The boom in exchange-traded funds in recent years can give retirement investment portfolios a new lease on life. ETFs offer similar diversification to mutual funds, but they trade like stocks, and come in assorted flavours that can be used to build a balanced portfolio. Investors can find ETFs that track equity markets by countries, regions and industry sectors, or focus only on dividend-paying stocks.
ETFs are compelling because of their lower fees compared with most mutual funds, but investors can buy them only through a discount or full-service broker. Some ETFs will charge even less than their peers, so keep an eye on the management expense ratio [MER]. The pioneering ETFs tracked passive indexes such as the S&P 500, but some of the newer kids on the block with slightly higher fees are focused on fundamental indexes based on criteria including dividend and strong earnings growth.
With the registered retirement savings plan (RRSP) season now in full swing, we asked four ETF watchers to give their top Canadian-listed conservative and aggressive picks for a nest egg.
Pat Chiefalo, director of ETF research and strategy at National Bank Financial
iShares MSCI USA Minimum Volatility ETF (XMU) (conservative). This ETF, which invests in stocks with lower volatility than a traditional benchmark, includes names in the MSCI USA Index such as United Parcel Service, AT&T and McDonald's. "With a backdrop of an improving economic environment, this type of fund should do well," says Mr. Chiefalo. Because he is bearish on the Canadian dollar, he said that un-hedged ETFs should benefit from a strong U.S. greenback.
First Asset Morningstar Canada Momentum ETF (WXM) (aggressive). Given that the Canadian stock market materially lagged its U.S. peer last year, investors might consider adding to their domestic holdings, says Mr. Chiefalo. An ETF that invests in Canadian equities with positive earnings and price momentum should do well in a strong market, and could potentially outperform traditional indexes, he added. This ETF holds names such as Constellation Software, Home Capital and CI Financial.
John DeGoey, associate portfolio manager at Burgeonvest-Bick Securities Ltd.
Vanguard FTSE Canadian High Dividend Yield ETF (VDY) (conservative). This ETF is a single-ticket solution that provides considerable diversification for investors who want exposure to dividend-paying stocks, said Mr. DeGoey. "I could make a case that such securities might actually be less risky than even short-term bonds in this rate environment." The ETF owns the big five Canadian banks, insurers and other names including Enbridge, TransCanada and Cenovus Energy.
iShares MSCI World ETF (XWD) (aggressive). This global investment offers the broadest diversification within developed markets, and "if you could buy only one equity ETF, this should be the one," says Mr. DeGoey. It's an ETF that holds three other iShares ETFs focused on the United States, Canada and markets outside North America. U.S. stocks make up just more than 50 per cent of the ETF, while Japanese and British equities are slightly below 10 per cent.
John Gabriel, ETF strategist, Morningstar Inc.
Vanguard FTSE Developed ex North America ETF (VDU) (conservative). This ETF, which invests in developed markets outside North America, owns European stocks such as Nestlé, Royal Dutch Shell and Roche Holding. The recovering European markets are still off their 2007 highs, and "there could be more room to run," says Mr. Gabriel. There are fewer concerns now about the survival of the euro, he added. There are still plenty of risks … but that is why there may also be opportunity."
Vanguard FTSE Emerging Markets ETF (VEE) (aggressive). This ETF has exposure to 900 stocks from 22 developing countries. The emerging markets, which have sold off amid concerns about slowing Chinese growth and the tapering of U.S. stimulus measures, trade at low valuations so there is an opportunity, says Mr. Gabriel. Taiwan and Brazil make up 50 per cent of the assets. Stocks in this ETF include China Mobile, Vale and Taiwan Semiconductor Manufacturing.
Tyler Mordy, co-chief investment officer at Hahn Investment Stewards
iShares DEX All Corporate Bond ETF (XCB) (conservative). This corporate bond ETF has 48 per cent of its assets in the financial sector, and 13 per cent each in infrastructure and energy. After the run-up in stock markets, adding defensive positions to a portfolio is prudent, says Mr. Mordy. "Given the strong, negative sentiment toward the bond market … history tells us that a buying opportunity for bonds is now even though they may only provide modest returns."
iShares S&P/TSX Global Gold ETF (XGD) (aggressive). The ETF, which is a play on gold miners, has just more than 40 per cent of its assets in Barrick Gold, Goldcorp and Newmont Mining. "The prices of the miners' shares have fallen much faster than the price of gold itself," Mr. Mordy notes. This ETF can be a hedge against asset inflationary pressures from money printing or quantitative easing, while demand for gold amid a diminishing supply will help stock prices rise, he said.