Lots of ETF developments to report as we close out January. The February/March 2016 issue of MoneySense magazine includes the latest edition of a feature I spearheaded called the ETF All-Stars.
The focus is on low-cost broadly diversified “plain-vanilla” ETFs but we also included several “Satellite” picks, some of them low-volatility products covering Canada, the US, EAFE and Emerging Markets.
Our six panelists strive not to change the “All-star” lineup too often, since the idea is to minimize turnover and taxes, while having low-cost portfolios that can be bought and held over the proverbial long run. Even so, each year there there are inevitably a few substitutions and replacements and this time around we modestly expanded the number of “All-Stars.”
BMO’s ETF Outlook 2016
Meanwhile on Friday, BMO Global Asset Management released its ETF Outlook 2016. It noted the ETF industry had another record-breaking year in 2015: globally it grew to more than US$2.9 trillion as of December 2015, with a record US$372 billion in new assets the last year.
The Canadian ETF industry also had an historic year, with a record $C16.3 billion in inflows, and assets hitting just under $C90 billion, which is twice as much as five years ago.
Market volatility and ETFs
The report reprises the market volatility of 2015, notable the China-centric selloff of August 24, the surprise non-hike of interest rates by the Fed on Sept. 16th, and its finally raising them by 25 basis points on December 16. And of course there was the continued slide in the price of oil, which hurts resource-based economies like Canada.
BMO notes that as market volatility persists, investors and regulars are looking at them, and mutual funds too, to try to assess portfolio risk. They say:
“ETFs have several significant benefits that help to mitigate the risks of the underlying holdings.”
These benefits include wide diversification and better liquidity than the underlying asset classes. Of course, as the ETF All-stars illustrate with its satellite picks, BMO has been a leader in creating so-called “Low Volatility” ETFs. I mentioned its low-vol Canadian equity ETF in my FP (and Hub) blog earlier this week on putting high cash levels to work in the market.
BMO notes that smart beta ETFs are helping investors manage volatility, initially for North American markets but increasingly in the rest of the world as well. “In particular, ETFs built around low-beta stocks are designed to cushion against broad market downturns.”
Volatility also affects fixed-income portfolios. BMO notes that Canada continues to have higher allocations to fixed income ETFs than the U.S., “as Canadians bonds are more difficult to trade directly than their American equivalents.”
Horizons ETFs: Canadians finally overcoming home country bias
Finally, Horizons ETFs had an ETF media luncheon on Friday, titled The Global ETF Landscape in 2016, the focus was on the need for Canadians to get over their “Home country bias” and start investing in earnest outside Canada. For more, see my Financial Post blog that ran on Monday.
As is well known, Canada represents just 3% of the world stock market capitalization, but Canadian investors typically have more than 50% of their investments in Canadian securities. Worse, just two sectors – Financials and Energy – make up 55% of the S&P/TSX composite index, which means that important growth sectors are significantly underrepresented: notably technology, health care and consumer discretionary.
Complicating matters is the falling loonie. Canadians who were already invested outside Canada have benefited greatly from investing in US dollar denominated assets. Horizons believes Asian equities are the place Canadians need to go, which is why it recently launched the Horizons China High Dividend Yield Index ETF (ticker HCN/TSX), which pays a dividend of more than 5%. (best held in registered accounts; in taxable portfolios it would be taxed like interest or earned income).