By Myron Genyk
Special to the Financial Independence Hub
Over the years, many close friends and family have come to me for guidance on how to become DIY (do-it-yourself) investors, and how to think about investing.
My knowledge and experience lead me to suggest that they manage a portfolio of a few low-fee, index-based ETFs, diversified by asset class and geography. Some family members were less adept at using a computer, let alone a spreadsheet, and so, after they became available, I would suggest they invest in a low-fee asset allocation ETF.
What would almost always happen several months later is that, as savings accumulated or distributions were paid, these friends and family would ask me how they should invest this new money. We’d look at how geographical weights may have changed, as well as their stock/bond mix, and invest accordingly. And for those in the asset allocation ETFs, there would inevitably be a discussion about transitioning to a lower risk fund.
DIY investors less comfortable with Asset Allocation
After a few years of doing this, I realized that although most of these friends and family were comfortable with the mechanics of DIY investing (opening a direct investing account, placing trades, etc.) they were much less comfortable with the asset allocation process. I also realized that, as good a sounding board as I was to help them, there were millions of Canadians who didn’t have easy access to someone like me who they could call at any time.
Clearly, there was a looming issue. How can someone looking to self-direct their investments, but with little training, be expected to sensibly invest for their retirement? What would be the consequences to them if they failed to do so? What would be the consequences for us as a society if thousands or even millions of Canadians failed to properly invest for retirement?
What are Target Date Funds?
The vast majority of Canadians need to save and invest for retirement. But most of these investors lack the time, interest, and expertise to construct a well-diversified and efficient portfolio with the appropriate level of risk over their entire life cycle. Target date funds were created specifically to address this issue: they are one-ticket product solutions that help investors achieve their retirement goals. This is why target date funds are one of the most common solutions implemented in employer sponsored plans, like group RRSPs (Registered Retirement Savings Plans).
Generally, most target date funds invest in some combination of stocks, bonds, and sometimes other asset classes, like gold and other commodities, or even inflation-linked bonds. Over time, these funds change their asset allocation, decreasing exposure to stocks and adding to bonds. This gradually changing asset allocation is commonly referred to as a glide path.
Glide paths ideal for Retirement investing
Glide paths are ideal for retirement investing because of two basic principles. First, in the long run, historically and theoretically in the future, stocks tend to outperform bonds – the so-called equity risk premium – which generally pays long-term equity investors higher returns than long-term bond investors in exchange for accepting greater short-term volatility (the uncertain up and down movements in returns). Second, precisely because of the greater short-term uncertainty of stock returns relative to bond returns, older investors who are less able to withstand short-term volatility should have less exposure to stocks and more in less risky asset classes like bonds than younger investors.
Before we launched the Evermore Retirement ETFs, target date funds were only available to Canadians in two ways. First, they are accessible to Canadians as higher-fee mutual funds, where the management expense ratio (or MER) averages about 2.05%. This fee seemed needlessly excessive and called for a better solution. Second, they are available to only select Canadians via their company’s RRSP as pooled funds, at varying costs, depending on the employer. Until recently, there have been no low-fee target date retirement products accessible to all Canadians.
Evermore Retirement ETFs
In February 2022, Evermore launched its suite of Evermore Retirement ETFs, making low-fee target date funds accessible to everyone. In fact, Evermore was established exactly for this purpose: to provide all Canadians an easy, one-ticket, goals-based, low-fee retirement investment solution.
The Evermore Retirement ETFs were constructed using a foundation of portfolio construction techniques. First, we concluded that exposure to indices that contain equities of all market capitalizations (where possible, or as close to all-cap as possible) and aggregate bond indices was ideal. We excluded short-term bond indices for portfolio efficiency reasons; we excluded various asset classes traditionally used for inflation hedging because of the increasing research suggesting their inability to hedge unexpected inflation; we excluded cryptocurrencies because of their high volatility and their lack of any intrinsic value.
Next, in determining geographic allocations for stocks and bonds, we examined all possible efficient portfolios: that is, the set of portfolios that had the greatest expected return for a given amount of expected risk, across different levels of risk. In the case of stocks, we chose the efficient portfolio that maximized the Sharpe ratio (the ratio of expected return versus the amount of volatility associated with that return, i.e. for any given level of risk look for the highest possible expected return); in the case of bonds, we chose the efficient portfolio that had the most negative correlation to the stock portfolio, to act as the best possible ballast, thereby reducing overall portfolio volatility.
Finally, to create our glide path, we tested thousands of possible glide paths and examined outcomes over tens of thousands of simulations, running these multiple times for a variety of investor profiles and market conditions. A variety of potential glide path candidates emerged, and we chose the one that provided investors with the best chance of not outliving their nest egg. Finally, we chose ETFs for each of these asset/geographies that were most liquid and carry a low fee.
Using all available academic and industry research, as well as decades of market data, we sought to create the most rigorously constructed and lowest cost target date fund. We believe all Canadians should have to access easy, one-ticket, goals-based, low-fee retirement solutions. We’re proud to be able to provide the Evermore Retirement ETFs to all Canadians.
Myron Genyk, CFA, is a 15-year Bay Street veteran and ETF innovator, with experience at two bank-owned dealers and two ETF issuers. Prior to co-founding Evermore Capital, Myron was at BlackRock Canada, where he was responsible for overseeing ETF markets, improving ETF liquidity, and helping source best execution for clients. Prior to BlackRock, Myron briefly consulted for Horizons ETFs.
Before that, Myron spent over 10 years at National Bank of Canada as a structurer, trader, and salesperson on the derivatives desk. Myron managed a multi-asset hedging portfolio and gained a reputation for structuring creative and scalable solutions for ETF issuer clients, including the world’s first synthetic bond ETF. Prior to NBC, Myron interned at RBC Capital Markets on the emerging markets bond desk. He has an M.A. in Applied Statistics and a Graduate Diploma in Financial Engineering from York University.
Nothing herein should be construed as investment, tax, legal or other advice. All investments involve risks, including potential loss of principal. Investors should consult their own professional advisor for specific investment advice tailored to their needs and based on the latest available information. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund and ETF investments. Please read the prospectus before investing. Mutual funds and ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.