Skepticism is often justified when you see a herd of investors stampeding in a particular direction, but ETFs are a notable exception.
Exchange-traded funds have been around for decades, but it was only in the past 10 years that they hit their stride.
ETFs outsold mutual funds for the second straight year in 2019 and ended the decade with combined assets of $205-billion, National Bank Financial says in its latest Canadian ETF Flows report. The total number of ETFs available rose eightfold to 877 from 110 over the decade.
Frankly, a lot of questionable products are being released by ETF companies in an effort to build market share. But the NBF report reveals some underlying trends that show investors are making excellent use of what ETFs have to offer. Here are three examples:
Embracing bond ETFs for fixed-income exposure
NBF says asset growth in bond ETFs exceeded equity funds over the past 10 years. Never mind the fact that bond ETFs delivered returns of 4 per cent annually, with low volatility, in the past decade. The soundness of bond ETFs is better documented in the benefits these funds offer in comparison with holding individual bonds or bond mutual funds.
Bond ETF fees have fallen in recent years, and a broad-based product holding government and corporate bonds can now be had with a management expense ratio of 0.09 per cent. Yields for these funds are highly competitive with individual bonds, which are often sold by brokers with high price markups. The higher the price paid for a bond, the lower the yield.
Bond ETFs also offer excellent liquidity and flexibility – you can buy a broad-based ETF or zero in on short- or long-term bonds, corporate bonds, high-yield bonds and more.
Favouring low-cost index-tracking ETFs
While there’s been an explosion in the number of ETFs, traditional index-tracking funds continue to dominate. NBF says one explanation is that markets moved higher for most of the past decade, and investors saw index-tracking ETFs as an easy way to ride this trend.
But index-tracking ETFs have other benefits that make them ideal for all market conditions. They have the lowest fees, and they track stock and bond indexes that both professionals and individuals struggle to match with their own selection of securities.
Embracing asset-allocation ETFs, aka balanced ETFs
Asset allocation ETFs only appeared in early 2018, so they’re a relative newcomer to the ETF universe. But NBF says this category of fund consistently scooped up almost $100-million in assets a month last year, which is considerable. There’s now about $3-billion in these funds, which provide a low-cost, properly diversified portfolio in a single convenient package.
The market for asset-allocation ETFs is still in its infancy. Every investor mucking around with stocks, mutual funds or anything else needs to ask this question: “Would I be better off with a balanced ETF?”
Rob Carrick