% Canada, 3.6% U.S. and 4.8% outside North America.
The balanced version, VBAL/TSX, is weighted 60% in equities, and 40% in fixed income. And the conservative version, VCNS, is only 40% in equities and thus has the highest proportion of fixed income (60%).
As it happens, two of the building blocks in these ETFs are themselves returning MoneySense ETF All-Stars: the Vanguard FTSE Canada All-cap Index ETF (VCN/TSX) and the Vanguard FTSE Emerging Markets All Cap Index ETF (VEE).
In fixed income, returning is the All-Star VSB (Vanguard Canadian Short-term Bond Index ETF) even though the new Vanguard asset allocation ETFs use the Canadian Aggregate Bond Index ETF, VAB. Still, it’s pretty clear that investors could mix and match among these picks, depending on their objectives and what their advisors and tax professionals advise. Note too that in previous years, VAB was also an All-Star; but for the 2017 ETF All-Stars the panel replaced it with BMO’s ZAG when it became the lowest cost fixed-income ETF in Canada.
The panel even debated creating a new category of international fixed income, based on the two Vanguard foreign bond ETFs hedged back into the C$, (VBU and VBG; both of which feature as components for U.S. and foreign fixed-income in the new asset allocation ETFs.) However, we stopped short of taking that measure this year, for reasons cited near the end of this article.
For now, as Rebetez notes, “fixed income and currencies could well be significant contributors to either incremental or detrimental returns: investors need to properly address their exposure and understand the calibration of their respective positioning.”
Apart from this major innovation, the core of the MoneySense All-stars has returned, with three other additions.
Avoid faddish new sectors
One thing the panel was unanimous about was our wish to avoid certain new ETF launches in new sectors that grabbed the imagination of many retail investors in 2017: marijuana stocks and cryptocurrency ETFs. As Rebetez put it, “Do investors ‘need’ or want their portfolio to get ‘high’ with MJ ETFs? Maybe, maybe not.”
Apart from the myriad issues of the underlying holdings, investors need to consider the volatility and sometimes questionable fundamentals of these themes. Even so, new tech developments like A.I. and blockchain bear watching, Rebetez notes. They can’t all be MoneySense All-Stars but ETFs can give investors access to “topical and timely development in finance and tech.”
It will be fascinating to see how the public votes with their wallets on these products in 2018, and how Vanguard’s competitors react to its new asset allocation ETFs. We will get back to you later this year to check up on the funds’ performance.
Meet the MoneySense ETF All-StarPanel:
- Justin Bender, portfolio manager with PWL Capital in Toronto
- Dan Bortolotti, investment advisor with PWL Capital in Toronto
- Jonathan Chevreau,personal finance writer and founder of the Financial Independence Hub
- Alan Fustey, portfolio manager at Index Wealth Management in Winnipeg
- Tyler Mordy, president and chief investment officer at Vancouver-based Forstrong Global Asset Management
- Yves Rebetez, CFA, editor of ETFInsight.ca
- Karen Tsang, vice-president and associate portfolio manager at Forstrong
- Mark Yamada, CEO of Toronto’s PUR Investing
|Rank||Company||Symbol||Market Cap ($ Millions)||Trailing P/E||Debt/Equity Ratio||Free Cash Flow/Share||Price/Cash Flow|
|1||Prudential Finl Inc||PRU||44183.40||9.90||0.34||30.84||5.20|
|2||Annaly Capital Mgmt||NLY||12083.28||8.54||0.48||6.50||1.61|
|4||Western Digital Corp||WDC||26994.67||7.82||1.04||12.04||9.54|
|5||Reinsurance Grp America||RGA||9773.45||13.97||0.37||28.77||6.12|
|8||Travelers Companies Inc||TRV||37419.05||19.34||0.25||13.50||5.68|
|9||Lyondellbasell Ind NV||LYB||40378.89||10.06||0.96||9.18||7.04|
|11||Micron Technology Inc||MU||58544.91||5.80||0.29||5.92||4.06|
|14||Royal Caribbean Cruises||RCL||24136.54||15.18||0.59||10.71||9.60|
Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected]
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