Why ETF strategists are the next big thing in Canada
by Ted Bader, National Sales Manager, SIA Wealth
The ETF industry has seen remarkable growth over the last seven years. 2008 was a tipping point that pushed advisers and investors to consider lower cost alternatives to what they had traditionally bought. Growth has been exceptional, but so has ETF product creation. The number of ETFs listed on exchanges around the world has grown at an ever-increasing pace. In Canada alone, there are 394 ETFs listed on the TSX.
This product creation frenzy has left a lot of advisers and investors feeling uncertain about how to evaluate the abundance of ETFs. How should an investor or advisor determine which ETF is the right choice? If markets change, what will you do to get out of that ETF and into another better-suited ETF?
This issue of selecting the right ETF has led to a growing segment of the asset management business called the ETF Investment Strategist. In the US, ETF Investment Strategists are the fastest-growing segment within the asset management space. Canadians are starting to realize the benefits of working with an ETF Investment Strategist as well.
What is an ETF strategist and why has it come about? In simplest terms, an ETF strategist is an active manager that uses ETFs instead of individual stocks to get exposure to particular asset classes. These managers focus on larger macro trends and asset classes rather than individual security selection like the vast majority of active managers. The question for the ETF strategist is not “Which security will give me the best return?”, but “Should I be exposed to sectors and asset classes or be out of them completely?” The growth of products in the ETF market has allowed for these managers to navigate asset classes and sectors effectively.
Most ETF strategists offer global ETF portfolios. These can vary greatly between managers, but essentially these portfolios are a way to use ETFs to make a macro call on what is happening in the world. ETFs are the best vehicle for this asset allocation selection because they are transparent, liquid and low cost. ETFs allow the manager to pinpoint asset classes, sectors and subsectors with more accuracy than ever before.
Some advisers believe it to be counterintuitive to buy a manger that is just going to buy ETFs. It would seem a duplication of fees, but the alternative is the adviser having to deal with every ETF provider to weigh the benefits of its particular product line-up to determine which ETF is the right fit. A small cost to help manage the portfolio might be the best decision you can make. This has proven to be true as many advisers and investors pay for services to help navigate the ETF landscape.
Advisers and investors have a time issue, and that is why ETF product proliferation has been a negative for investors: there is simply not enough time to get up to speed on the ETF universe in Canada, let alone the US. That is why sub-advising the investment management of ETFs might be the best solution. Advisers have done this for decades, but they have mainly bought long-only equity mutual funds. After 2008, this model has changed.
Advisers, and, more importantly, their clients, need to have a sell strategy in place for their equities. ETF Investment Strategists can be tactical and exit entire asset classes when there is opportunity to invest somewhere else. This is the reason for the growth in ETF strategists in both the US and Canada. In addition, advisers and investors want the ETF portfolio to be constructed by a third-party manager where the ETF selection is not dependent on the ETF provider, but is the best ETF to achieve the purpose of the mandate.
Advisers have been asking for help in determining which ETFs to buy. Out of the entire ETF product universe, it is daunting to know exactly which ETF is best. An objective and unbiased third-party manager to help in that investment process adds an incredible amount of value. That is why advisers and investors alike are looking to invest with ETF Investment Strategists in both the US and Canada.
This article and the views expressed herein are the author’s own work and not necessarily shared by CEFTA, ETF World magazine, the publisher or the author’s employer.
This post was originally published at ETF World Magazine Canada