Perhaps the most basic piece of investing wisdom is: don’t put all your eggs in a single basket.
That advice goes further when one is investing in financial markets. There, the ironclad rule to manage risk is: be diversified, or put your eggs into a lot of baskets. The reason for this is that, on average, a portfolio made up of a variety of investments spread across different industries and countries is more likely to yield better long-term returns and reduce the risk tied to any individual company, economic sector or national economy.
And yet, these days, Canadians looking for a simple and low-cost way to invest for retirement may be just fine buying a single investment product and holding it until — or close to — the time they stop working, according to a number of financial experts.
The product in question is so-called all-in-one exchange-traded funds (ETFs), currently offered by Vanguard, iShares, BMO and Horizons, some of Canada’s largest ETF providers.
All-in-one ETFs are funds of funds that offer global diversification across Canadian, U.S. and international markets, low fees and automatic rebalancing, meaning that investors don’t have to worry about re-aligning their portfolio to maintain their desired value split among different types of assets despite price fluctuations.
Investing in an all-in-one ETF for retirement is like turning your registered retirement savings plan (RRSP) or tax-free savings account (TFSA) into a low-cost professionally managed pension plan, said Larry Bates, a former Bay Street investor and author of investing book Beat the Bank.
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Wait, what’s an ETF?
An ETF is a basket of securities, like stocks and bonds, that track a market index like the S&P 500, a commodity, bonds or group of assets. ETFs come at a fraction of the cost of turning to an investment advisor or wealth manager. Plenty of research has shown that using ETFs to mirror the movements of a broad financial index yields better returns than those achieved by investors who try to beat the market.
Until about a year ago, though, Canadians hoping to invest in ETFs had two main choices: sign-up with a robo-advisor or build their own portfolio of ETFs through a financial institution or discount broker.
Robo-advisors, which are essentially online wealth managers, have traditionally been the easier option. All you have to do is take a quick online quiz, and the robo-advisor will slot you into a pre-made portfolio of ETFs that suits your personal profile. Set up automatic contributions, and you’re done.
The alternative to that used to be building your own ETF portfolio. In terms of investment fees, that’s usually even cheaper than a robo-advisor. The catch is that it requires quite a bit more legwork. You’d have to research the various types of funds and take care of rebalancing.
All-in-one ETFs make DIY investing almost as seamless as signing up with a robo-advisor, according to Benjamin Felix, portfolio manager at PWL Capital in Ottawa. A single all-in-one fund is made up of several underlying ETFs, so there’s no need to hold anything else to achieve adequate diversification, Felix and Bates both told Global News.
The main choice investors have to make with all-in-one funds is picking a mix of stocks and bonds that matches their investment goals, time frame, and risk tolerance, Bates said. For the Vanguard funds, for example, the range goes from an 80-per-cent-bond and 20-per-cent-stocks split to a balanced ETF made up almost exclusively of stocks. When choosing an asset allocation, investors usually consider that stocks are more prone to ups and downs but also likely to offer higher long-term average returns than bonds.
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All-in-one ETFs vs. robo-advisors
So how do all-in-one ETFs stack up against robo-advisors like Wealthsimple, WealthBar or Nest Wealth? We asked Felix to compare the two:
Robo-advisors are cheap, but in almost every case all-in-one ETFs have even lower management fees, Felix said.
The only caveat is that all-in-one ETFs could cost you significantly more in foregone returns than you’d save in fees if you sell your investments in a panic when the market crashes. Robo-advisors are starting to send targeted messages that help nervous clients navigate a rough stretch without making impulsive decisions. But if you invest in a balanced ETF, you’ll be navigating market downturns on your own, Felix noted.
All-in-one ETFs are the ultimate set-it-and-forget-it DIY investing. But the “set-it” part is still a bit more labour intensive with ETFs than with robo-advisors. The user experience usually isn’t as intuitive with discount brokerages as it is with robo-advisors. For example, users have to calculate on their own how many units of an ETF they can afford to purchase, Felix noted.
Another small pain point of all-in-one ETFs is that they may force investors to make infrequent lump-sum contributions instead of setting up automatic monthly transfers, Felix said.
Finally, investing in an all-in-one ETF may leave you with some leftover cash that isn’t quite enough to buy an additional ETF unit, an issue that doesn’t exist with robo-advisors, according to Felix.
The “forget it” part of all-in-one ETFs may also be an issue for some people, Felix said.
The risk is that, once you’ve set up an account with a discount broker and figured how to purchase investments on your own, you’ll be tempted to tinker with portfolio instead of just sticking to a single fund.
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Could you hold a single all-in-one ETF until retirement?
All-in-one ETFs may be about to challenge another piece of conventional investing wisdom.
The general rule of thumb when you’re investing for retirement is that you should start out with a portfolio more heavily weighted toward stocks and gradually add more bonds as you get closer to retirement. The idea is that when you’re young you need higher returns to build up your baby investments and have plenty of time to ride out any market tumbles.
Recent research, though, is starting to question that. When Peter Forsyth of the University of Waterloo ran the numbers, for example, he found that increasing the bond-weighting as one gets older does not work better than sticking to the same proportion of stocks and bonds until retirement.
Forsyth was looking at the so-called glide path investments strategies used by target-date funds, which reduce the exposure to stocks according to a deterministic formula as a target retirement date draws near. He then compared that to the performance of a fund that simply maintained a constant split of stocks and bonds equal to the average stocks-bonds weighting of a target-date fund. He found that the chance investors would miss their target portfolio value at the end of 30 years was roughly the same with either strategy.
“It’s only sort of an intuition that something might be better if you move to the bonds as you get older,” he said.
For one, most investors don’t have a lot of money to invest when they are just starting out when they are supposed to be heavily weighted toward stocks.
“So these big gains you make are on a very little amount of money,” he said.
Forsyth’s research suggests that changing the asset allocation based on how close or far the portfolio value is to the investor’s target value may be a much more promising strategy.
But that would be hard for small investors to implement, Forsyth said. When it comes to investing in all-in-one ETFs, sticking to a single asset allocation that suits the investor’s needs and risk tolerance may be the best way to go, he told Global News.
Still, if you’d rather stick by the old rule and decrease your exposure as you approach retirement, that’s also easy to do with these ETFs, Bates said. All you’d have to do is switch to a fund with a heavier bond weighting every few years or even once per decade. Or you could simply channel your new contributions to more conservative funds, he added.