Erika Toth: ETFs, Credentials, Strategies and Advisory Tools - Level Up Your Competitiveness

Erika Toth shares her first hand perspective about the work she's doing with advisors to assist them into the realm of top shelf wealth management. This was a comprehensive talk about the trends shaping the wealth management business, the evolution investment advisors have undertaken to become Fee-based, to earn PM designations, and to level up and grow their business, to go toe-to-toe with ICPMs (Investment Counsel PMs).

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[00:00:00] Pierre Daillie: Hello and welcome to the Insight is Capital Podcast, I’m Pierre Daillie, managing editor at advisoranalyst.com. As the Canadian wealth management industry evolves, there is growing pressure in the ranks to continually upgrade knowledge and services among Canada’s leading and growing, established, and more newly-minted advisors respectively. The landscape is becoming more and more competitive in terms of the proliferation of products, solutions, level of advice and services, as well as technologies used at all levels, the institutional level, the retail level, and also the direct-to-consumer level that are happening.

[00:00:35] The largest demographic cohort of investors as measured by assets invested is entering or already well into their retirement or decumulation phase. To add to the mix, markets are facing and experiencing this year a complex regime change as rising inflation and interest rates have ravaged both bonds and stocks at the same time. The demand for portfolio construction and guidance in this climate has never been higher in the history of the business, and that too means that the value of advice has never been higher as well than it is now, assuming advisors rise to the challenge.

[00:01:09] Here to share her insight on this evolution and discuss the trends shaping the wealth management business is Erika Toth, director of Institutional and Advisory for Eastern Canada at BMO ETFs. Erika brings to the table experience in investment analysis, portfolio construction, and trading of equities, fixed income, foreign exchange, options, ETFs and mutual funds. She’s known for her attention to detail and consultative approach in providing support and education to advisors and portfolio managers.

[00:01:39] Erika is a CFA Charter holder and has obtained several licenses with the Canadian Securities… Ca- Canadian Securities Institute in derivatives and options trading. She holds a bachelor of commerce, double major in finance and marketing from John Wilson School of Business at Concordia University in Montreal.

[00:01:58] Speaker 2: This is the Insight is Capital Podcast.

[00:02:03] Speaker 3: The views and opinions expressed in this podcast are those of the individual guests and do not necessarily reflect the official policy or position of advisoranalyst.com, or of our guests. This podcast is meant to be for informational purposes only. Nothing discussed in this podcast is intended to be considered as advice.

[00:02:17] Pierre Daillie: Erika, welcome, it’s terrific to have you, looking forward to our conversation.

[00:02:21] Erika Toth: Thank you so much for having me, Pierre, I appreciate the, the chance to be here and chat with you.

[00:02:25] Pierre Daillie: Awesome. E- Erika, for those of us who don’t know you, please, tell us about the arc of your career, what you do at BMO ETFs, and what you’re hard at work on these days, and in the context of the markets we’re in.

[00:02:37] Erika Toth: Yeah, absolutely. Um, so I’ve been with BMO for 12 years now. Um, I started, uh, within the discount brokerage arm so that allowed me, you know, to get all my trading licenses and, uh, you know, do my CFA charter at the same time, so really to get a better understanding of, of markets. Um, and then I moved over to BMO global asset management, uh, you know, it was nine years ago when, in August, actually, of, of this year, um, where I was helping advisors and portfolio managers understand and integrate ETFs for their clients.

[00:03:10] So at the time when I joined BMO GAM’s ETF division nine years ago, there were six ETF providers in Canada, um, so the landscape-

[00:03:19] Pierre Daillie: Right.

[00:03:19] Erika Toth: … has really changed a lot over the last nine years. Um, it’s become one of the best-selling investment vehicles, we’ve h- we’ve had, uh, significant growth, uh, about 22% per year in terms of the, uh, the annual compounded growth rate, um-

[00:03:35] Pierre Daillie: Right.

[00:03:35] Erika Toth: To now, we’re at the point where ETFs, uh, are approximately 300 and, and 20 million, uh, 20 billion, sorry, dollars, uh, in, in terms of the Canadian ETF market, there’s now 42 providers compared to the, the six that we were when, when I started, uh, with the team here. Um, and there’s about 1271 listed products at the end of last month in Canada, so there’s a lot more product out there, uh, to wrap, for, for advisors and portfolio managers to wrap their heads around, a lot more due diligence required.

[00:04:04] And so, that’s where myself and my colleagues come in, so to, to help advisors and portfolio managers with that homework, and, and understanding the ins and outs of ETFs and how to analyze them and make sure that, you know, they’re buying the best possible solution for their clients at the end of the day. And my role, I mean, in that nine years, has evolved quite a bit as well. Um, so now, I, I kind of wear two hats, I take care of not only the advisors and the, the portfolio manager, uh, market for Eastern Canada, but I also wear, uh, an institutional coverage hat as well.

[00:04:36] So I’m also working with asset managers, um, with, with ICMP, investment counsel firms, um, and also with, with pension funds. Uh, so, it’s, it’s been exciting, I mean, experiencing all that, that growth and watching the industry change so much, but also being able to learn, uh, different parts of, uh, of, of the market, and, and how different segments of the marketplace use ETFs, that’s, it’s been really fascinating. Um, and, you know, it, over that time, I think ETFs have become increasingly popular because of some of the pressures and some of the changes in the industry.

[00:05:09] I mean, I think as an industry, it’s become a lot more fee sensitive, and ETFs definitely, uh, you know, one of their key benefits has been their, their lower fees. But they also bring, you know, tremendous amount of transparency, um, they’re highly liquid, they allow, uh, portfolio managers to, to rebalance very easily during, during the treating day. Um, you can pinpoint a specific allocation, uh, so they’re really excellent portfolio building blocks, and, and I think those are some of the key reasons why they’ve become so popular in portfolios.

[00:05:40] Pierre Daillie: Yeah, I, I guess, I mean, I would say that with the proliferation of, of the ETF business in Canada and the number of solutions and products that are now available in the market, um, it hasn’t just benefited retail investors, it’s benefited advisors, obviously, and their business and, and, and, uh, accessibility to, uh, solutions that weren’t available, you, you know, in, in many cases even just five years ago. Um, but it’s also, it’s also, also, and it… Sorry, it’s also enabled the investment counselor portfolio managers to also, uh, cha- change the nature of their portfolio management as well.

[00:06:13] So, so, you know, we talk about democratization of investing, but the ETF has democratized investing at all levels, not just, not just at the, at the end investor level, but at the, at the retail portfolio management advisory level, at the ICPM level. Um, we’ve also had the introduction of alternatives, uh, some three years ago, which has also in, which has also, um, changed the accessibility of strategies very ad… You know, in some cases, uh, you know, uh, plain vanilla alternatives, but also in other cases, more complex, uh, you know, hedge fund-type alternatives are available in hedge fund i- in, uh-

[00:06:56] Erika Toth: In ETF format. Yeah.

[00:06:56] Pierre Daillie: … ETF formats. Um, but along with those products, there’s been a significant learning curve, and can you talk about… You, you know, you, you… Since you’re, you’re talking to both the portfolio manager at the, you know, and, and advisors at the brokerage level, and the investment counselor portfolio managers, um, what are you seeing as the key competitive differences between the two types of portfolio manager that are out there?

[00:07:27] Erika Toth: Um, so just to make sure I, I’m answering the question correctly, you wanna know the, like competitive difference between begin investment counselor, family office, versus, um, a traditional investment advisory, like a bank-owned brokerage?

[00:07:41] Pierre Daillie: Well, I’m guessing, I mean, because we speak to, because we speak mainly to advisors in our, in our channel, um, since advisors now, advisors and portfolio managers that are at the brokerage firms, uh, are in, in fact competing with investment counselor portfolio managers, um, there are some key differences, but, but in essence, uh, i- inve- uh, portfolio manager investment advisors now have really, uh, a great opportunity to compete, uh, in the same playing field as the investment counselor portfolio managers. But can you, can you speak to that? Is that, is that, are you seeing that? Is that something that’s happening?

[00:08:24] Erika Toth: Yeah, absolutely. Like, that’s definitely a trend that we’ve noticed over-

[00:08:27] Pierre Daillie: Yeah.

[00:08:27] Erika Toth: … the last several years in terms of the, uh, the, the bank-owned brokerages, and there’s been a tendency, uh, for more advisors to get their portfolio manager designations, either by going the CIM route or the CFA route. Um, and typically-

[00:08:41] Pierre Daillie: Right.

[00:08:41] Erika Toth: … within their firms, there’s certain guidelines that they would have to follow in terms of constructing portfolios. But at the end of the day the bottom line is that it gives them a wider toolkit, right? Um, and they’re able to construct portfolios and make changes to portfolios without having to call their clients every single time, and they could run a portfolio like, like a fund manager would run their fund. Right? So it’s given them more-

[00:09:04] Pierre Daillie: Right.

[00:09:04] Erika Toth: … flexibility, it’s given them for access to different products. And at the same time, it’s put more onus on them in terms of due diligence, because, um, an advisor that’s licensed as a portfolio manager has to prove that anything that they’re putting in the portfolio, um, that they’ve done extensive research on it, number one. But also, that it’s the best product to meet their clients’ objectives, so there’s really, there’s more, uh, there’s more homework, there’s more legwork that goes into it, but at the same time, it gives them access to a wider toolkit, um, and they have more, more latitude in terms of, in terms of making decisions.

[00:09:36] But it’s, at the same time, like you said, it’s, it’s kind of leveled the playing field, uh, between advisors and, um, independent investment counselors, because they’re no longer tied to, let’s say, internal, uh, product, like maybe, uh-

[00:09:50] Pierre Daillie: Right.

[00:09:50] Erika Toth: … you know, so- some advisors would be. So that’s definitely the-

[00:09:53] Pierre Daillie: Yeah, so-

[00:09:54] Erika Toth: … trend that we’ve noticed. And it also helps make businesses more scalable, as well, when an advisor becomes PM licensed, uh, they can then onboard more households, um, it’s, it becomes a lot more scalable to run the portfolios, rather than sort of taking a piecemeal approach, and, and, uh, you know, um, every client would have a different portfolio, and that’s very, very challenging to scale, and I know it’s a pain point for a lot of-

[00:10:15] Pierre Daillie: Right.

[00:10:15] Erika Toth: … advisors, so I think that that’s also part of the reason why we’ve seen a trend towards, uh, portfolio managers, um, licensed portfolio managers in, in the advisory space.

[00:10:26] Pierre Daillie: Right. So in essence, um, I take it that, that the evolution of ETFs, o- of the ETF marketplace has really enabled advisors to be… So the advantage goes to advisors, in essence, right? I mean, ICPMs have, have been doing what they’ve been doing all along, um, uh, and we’ll get to the key differences, obviously, between the two, and, and the different expectations, perhaps, that, that clients can, can h- can hope for from either. But, but, uh, in essence, the advantage has gone to advisors, right? The toolbox, the toolbox now that’s available to advisors has far more breadth and, and, and depth than, than used to be. And so now, uh, as you said, for advisors, the playing field has leveled, where, where-

[00:11:13] Erika Toth: Yes, absolutely.

[00:11:14] Pierre Daillie: Yeah.

[00:11:15] Erika Toth: But the other thing too is-

[00:11:16] Pierre Daillie: Yeah.

[00:11:16] Erika Toth: … even for investment counselors, like they might have not been using ETFs to the extent that they are now, when you, when you compare 10 years ago-

[00:11:23] Pierre Daillie: Right.

[00:11:24] Erika Toth: So like you said, it’s really a tool that democraf- democratized investing, like, in, in many areas-

[00:11:29] Pierre Daillie: Period.

[00:11:29] Erika Toth: … in the industry, right? Not just, not just on the retail advisory side, but also for, um, you know, for, for smaller pension funds, for asset managers, for investment counselors. And they choose, use these strategies a little bit differently and are, I would, I would say gravitate towards different types of ETFs. Um, but I would say definitely, like, the, the ability to become a licensed portfolio manager, that’s changed the game for investment advisors.

[00:11:53] Pierre Daillie: Right.

[00:11:53] Erika Toth: Um, and at the same time, like there’s more strategies available. Yes, there’s more legwork to be done, um, but there’s a lot more tools available as well, and I wanted to talk a little bit about some of the tools and some of the support that we’ve put together, um, to help them do that job-

[00:12:06] Pierre Daillie: Yeah, pl-

[00:12:06] Erika Toth: … better, because their job has become harder, I would say, in the last decade, because clients have become more fee sensitive. Um, you know, with, with social media as well, like the news is available at, at your fingertips, uh, 24/7, probably a bit too much.

[00:12:19] Pierre Daillie: Right.

[00:12:19] Erika Toth: Um, so there’s really some, some great tools to help advisors navigate that, to help them do their due diligence and make that easier for them. Uh, so I did wanna maybe talk a little bit about those tools, um, later on if we, if we have some time.

[00:12:33] Pierre Daillie: Yeah, well, I mean, that’s, that’s a big part of your role, is, is you’re actually consulting with advisors on how they’re running their businesses, and how they’re running their, their model portfolios, and how to ameliorate their whole process. Um, what are some of the, what are some of the things that, that you’ve, uh, what are… You know, what are some of the biggest challenges that you’ve been helping advisors overcome?

[00:12:56] Erika Toth: Uh, so I think helping them reduce their fees has been really important in terms of like product MERs. Um, so, you know, part of what I do is clients will sometimes share with me their, their model portfolios, and we’ll help them look for opportunities, where they could either, uh, lower their fees, improve their performance, reduce risk or improve tax efficiency. And I always tell advisors that, you know, “I won’t tell you to make a change in the portfolio unless there’s really a reason for it.” Like, I won’t tell you to change-

[00:13:24] Pierre Daillie: Right.

[00:13:24] Erika Toth: … four quarters to a dollar just so that you have more, uh, BMOs and tickers in the portfolio, it’s really, um, if there’s an opportunity to, to help their end client or to help them at the end of the day make their life a little bit easier, um, or, or result in a better investment outcome for the client. So I spend a lot of my time, um, doing portfolio reviews with clients, and I would say this year especially, given how challenging the markets have been, I would say even more so this year, because now there’s kind of a silver lining with the markets being down, is that, in- in- investors are looking for ways to, um, make their portfolios better, they’re taking advantage of tax loss selling, right? So, that’s been sort of a silver lining-

[00:14:02] Pierre Daillie: Right.

[00:14:02] Erika Toth: … is that it’s, it’s kind of a good time to take stock of your, uh, portfolios and look at where you’re at, and, uh, see where you can maybe tweak or improve things a little bit. So that, the tax loss selling has been a really, really important conversation this year, especially with, you know, bonds and equities, like you mentioned, being down both, um, you know, to the magnitude that they are this year. I mean, we haven’t seen anything like this since 1969. Um, so we’re s- we’re talking a lot about tax loss selling.

[00:14:29] On the fixed income side, um, you know, over the last year, it’s been a really painful spot to be with interest rates, um, being increased around the world. Um, so what we’re telling clients is, you know, you don’t want to get out of the asset class, because while the central banks are hiking rates like crazy now, um, e- eventually it’s going to trigger a recession, and, you know, looking a year out, it’s gonna be a very different situation and there’s actually the potential to make money on bond positions, um-

[00:14:58] Pierre Daillie: Right.

[00:14:58] Erika Toth: And so, what we’re-

[00:14:59] Pierre Daillie: No, no, yeah, now that there’s actually some yield-

[00:15:01] Erika Toth: Yeah, I mean, these are some numbers-

[00:15:03] Pierre Daillie: Yeah.

[00:15:03] Erika Toth: … we haven’t seen the likes of in, in a decade, right? So I mean, to give a few examples-

[00:15:06] Pierre Daillie: Right.

[00:15:06] Erika Toth: … like, uh, clients are putting money now into, um, into money market ETFs, into cash alternative ETFs. It was a record in, uh, inflow month last year in terms of the ETF business in Canada. In September, I believe, it was $1.7 billion that went into, um, you know, cash and cash alternative ETFs. And certainly, um, at BMO, over, uh, over this last month in October, um, you know, we saw a, a very strong month in terms of flows, about a billion dollars-

[00:15:33] Pierre Daillie: Right.

[00:15:33] Erika Toth: … of, of net new flows. Close to $800 million of that went into bond ETFs, and the remaining 200 went into equities.

[00:15:39] Pierre Daillie: Interesting.

[00:15:39] Erika Toth: So we’re starting to see a shift there because of that. Um, so we’re definitely having a lot of tax loss selling conversations, and people are looking at the asset class a little bit more because of where yields are at, right? So if you’re looking at a one to five-year laddered corporate bundle investment grade in Canada, the yield to maturity on that is about 5%. Now, if you’re looking at, um, you know, a, a money market ETF, you’re getting close to 4% on that. So these are numbers we haven’t seen in, in many, many years, so we’re definitely, we’re, we’re seeing clients put money there.

[00:16:06] Um, and then the other thing, the other part of the tax loss selling conversation is, uh, we’ve been talking a lot about discount bond ETFs, because not only can you take advantage of that, that tax loss sale, but then the advisor could also go into something that’s more tax efficient going forward, so it’s sort of a one-two punch there. So you’re taking, taking advantage and, and harvesting the loss, but you’re putting your client in something that’s about 30% more tax efficient going forward. And so, clients taxed on, on the bond coupons and the bond coupons on discount bond ETFs are, are significantly lower, uh, but the yield to maturity-

[00:16:38] Pierre Daillie: Right.

[00:16:38] Erika Toth: … or the total return is, uh, is very similar to the traditional bond ETFs. That’s one of the tax loss selling conversations, uh, we’ve been having. Um, also, other areas, uh, in terms of tax loss selling, um, we’ve seen clients looking to replace individual stock positions where they might be down, so, um, you know, to name a couple of examples, like Facebook’s been in the news, the, the Meta stock, um, has had a very difficult time, uh, recently, so we’re seeing clients use ETFs to replace that, uh, maybe looking to, to NASDAQ.

[00:17:07] And with an ETF what’s kind of neat too is that the advisor will have the, the currency flexibility or the ability to really pinpoint the, the currency exposure that they want, so they could choose to go hedge, to go unhedge, or they could even buy the US dollar unit, so that’s, um, that’s an added level of flexibility. And then, they don’t have this single-name, uh, uh, I guess, uh, liability or exposure-

[00:17:29] Pierre Daillie: Right.

[00:17:29] Erika Toth: … that they would have, uh, with individual stocks. Um, another example is, is the REIT sector in Canada, that’s been hit really hard so far this year. So, uh, one name that I was talking to a client about yesterday was Granite REIT, and, uh, talking about replacing that with our Equal Weight REITs ETF, and when you look at REITs and you look at REITs in Canada, um, actually, equal weighting has tended to not only increase yields, but increase performance over time, versus, uh, cap-weighted indexes, um, for that-

[00:17:56] Pierre Daillie: Right.

[00:17:56] Erika Toth: … for that particular sector. So these are a few of the examples for, for tax loss selling and some of the conversations that we’ve been having. Um, another example is, you know, we, we, we have conversations about where we can take individual bonds or individual preferred shares, which are very cumbersome to trade, and we can exchange them for units of the corresponding ETF. Um, so that’s, uh, I think that’s been another plus for advisors and PMs really to help to make their businesses more scalable.

[00:18:22] We’re talking too about, you know, the differences in terms of, um, retail flow and institutional flow, so I wanted to highlight just a couple things there, a couple trends that we’re seeing-

[00:18:32] Pierre Daillie: Yeah, please do.

[00:18:32] Erika Toth: … especially on the institutional side now. So, um, fixed income is probably the fastest-growing area of uptake with, with institutions. And when I say institutions, I refer to, uh, asset managers, uh, family offices, and also, um, pension funds, so asset owners. Um, and, and we’re seeing them increasingly use fixed-income ETFs because of the added operational efficiency. Like, I would say that when you’re-

[00:18:58] Pierre Daillie: Right.

[00:18:58] Erika Toth: … when you’re talking about the advisory market in Canada, I would say the advisory market in Canada actually adopted ETFs quicker than the institutional side of things. Um, but now, the institutions are really starting to, uh, integrate ETFs, and especially for fixed income. So because individual bonds are, you know, they’re harder to trade, they’re less liquid, it’s, there’s less transparency there-

[00:19:19] Pierre Daillie: Right.

[00:19:20] Erika Toth: … uh, that’s one of the reasons or some of the reasons why we’re really seeing institutions now gravitate towards fixed-income ETFs, and, and incorporate them in their portfolios. And they’re also really, they’re able to pinpoint, you know, specific exposures that they want, whether that be, uh, you know, level of credit quality, uh, or duration, or even currency, like I mentioned, and they can make changes to the portfolios a lot quicker than they would be able to, uh, with individual bond holdings. So we’re starting to see a, a lot more uptake there-

[00:19:47] Pierre Daillie: Yeah, ’cause you actually have price discovery.

[00:19:49] Erika Toth: Exactly.

[00:19:49] Pierre Daillie: Yeah. Sorry, I didn’t mean to interrupt you. You, because you have, you actually have, you know, daily price discovery. So Erika, since you’re having these conversations, uh, with advisors, uh, on tax loss selling, I’m just curious because there tends to be, uh, you know, a bias among investors that doesn’t really favor selling, you know, some of their losing stock positions. I’m just curious to know if you’re, first of all, hearing about differences in emotionality versus, between, uh, tax loss selling of individual stocks versus ETFs?

[00:20:22] I think it’s probably much easier for an advisor to, to talk they’re… You know, assuming they’re not, uh, uh, managing money on a discretionary basis, uh, that it’s much easier for, uh, an advisor to convince a client that tax loss selling, uh, for example, a market cap-weighted index, uh, in favor of an equal, equal-weighted index is much easier to do than, than getting out of Facebook, which is down, uh, in favor of, you know, widening their, their exposure to the sector at a time when it’s also very, uh, uh, first opportune but it, you know, investors tend to be more attached to their stocks than they are to their ETFs.

[00:21:02] So I’m just wondering if there’s, if there’s a conversation there that, that, that you’re having with advisors where they, they can help their clients take their, you know, emotionality out of making those tax loss selling decisions. Because they are very opportune, they are… They make, they make lots of logical sense, but they don’t necessarily make emotional sense to, to the, to the client, to the end client.

[00:21:22] Erika Toth: Yeah, and I think that’s a great point that you bring up, Pierre, because, um, like anecdotally speaking, absolutely, like I could tell, um, individual, like investors tend to be more attached to their individual stock holdings-

[00:21:34] Pierre Daillie: Right.

[00:21:34] Erika Toth: … and, and married to them when they’re, when they’re down, and saying, “Okay, well, I want to watch this recover.” Um, and, and so yes, you’re absolutely right, that I think for advisors and, and portfolio managers, it’s, it’s easier to make a switch from let’s say one ETF to another. Um, but part of that conversation that we’re having is, you know, i- is to take advantage of the tax loss and go into the same sector, so you’re not giving up a potential rebound, but what you are doing is you’re reducing the level of concentration risk-

[00:22:04] Pierre Daillie: Right.

[00:22:04] Erika Toth: … in your portfolio, and you’re, you’re reducing that risk by owning a basket of names, instead of an individual name. So you’re in- you’re less likely actually to overreact, as well, when things don’t go well, because there’s also a tendency for, you know, when, when individual names go, go down and are very volatile, some, some people panic, and wanna get out of them-

[00:22:23] Pierre Daillie: Right.

[00:22:23] Erika Toth: So I think you’re less likely to do that with, with an ETF, and it also makes it, um, you know, more scalable, um, and it, and it helps, I think, the advisor convince the clients to stay invested when things do get, get rocky, which I think is also important. Um, and then-

[00:22:38] Pierre Daillie: Yeah.

[00:22:39] Erika Toth: … the other point I’ll make there, just sort of as a, um, you know, another part to the conversation about, about individual stocks, a lot of people assume, and, and sometimes incorrectly, that, you know, a lot of the growth in the ETF business has come at the expense of mutual funds, which is not necessarily the case. Like, it’s not that all money flowing into ETFs has come out of mutual funds, a lot of it’s come out of individual-

[00:23:01] Pierre Daillie: Of course.

[00:23:01] Erika Toth: … stocks, and individual positions for that reason, is because, you know, there’s, there’s actually less volatility, and, and it’s been proven that, you know, investors tend to have better outcomes owning a basket than concentrating themselves in individual names. Um, so then, you know, there’s, there’s a lot of great research to back that up as well, uh, so I wanted to make-

[00:23:21] Pierre Daillie: Yeah.

[00:23:21] Erika Toth: … that point.

[00:23:21] Pierre Daillie: Thank you. I, I… That’s a great point. I think, I think the, uh, you, you know, from a behavioral economic standpoint, behavioral finance standpoint, you know, having a portfolio that, that doesn’t cause you to have, you know, emotional reactions too far to the left or the right, uh, you know, too, too excited or too sad [laughs], too unhappy, uh, is a much, uh, is, is a much better longterm course of action, I think, in terms of preventing investors from either, you know, over-investing when markets… Uh, over-risking when markets are, you know, as good as they were, uh, most of last year, up to, up to last year. Uh, and over, overselling or over-panicking when markets are down like this year.

[00:24:02] Um, you know, that, that’s really a key to, as you said, having a better outcome in the long term, and, and, you know, in terms of a better wealth, wealth management, wealth result, uh, by, by having a smoother, a smoother ride.

[00:24:16] Erika Toth: And that’s absolutely, it’s a huge part of the conversation we’re having now. Uh, a lot of, uh, you know, a lot of it is going back to behavioral finance.

[00:24:24] Pierre Daillie: Yeah.

[00:24:24] Erika Toth: And, you know, we’re chatting a little bit about some of the tools that are available to advisors-

[00:24:30] Pierre Daillie: Yeah.

[00:24:30] Erika Toth: … and portfolio managers now. And I would say like every meeting I’m doing now, because of the type of market we’re in, like at the beginning of the year, in the last year, it was like the markets were defying gravity, right? People were-

[00:24:40] Pierre Daillie: Right.

[00:24:41] Erika Toth: Everybody was a genius, everybody was making money [laughs], people were just throwing more money in, and, uh, and people were, were excited. And this year, it’s been very challenging, right? We’ve seen, uh, both, both stocks and bonds correct. Um, so we, we have put together a revamped series of tools on the BMO Canadian ETF dashboard, that’s our value-added site for advisors and-

[00:25:02] Pierre Daillie: Right.

[00:25:03] Erika Toth: … PMs. Um, and there’s in particular-

[00:25:05] Pierre Daillie: That’s, that’s, uh, that’s B, bmoetfs.ca.

[00:25:08] Erika Toth: That’s right. Yes.

[00:25:09] Pierre Daillie: Right?

[00:25:09] Erika Toth: bmoetfs, with an S, .ca.

[00:25:10] Pierre Daillie: Okay.

[00:25:11] Erika Toth: And I spend a lot of my time in meetings with advisors and portfolio managers actually sharing some of these value-added resources that they could use with their end clients, and in particular, we’ve-

[00:25:20] Pierre Daillie: Right.

[00:25:20] Erika Toth: … we’ve added this year, um, a section called the Volatility Center. So there’s a number of actually non-product client-friendly pieces, um, really to help clients stay invested in a tough market, to put things into perspective, to keep them, you know, um, invested according to their, their longterm plans. And, uh, just to, to share just a couple of examples, there’s, uh, one piece that, that I love, that my eyes nearly popped out when I first read this piece, but it shows you over the last 20 years the impact of missing the five best days in the market, and the impact-

[00:25:55] Pierre Daillie: Right.

[00:25:55] Erika Toth: … of missing the 10 best days in the market, and so on. But really, those numbers were, were eye-popping. I mean, it’s, you’re looking at somebody who started with $100,000 to invest in 2,000, um, the difference, I mean, you’re looking at instead of about 450,000 at the end of last year, you’d be looking at 286,000 if you missed the five best days, and you’d be looking at 210,000 if you missed the 10 best days in the market.

[00:26:18] Pierre Daillie: Right.

[00:26:18] Erika Toth: And, you know, the, the reaction, um, even, even from advisors and PMs has been equally eye-popping because th- there’s a reminder too that, you know, these, the best days in the market, that these can happen during a bear market, as well.

[00:26:33] Pierre Daillie: Yeah.

[00:26:33] Erika Toth: And we, we can’t time it, we don’t know when they’re gonna happen. The reality is nobody has a crystal ball, so on the flip side, that piece that shows you, okay, just how damaging it is to, you know, to jump out of the market when things get tough, uh, the flip side of that is that, you know, it, it’ll cost you, and it’ll cost you big. Um-

[00:26:50] Pierre Daillie: Absolutely. Like, those are like unrec-

[00:26:52] Erika Toth: And so, that’s a big-

[00:26:52] Pierre Daillie: Those are like unrecoverable losses.

[00:26:54] Erika Toth: Absolutely. So, that’s-

[00:26:55] Pierre Daillie: Um, I just wanted to add. I, I, I just wanted… Sorry, and I, I, I wanted to add that, that often, the, the, those, those best days in the market are often right next to the worst days in the market.

[00:27:06] Erika Toth: The worst. Yeah.

[00:27:07] Pierre Daillie: Right? And so, so if you’re trying to avoid risk, you’re taking the risk of, you, you, you’re… There’s an enormous opportunity cost of, of-

[00:27:16] Erika Toth: Huge.

[00:27:17] Pierre Daillie: … risk avoidance. Yeah.

[00:27:18] Erika Toth: Yeah.

[00:27:18] Pierre Daillie: And that, that’s, that’s a great tool.

[00:27:20] Erika Toth: It’s, it’s a, I really love that one in particular. There’s, there’s some great ones too about, um, you know, staying invested for the long term, so showing-

[00:27:28] Pierre Daillie: Right.

[00:27:28] Erika Toth: … you know, over the last 30 years what some of the major drawdowns in the market have been, and then on the flip side of that page, you’ll see, you know, the, the average annualized return for a balanced portfolio versus equity, versus if you went to a, you know, even a five-year GIC over that period. And again, it’s, it’s a staggering difference. There’s another great piece on the, the history of Canadian bull and bear markets going back to 1960, which is quite powerful and it’s a really easy visual too. It’s not, it’s not complicated to understand, it’s not 10 pages of text.

[00:27:55] Pierre Daillie: Yeah.

[00:27:56] Erika Toth: Um, and it shows you that on average, bull markets in Canada have lasted, you know, four times longer than the average bear market, so that’s something to keep in mind. But also, the average return of a bull market has been, I believe it’s about 73% versus the average loss in a bull, in a bear market, uh, which has been about -23% going back to 1960. So not only do bull markets last longer, but the returns tend to be a lot bigger than the respective losses of, of a bear market. And so, it’s, it shows you, you know, how important it is, um, over the course of, of several market cycles and the big difference that that can make, you know, really staying invested for the, for the long term, so that’s another example of a piece that I, that I love, um, and that I’ve been-

[00:28:38] Pierre Daillie: Yeah.

[00:28:38] Erika Toth: … sharing with clients, um, on ETF dashboard. There’s also a tool I call the Big Picture, so remember the index charts that were, were up everywhere?

[00:28:47] Pierre Daillie: Right.

[00:28:47] Erika Toth: Um-

[00:28:48] Pierre Daillie: Yeah.

[00:28:48] Erika Toth: It’s, so it’s kind of like a digital version of an index chart, but what’s neat is that you can customize for a particular client’s time horizon and their dates, and you can sort of play around with different asset classes and you can really bring that planning to life with the client, and help them understand, um, you know, “This is why we’ve built the portfolio in a certain way, and this is, this is sort of the longterm out- outcome that we’re planning for,” uh, so that’s, that’s another great tool there.

[00:29:15] And you know, you brought up, you know, in a difficult year like, like this year, where, you know, a lot of, a lot of advisors are not having fun conversations with their clients, clients are looking at their statements and, you know, another bias that investors tend to have is they tend to anchor their portfolio values to the highest level it’s ever reached, right? Which is not how things-

[00:29:34] Pierre Daillie: Yeah.

[00:29:34] Erika Toth: … work. You can’t look at them in isolation. Um, but another, another piece is the, uh, value of advice that’s also on that Volatility Center, and that helps, um, advisors and PMs articulate the value that they’re providing and, and all the different aspects of the work they’re doing. And, and really focuses on the end result and quantifies the end result for that investor, and the difference, you know, overall for investors that use an advisor or PM versus the ones that don’t. And again, very eye-popping. I mean, net worth tends to be about, I, I believe it’s almost three times higher after a decade and a half of working with an advisor and sticking to a plan-

[00:30:13] Pierre Daillie: Right.

[00:30:13] Erika Toth: … versus, um, investors that do not. So I think that’s a- another great piece to highlight for, for advisors up there.

[00:30:19] Pierre Daillie: Yeah. And are you talking about the, um, the research by CIRANO?

[00:30:24] Erika Toth: I’m, I’m not sure. I think there was some of the research that was done, um, by, by BMO. Some of it might’ve been, uh, external sources, I would have to double check in terms of that piece, in terms of what, uh-

[00:30:35] Pierre Daillie: Yeah.

[00:30:35] Erika Toth: … what the source of it was-

[00:30:36] Pierre Daillie: But yeah, I, it-

[00:30:36] Erika Toth: … because I don’t know off the top of my head.

[00:30:38] Pierre Daillie: The, uh, the… Yeah, the research is conclusive, I think that that portfolio, that… Sorry, that, that investors who are advised, um, and stay advised, uh, tend to do multiple times better than, than those who aren’t, so-

[00:30:52] Erika Toth: Much be- better outcomes over time.

[00:30:54] Pierre Daillie: But if you can illustrate it, that’s, that’s even better.

[00:30:56] Erika Toth: Yeah.

[00:30:56] Pierre Daillie: I think, I think that’s another, um, big deal. And I’m, you know, so much, so much emphasis in the industry over… Historically, not, not, not… I think it’s changing, but historically, so much emphasis was placed on, you know, the 60/40 bond split. Um, and, I, I think very little emphasis was placed on the fact that, that the interest rate risk of a 60/40 portfolio was closer to 90% equity, uh, exposure in terms of equivalent risk budget.

[00:31:28] Erika Toth: Yeah.

[00:31:29] Pierre Daillie: Um-

[00:31:29] Erika Toth: That’s a great point.

[00:31:30] Pierre Daillie: And if you… Is that something that you’re working with advisors to, to address? Is the risk budgeting within their portfolio constructions in terms of, um, you know, what the, you know, how, how budgeting risk within a portfolio as opposed to budgeting between assets, uh, i- is actually a much more, um, i- is a much more improved way of looking at portfolio construction over the simple 60/40 bond split-

[00:31:59] Erika Toth: I would say-

[00:31:59] Pierre Daillie: … i- idea?

[00:32:00] Erika Toth: Yes. I mean, that’s definitely something we’ve been having conversations about for the last while. And even within that-

[00:32:06] Pierre Daillie: Yeah.

[00:32:06] Erika Toth: … fixed income bucket, you know, we’ve been having conversations about the level of volatility in the different areas of the bond market. And so, in a sense, yeah, when you’re looking at, at volatility and how certain areas of the bond market trade, um, you know, we’re, we’re looking at risk budgeting there. So that, that’s important. And I would also say, you know, if you look at our… We, we have, um, two series of, of model portfolios. We have our quarterly strategy report, um, that our, our strategist Alfred Lee puts together.

[00:32:34] Pierre Daillie: Right.

[00:32:34] Erika Toth: We’ve been running that model for 10 years now. Um, and, uh, I just recorded our quarterly podcast about that model with him yesterday. And that question actually came up, about, you know, the 60/40 portfolio, and-

[00:32:47] Pierre Daillie: Right.

[00:32:48] Erika Toth: … you know, instead of doing, uh, a traditional 60/40 portfolio, what we’ve been doing in that model is we’ve been doing a, a, uh, 50/30/20 split [laughs], where, you know, 50% is your equities, 30% is your fixed income, and then 20 would be sort of a hybrid or alternative bucket.

[00:33:06] Pierre Daillie: Right.

[00:33:07] Erika Toth: And we’ve found that that has actually helped to not only improve returns, but also reduce the level of volatility in portfolios by including exposure to, to sort of, uh, you know, alternative asset classes. So a couple of examples that, you know, that we’ve been talking a lot about with clients, um, so Alfred uses, uh, preferred shares in his model to help increase-

[00:33:29] Pierre Daillie: Right.

[00:33:29] Erika Toth: … uh, yield, uh, but we’ve also been talking a lot with advisors about the impact of adding, uh, infrastructure, let’s say. Because, um, if you look at, you know, the last 10 years, um, the correlations with bron- broad equity and bond markets have been lower than other asset classes, so we’re talking about, you know, I had a conversation with, with that portfolio manager last week about, you know, making, maybe taking down some of their international equity exposure, for example, and reallocating some of that, um, towards alternatives, towards infrastructure in particular for that conversation. Um, and, and that, part of that was in an effort to, uh, to reduce the overall risk of the portfolio longer term.

[00:34:08] Pierre Daillie: Very interesting times we’re in. Um, I’m, I, I want to ask you about the US dollar, because of its, uh, obvious, you know, behavior this year and how strong it’s been. Um, what are you recommending, or, you know, what’s your suggestion for investors, uh, wondering what to do in light of the fact that the dollar is strong and could have a reversal, uh, you know, some years, you know, over the next few years, um, as, as policy changes in the, you know, everywhere, not just in the US? But as, as por- potentially Fed, you know, Fed interest rate policy changes, and central bank policy changes a- affect the strength of the dollar, um, one way or another, how do you…

[00:34:52] You know, what are a couple of ways to, number one, if, if you believe that the dollar’s gonna weaken at some point, how do you, how do you position for that? And number two, if you believe that, uh, you know, if you wanna take a neutral stance on, on the dollar, what are some ways to consider?

[00:35:11] Erika Toth: Yeah, so that’s actually something that’s figured quite prominently in conversations this year as well, just because of the fact that, you know, the US dollar’s been on a tear, we’ve had a ton of volatility in the markets and in, in years like this, that’s when the US dollar is really, you know, that flight to safety currency, and it certainly has been, um, this year. Um, so we have seen an increased interest in Canadian dollar hedged products, so clients can still access the underlying US market, but they’re stripping the currency out of that equation given, you know, how, how strong it’s been-

[00:35:43] Pierre Daillie: Right.

[00:35:43] Erika Toth: … um, this year. Um, in terms of portfolio construction though, I would say there’s, there’s a bit of a caveat there, because I always ask, um, my clients, you know, “What is the time horizon of, of this intended investment?” And I think that’s an important part of the conversation as well, because-

[00:35:59] Pierre Daillie: Right.

[00:35:59] Erika Toth: … if it’s sort of, um, a portfolio building block, if it’s intended sort of as a, as a longterm buy and fold position, in that case, investors are typically better off leaving their, uh, US dollar exposure unhedged. And if you look at, you know, very, very longterm charts, that typically tends to result in a lower standard deviation and slightly higher returns, because of stuff like we’ve seen over the, this last year, where the US dollar has rallied and in a stressed market. Um, so that’s why we see those, those results over the long term, it has important diversification there.

[00:36:30] Um, but if, if you’re looking at, you know, the, the time horizon might not be a multi-decade time horizon, and, you know, maybe-

[00:36:37] Pierre Daillie: Right.

[00:36:37] Erika Toth: … you’ll reassess the position a year from now, two years from now, I think that it could make a lot of sense to use a Canadian dollar hedged product, just because of the strength of the US dollar that we’ve seen. And we’re certainly seeing that in terms of the, the flows. Um, so in terms of, you know, where we’ve seen money going, um, you know, broad indexes have always been, um, a staple in terms of portfolio construction, uh, but with an ETF, you have the added control over the currency. And in a lot of cases, uh, for US exposure, we’ll offer three currency choices. So we’ll offer the ability to go hedged to CAD, which strips out the, the currency out of the equation.

[00:37:12] You can go unhedge, where you have the return of the underlying stocks, plus the return of the US dollar, or you could go in US dollar units, which are becoming increasi- increasingly popular, especially for, um, wealthier clients that have US dollars to invest in non-registered accounts. And I always tell advisors, you know, if you’re… “If you want to hold on to some US dollars and physical US dollars, if you have physical US dollars in a portfolio, it’s actually often better to look at what’s available trading as a .U, we call them here in Canada-

[00:37:38] Pierre Daillie: Right.

[00:37:39] Erika Toth: … rather than looking to what’s available, uh, trading on New York. And the reason is, for those, uh, high-net-worth clients, you’re then not gonna have US estate packex- tax exposure and you’re not gonna have to file additional-

[00:37:51] Pierre Daillie: Right.

[00:37:52] Erika Toth: … T1135 paperwork. So those have become increasingly popular, and there’s more and more solutions, uh, BMO has, I, I believe 20 of them on the shelf at this point, so those that we’ve been having a lot of conversations about those too for clients that, you know, maybe they’ll, they wanna hold on to US dollars because they have, let’s say, expenses in US dollars, maybe they travel there freque- frequently or they have property there. Um, so that’s another reason, you know, clients might wanna hold on to some US dollars in-

[00:38:14] Pierre Daillie: Right, absolutely.

[00:38:14] Erika Toth: … in their accounts as well. So I think there’s, there’s different reasons, and, you know, when we have those conversations, it goes down to the, the portfolio construction level, but it also goes back to the, the client need. Um, so yes, tactically I think it makes a ton of sense to, to hedge out the US dollar right now, so we are seeing, you know, more hedge to CAD flows in terms of our products. Um, but there’s also cases where, you know, if you’re buying a broad S&P 500 ETF and you’re planning on holding that for your client for the next two decades, well, then you might wanna consider going unhedged, um, and then for the reasons we’ve just discussed, as well, you know, if the client has specific needs and has US dollars to invest in the first place, then why not consider a .U for those particular clients?

[00:38:53] Pierre Daillie: Right. So coming back, I wanna circle back to the tax loss selling conversation.

[00:38:58] Erika Toth: Mm-hmm.

[00:38:59] Pierre Daillie: Um, does the tax loss selling, uh, does, does it, does it make sense to use this opportunity that we have at this time to tax loss sell, uh, one currency base position in, in let’s say S&P 500 Index or TSX, or not TSX but, uh, let’s say a US index, uh, to switch from the US dollar version to the hedge to CAD version? Does it make any-

[00:39:26] Erika Toth: Yeah, that’s certainly another way that, uh, that people could look to take advantage of, uh, of tax losses, because, you know-

[00:39:31] Pierre Daillie: Right.

[00:39:32] Erika Toth: … prior to this year-

[00:39:33] Pierre Daillie: That would be eligible, though, with CRA?

[00:39:34] Erika Toth: Yes, it would. Yeah.

[00:39:35] Pierre Daillie: Yes. Okay.

[00:39:35] Erika Toth: So it, it’s considered a deemed disposition, and because the currency exposure is different, it’s not, it’s not considered, you know, an identical exposure.

[00:39:42] Pierre Daillie: Right.

[00:39:42] Erika Toth: So yeah, it would be eligible for tax loss selling, but we’re in, we’re in a situation where, you know, prior to this year, there weren’t that many tax loss selling [laughs] opportunities. Like, I spoke to a lot of-

[00:39:52] Pierre Daillie: No.

[00:39:52] Erika Toth: … a lot of people, a lot of portfolio managers that, you know, they didn’t have… They had deems, right? So that-

[00:39:57] Pierre Daillie: Right.

[00:39:57] Erika Toth: … a bad market, like we have this year, you know, and, and going back to that history of Canadian bull and bear markets, there’s more good years historically speaking than there are bad years. So when a bad year comes along, that’s sort of a silver lining, and that is another opportunity that people can look to. “Okay, where… ” Take stock of where I have losses in my book, and, and currency is a, is a great way to do that, especially given the strength of the US dollar rally that we’ve had this year. So yeah, we are having a, we are having conversations-

[00:40:22] Pierre Daillie: Yeah.

[00:40:23] Erika Toth: … about that, and seeing that in terms of the flows as well. So that’s a really-

[00:40:26] Pierre Daillie: Yeah, so I mean, it’s a-

[00:40:26] Erika Toth: … astute point-

[00:40:27] Pierre Daillie: Yeah, [laughs].

[00:40:28] Erika Toth: … to, you know, to make there.

[00:40:29] Pierre Daillie: I, I, as you were… As you were talking about it, I was thinking, you know, just, uh, maybe, you know, [laughs], I should ask you about clarifying that because, because it’s not that you necessarily want to get out of all your US dollar exposure, but you could definitely diversify some of your currency exposure by taking advantage of the tax loss selling opportunity that-

[00:40:46] Erika Toth: Absolutely.

[00:40:47] Pierre Daillie: … that’s, that exists today. Um, you know, in, in, in more than one dimension. I mean, so if you’re looking at it like, you know, playing it like a tridimensional chess board, um, you know, you have all these different layers of, of thought that you can apply to portfolio construction or reconstruction, um, that are really interesting right now given, given the climate we’re in.

[00:41:06] Erika Toth: And tax alpha is one way that advisors can add value-

[00:41:09] Pierre Daillie: Yeah.

[00:41:09] Erika Toth: … for their clients, right? So there’s the portfolio management aspect-

[00:41:12] Pierre Daillie: Yeah.

[00:41:12] Erika Toth: … but there’s also the tax management. Um, and then behavioral coaching, [laughs], you know, going back to that, like that’s, uh, that’s probably one of the, the largest areas. So these are three really important things that advisors can be doing for their clients right now.

[00:41:24] Pierre Daillie: Yeah.

[00:41:24] Erika Toth: And to set themselves apart from, from their competition, I think, as well.

[00:41:29] Pierre Daillie: So Erika, thank you very much. That, that was, uh, I think that, you know, those were some very revealing insights. Um, what, what are some of the… Uh, did we cover all of the tools that you wanted to talk about today?

[00:41:41] Erika Toth: Um, so I, I did put together, you know, just a series of, of points and sort of takeaways in terms of what, what we’re seeing in the markets right now. Um, so we spoke about-

[00:41:51] Pierre Daillie: Right.

[00:41:51] Erika Toth: … um, you know, we’re seeing, uh, investors and portfolio managers allocate to cash as an asset class again, so you know, last month I would say cash is king, right? We’re, we’re seeing that because the interest rates are that much more attractive right now. Um, so I would say, you know, a reminder, don’t… It’s, it might be tempting to go all to cash, um, but to have… You know. And we’ve, we’ve talked about with, the reasons why that’s not a good idea. Um, but-

[00:42:15] Pierre Daillie: Yes, potentially a very dangerous move.

[00:42:16] Erika Toth: It’s potentially very dangerous.

[00:42:17] Pierre Daillie: Yeah.

[00:42:17] Erika Toth: But to have, you know, maybe an, a slightly higher cash allocation and keeping some dry powder and getting, getting paid while you’re sitting on that maybe slightly higher allocation to cash, I don’t think-

[00:42:26] Pierre Daillie: Yeah.

[00:42:26] Erika Toth: … is necessarily a bad idea, ’cause now you’re, you’re looking at numbers, like I said, that we haven’t seen in, uh, probably a decade in terms of, uh, returns on, on cash or cash-like type, uh, strategies. And, and certainly in the ETF space, there’s, there’s a lot of choice now in terms of ultra-short-term bonds or mining markets. So cash is king, I would say yes, but there’s a caveat there, make sure you don’t go [laughs] all into-

[00:42:47] Pierre Daillie: Yeah.

[00:42:48] Erika Toth: … cash, and, and make sure you stay invested, but there’s a lot of great tools, um-

[00:42:51] Pierre Daillie: Don’t go, don’t go completely risk on-

[00:42:52] Erika Toth: Don’t fall off the deep end there. Yeah.

[00:42:53] Pierre Daillie: Yeah.

[00:42:53] Erika Toth: Because things can turn around, um, and we can’t-

[00:42:55] Pierre Daillie: Yeah.

[00:42:56] Erika Toth: … really predict when that’s gonna happen. Uh, so the second takeaway, bonds are back in a really big way. I mean, we’ve been essentially a reset in the bond market, so I think there’s gonna be some, some actually really good opportunities there going forward. And I would say, you know, we’re, we’re seeing that interest not, not just on the retail side but also on the institutional side, um, because you’re looking at, you know, much more attractive yields again right now. Um-

[00:43:16] Pierre Daillie: Well, yeah. We’ve gone, we’ve gone from, from, uh, TINA, you know, there is no alternative, to having tons of alternatives-

[00:43:22] Erika Toth: Yeah.

[00:43:22] Pierre Daillie: … and bonds are competitive again, against other assets.

[00:43:24] Erika Toth: Exactly.

[00:43:24] Pierre Daillie: Right? And, um, I mean, the, both tactically and, you know, yield-wise.

[00:43:30] Erika Toth: Yeah. And speaking of yields-

[00:43:32] Pierre Daillie: Yeah.

[00:43:32] Erika Toth: … that’s another point that I wanted to bring up, because, um, you know, enhanced income solutions, uh, remain really popular in terms of our-

[00:43:41] Pierre Daillie: Right.

[00:43:41] Erika Toth: … product suite, but also in the market overall. Um, and there’s several reasons behind that, so we’re talking about, when I, when I say enhanced income I’m talking about things like covered calls, uh, put writing strategies or premium yield strategies, which is a combination of, uh, call selling and put selling. Um, and I would say those are, are very popular right now for a number of reasons. I mean, some of those, uh, key reasons, the aging demographic, right? So there’s more people, you mentioned this at the beginning of our chat, there’s more people that are relying on the cashflows of their investments, um, and these not-

[00:44:10] Pierre Daillie: Right.

[00:44:10] Erika Toth: … only give that, that higher cashflow, they give a nice monthly cashflow, and it’s also really tax efficient because the option premiums on the cover call strategies, for example, are taxed as capital gain, so I think that’s, that’s really compelling. Um, but also, you know, inflation being what it has been this year, it’s put more focus onto, uh, strategies that generate a higher level of, of current cashflow. Um, so dividend-oriented strategies have been quite popular, and they’ve actually performed really well in this market.

[00:44:37] Um, and you know, the, the covered call, um, high-dividend portfolios that we run, they have that dividend focus, but they’re also, they have, they have a dual return stream. They have their-

[00:44:47] Pierre Daillie: Right.

[00:44:47] Erika Toth: … this, they return, they, they’re… They, they’re yielding the, um, the underlying dividends of the stocks, but they’re also generating that additional cashflow from selling the options. Um, and in volatile markets like we’re living this year, uh, that tends to translate into higher option premiums. Um, so-

[00:45:03] Pierre Daillie: Right.

[00:45:04] Erika Toth: … this type of market is very attractive for option writing strategies. You’re, you’re turning market volatility into a source of returns and into a source of tax-efficient cashflow for clients, so those have been really, really popular. Um, and in terms of our lineup at BMO, uh, we’re actually the largest manager of covered call ETFs in the world, which is pretty [laughs] crazy-

[00:45:22] Pierre Daillie: [laughs], that’s interesting.

[00:45:22] Erika Toth: … to wrap your head around, um, but here in Canada-

[00:45:24] Pierre Daillie: That’s amazing.

[00:45:24] Erika Toth: … we manage about $10 billion of options-based strategies. Um, we represent about two thirds of the AUM in the Canadian industry. Um, and strategies that have been really popular, like, uh, owning the Canadian banks with a covered call overlay, I mean, stuff like that’s yielding about seven… over 7% right now. Um, and that’s taxed as Canadian dividends and as a capital gains, so really, really powerful tools in terms of generating that tax-efficient cashflow.

[00:45:48] Another one that’s been really popular this year has been our, our ZWU, which is a covered call in the u- utilities sector. I mean, it’s a defensive sector, which is, is pretty in demand right now given what’s going on in the markets. Um, so that’s yielding about eight and a half percent right now. So these tools have-

[00:46:02] Pierre Daillie: Amazing.

[00:46:02] Erika Toth: … have been really, really popular, a lot of them have, you know, over 10 years of track record. Um, and we’re not just seeing investment advisors use these, we’re also seeing family offices, um, look to these types of strategies because of their tax efficiency and the, the higher level of, uh, of yield, as well, so that’s another thing that I would, I would highlight. Um, so there’s definitely a few reasons behind their popularity.

[00:46:23] Um, we spoke about the, uh, the tool-

[00:46:25] Pierre Daillie: I’ve al- I’ve always been, you know, Erika, I’ve always been surprised that, at how long the adoption runway for these enhanced-income, uh, you know, solutions has been. I mean, buy write strategies have been around for a very [laughs] long time. And, and, um, you know, I, I guess, you know, I guess we were all in love with the stock market for so long, and, and you know, afraid to give away some of that upside i- in return for yield. But, but I think for, as you said, for the, you know, for the, uh, pre-retiree or retiree, uh, cohort, you know, that that’s, that’s a really, really important and essential option that’s available, is, is the-

[00:47:00] Erika Toth: Yeah.

[00:47:00] Pierre Daillie: … uh, the covered call, you know, overlay strategies-

[00:47:03] Erika Toth: Yeah, and if you look at-

[00:47:03] Pierre Daillie: … which w-

[00:47:04] Erika Toth: … the current markets we’re in right now, like if we’re, if we’re in a down market or if we’re in a volatile sideways market, that these types of strategies actually tend to perform very well in, in those markets. Um-

[00:47:12] Pierre Daillie: Sure, I mean, because of the uncertainty, the, the heightened al- you know, the slight, the increase, heightened volatility or, or increase in, in overall volatility is, is definitely providing, uh, a higher premium income. Yeah.

[00:47:25] Erika Toth: Yeah. And also, you know, one, one important thing that goes back to the sort of portfolio construction, um, not all buy write strategies are managed the same way. So when I’m talking to advisors and PMs, it’s, it’s really important if you’re gonna be considering this type of strategy, you wanna look at what’s under the hood and how they’re being managed.

[00:47:41] Pierre Daillie: Right.

[00:47:41] Erika Toth: Um, so in terms of the way that, that we do it, you know, we want to be really mindful of capping that potential upside. Um, the, the goal really is we write on about half of the portfolio, we’re not writing on the entire portfolio, and that’s an important distinction to make. Um, because some of the s- some of the strategies available, they write on 100% of the portfolio, and they’re, you’re giving away more upsides. So what we try to do is-

[00:48:03] Pierre Daillie: Right.

[00:48:03] Erika Toth: … we want to sort of hit that sweet spot between, yeah, we want to, we want to provide the additional yield, but we also want to capture the majority or, or as much upside as possible over time, so we’re only writing on half the portfolio. Another really important point is that we’re always writing above current market prices. And these things are being reassessed on a daily basis, um, because we want to be able to provide a mixture of the income and the growth to clients.

[00:48:24] Pierre Daillie: Yeah.

[00:48:24] Erika Toth: We don’t just want to provide the income but then not have any growth potential, so I think that’s a really key point to make. I mean, sometimes, if you’re, if you’re analyzing different, uh, options strategies and different ETFs available, some of them might have yields, you know, upwards of nine or 10% right now, so you always… Like, I would say for the advisor and PM, it’s really important to look under the hood and to find out are… Is the management team writing on 100% of the portfolio?

[00:48:47] Pierre Daillie: Right.

[00:48:47] Erika Toth: Are they writing at the money options? Because these types of things can cap the return even more, so even though that yield might be really eye-popping, uh, you’re not gonna get that, that upside capture that, that you want. So ideally, you would get a mix. You don’t want to sacrifice all of the growth potential. So I, I would say that that’s a really important point to highlight when you’re looking at these types of options strategies. Um, so a couple tools that we have for advisors and PMs that are, that are interested in this type of strategy, uh, we publish our, um, monthly derivatives and volatility report, which I have-

[00:49:20] Pierre Daillie: Okay.

[00:49:21] Erika Toth: … I haven’t seen anything that shows this degree of transparency on, on options-based strategies. So the advisor, you know, by looking at this one-pager, you can see how these strategies are positioned, um, and you can also see, you know, the mix of, of the yield coming fro- the percentage coming from the dividends versus the options. And you can see the consistency over time, but you can also see how, how nimble and how active they are in terms of, you know, uh, the, the strike prices and how far out of the money they are in response to market conditions.

[00:49:48] So when, when markets are very volatile, our PM team can actually write the options further out of the money because with that we’re able to get fatter premiums, but then we’re able to actually capture more of the upside, um, when the markets turn around. So a- that, that tool is a fantastic tool for advisors and PMs looking to, you know, wrap their heads around that strategy. It’s, it’s really transparent, it’s easy to understand.

[00:50:10] We also publish a five-over-five report that advisors can actually use with their clients, and it’s our top five picks of ETFs yielding over 5%, and that’s published also on a quarterly basis. So these are the types of tools that we can provide to help support, um, su- su- support advisors in those conversations.

[00:50:26] Pierre Daillie: Yeah.

[00:50:27] Erika Toth: So I w- I think-

[00:50:28] Pierre Daillie: Well-

[00:50:28] Erika Toth: … that’s an important thing to, uh, to highlight. Um, I think we hit everything else, really. I mean, we talked about the tools, the support, the trends that we’re seeing, the tax loss selling. I mean, these are great, uh, great, great things to keep in mind after a year like this year. But I think, you know, one of the key things that I would, that I would wanna highlight, um, is, is definitely that Volatility Center and those tools to help advisors have those challenging conversations, given how difficult markets have been this year, and to help their clients stay invested, and the importance of that over time.

[00:50:59] If I could leave, you know, one impression-

[00:51:00] Pierre Daillie: Yeah.

[00:51:00] Erika Toth: … today, [laughs], I think it would be that one, ’cause I think that that’s the biggest difference they could make for their clients.

[00:51:06] Pierre Daillie: Well, I, I, I, uh, agree with you. I think the, you know, having the ability to put things into a, uh, to, to, to be able to present things to, to your clients visually, uh, is very powerful. And, and, Erika, I’m, I’m, you know, I’m so impressed by what you and, and, uh, you know, the team at, at BMO Global Asset Management, um, ETFs, um, are doing. I think the, uh-

[00:51:30] Erika Toth: Thank you.

[00:51:31] Pierre Daillie: … the portal, the bmoetfs.ca portal is impressive, uh, and, and does offer advisors really valuable tools for, uh, especially navigating this market that we’re in right now. And, um, I guess o- one final point that I would add is, is that, you know, it’s very important, I think, f- to remember also, this is, this is no time to abandon the 60/40 portfolio. You know, if there was a time, it was probably the end of last year, [laughs]. You know?

[00:52:05] Erika Toth: Hindsight 20/20, right?

[00:52:07] Pierre Daillie: Yeah, [laughs], like 100%. Right? But, but, uh, you know, um, I was, I was particularly impressed by, by, uh, Steve Cohen’s assertion, uh, Steve Cohen from S.A.C. Uh, when he was asked what he thought of the 60/40 portfolio, his response was very surprising, and it was, it was that this is a great time to be a 60/40 investor. Right? And I wasn’t expecting it, I don’t think the host was expecting the q- the, the answer to that question to be that, but the point was very simple. Stocks are depressed, bond prices are depressed, there’s yields, um, you know, anybody coming into the market right now, 60/40 is fairly attracti- is a fairly attractive proposition.

[00:52:47] So what I get from that is, okay, if you’re a, if you’re a well-heeled investor being invested, you know, 10, 15, 20, 30 years and you’re worried about your current position in the market, um, this is definitely not the time to exit risk. And you know, despite the emotions that are running right now, to f- and, and the feeling of doing, the, the feeling like that’s what you need to do given, given the regime changes that we’re, we’re sort of encountering right now. But that, that was my point, my point is this is no time to exit risk. The time to have exited risk was at the end of last year-

[00:53:22] Erika Toth: Yeah.

[00:53:22] Pierre Daillie: … and if you did it, wonderful, but if you haven’t-

[00:53:24] Erika Toth: And if you didn’t, you have to hold on-

[00:53:26] Pierre Daillie: [laughs].

[00:53:26] Erika Toth: … and stick to your guns.

[00:53:27] Pierre Daillie: Absolutely.

[00:53:27] Erika Toth: It’s not the time to, uh-

[00:53:28] Pierre Daillie: Yeah.

[00:53:28] Erika Toth: … to reinvent the wheel, and-

[00:53:29] Pierre Daillie: Yeah.

[00:53:30] Erika Toth: You know? It, it really highlights the cyclical nature of markets. Um, you know, it’s tempting always to say, “This time’s different because this, this, this,” but the reality is that markets are highly cyclical, and-

[00:53:40] Pierre Daillie: Yeah.

[00:53:40] Erika Toth: … you know, just because bonds have been a tough place to be over the last year, um, I don’t, I don’t believe that’s gonna be the position that we’re gonna be in a year from now, so I think it’s actually a, a really big opportunity to in-

[00:53:49] Pierre Daillie: Yeah.

[00:53:50] Erika Toth: … for investors to start looking at over the next-

[00:53:52] Pierre Daillie: Yeah.

[00:53:52] Erika Toth: … over the next year.

[00:53:52] Pierre Daillie: Use the tools.

[00:53:53] Erika Toth: Yeah.

[00:53:54] Pierre Daillie: Use the tools that are available, educate yourself if you need to, and you know, take advantage, [laughs], by all means take advantage of the tax loss selling opportunity that’s available today, which is, which is, you know, an opportunity to move your assets around from, from, you know, one risk budget to another, and also currency.

[00:54:17] Erika Toth: And also, you know, potentially make your-

[00:54:18] Pierre Daillie: Yeah.

[00:54:18] Erika Toth: … um, portfolios more efficient and more scalable-

[00:54:21] Pierre Daillie: Yeah.

[00:54:21] Erika Toth: … over time. I think that’s a, you know, key takeaway and a, and an opportunity that, that tax loss selling in these bad markets are presenting us with right now. It’s sort of that silver lining, you know?

[00:54:30] Pierre Daillie: So many.

[00:54:31] Erika Toth: Yeah.

[00:54:31] Pierre Daillie: So many right now. Erika, uh, it’s been really a pleasure to talk to you, thank you so much for your-

[00:54:35] Erika Toth: Thanks, Pierre, likewise.

[00:54:37] Pierre Daillie: Yeah. Thank you for your valuable time and your insight.

[00:54:40] Erika Toth: It’s my pleasure. At the end of the day, we, uh, we want to, we want to help our clients do the best that they can for, for their clients, and I think that, uh, we’re very, we’re very passionate about that. So, uh, you know, we put together these, these great tools, and, and we’re happy to have that conversation any time about how we can, how we can help you do that.

[00:54:56] Pierre Daillie: Wonderful. Thank you.

[00:54:57] Erika Toth: Thanks.

Listen on The Move

 

What's driving this massive change, this levelling of the playing field?

Erika Toth, CFA is the director of Institutional and Advisory for Eastern Canada at BMO ETFs. She has extensive experience in investment analysis, portfolio construction, and trading of equities, fixed income, foreign exchange, options, ETFs and mutual funds. She is known for her attention to detail and providing support and education to advisors and portfolio managers in a consultative manner.

We discuss:

- Erika's experience and background
- The size and growth of the ETF space in Canada
- The proliferation of products over ten years ranging from simplicity to complexity
- the trend of advisors graduating to PM in the field, gaining the credentials to do so
- from index ETFs to liquid alternative ETFs.
- how ETFs are levelling the playing field between Investment Advisor PMs vs. Investment Counsel PMs
- how ETFs are providing advisors with all the building blocks they can use to compete
- how advisors are competing with ICPMs using ETFs
- how she and the team at BMO ETFs are assisting advisors on a daily basis to level up their competitiveness
- how the playing field is levelling
- ideas and strategies advisors can implement to be competitive in the business and vs. ICPMs.
- portfolio construction and investment planning tools BMO ETFs have created for advisors

Connect with Erika Toth on Linkedin

You can find pretty much everything we discussed at bmoetfs.ca.

BMO ETFs Trade Ideas and Podcasts: https://www.bmoetfs.ca/trade-ideas-podcasts

ETF tools and resources: https://www.bmogam.com/ca-en/advisors/tools-and-resources/etf-investing-basics/etf-tools-and-resources/

 

Thank you for listening. Thank you for watching. Please make sure to like us and share us wherever you can. It helps more people like you find us.

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