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Advisor ETF Insights

Why investors like owning ETFs

Clients looking for an alternative to traditional, high-cost mutual funds are increasingly turning to the lower fees and diversity typically found with exchange-traded funds

By: PAUL BRENT

Date: April 24, 2017

There was a time when investors paid little attention to fees.

But today’s ultra-low return environment for fixed-income investments and the uncertainty around stocks has put a greater focus on the fees investors pay.

Expenses like management fees can impact an investor’s annual returns, making it difficult, if not impossible, to achieve long-term savings and retirement goals after the potential negative effects of inflation are considered.

There is an increasingly popular alternative to traditional, high-cost mutual funds, however: exchange-traded funds (ETFs). Through the use of passive and low-cost investment strategies, ETFs can offer investors the diversified exposure to equity and fixed-income markets, sometimes at a fraction of the cost that mutual funds charge.

Even though ETFs are gaining popularity and are the backbone of so-called robo-investment services, ETFs have not been embraced as widely as they could be. For advisors, ETFs offer the potential to improve returns for their clients and provide them with something “new” to talk about in meetings with their clients.

“ETFs are certainly a way for advisors to lower the overall cost of portfolios for their clients, so they should definitely be looking at them and considering them to add long-term value,” says Krista Matheson, head of ETFs and structured products for Manulife Investments.

Ambitious and inventive ETF providers continue to add complex and actively-managed funds that do far more than passively mirror the performance of equity and fixed-income indexes. As the complexity grows, however, most investors are just grasping the differences between ETFs and mutual funds, says Ms. Matheson.

“Particularly given the relative newness of ETFs, there is a real diversity of knowledge about them. There are some people who understand what they are, but there are a lot of people who think ETFs are a strategy, not simply an investment structure,” she notes. Part of the confusion around ETFs and their role in a portfolio has to do with the fact that some of the first exchange-traded funds introduced to the market were based upon complex leveraged investment strategies that were misunderstood.

Ms. Matheson, whose own portfolio is comprised mainly of a handful of relatively straightforward ETFs, says that the simplicity of most ETFs on the market is their biggest selling point.

“In general, most ETFs are either passive strategies or rule-based strategies and you should have clear understanding of what exposure you are getting through that ETF,” she says. “You have to understand the specifics of each ETF.”

Like the low-fee, robo-advisor services that are proliferating across the Canadian investment industry, ETFs are particularly appealing to younger investors who are often looking for a way to invest that’s different from what their parents have done. Younger investors may require more financial-planning advice and goal-setting than older investors, but embrace the message of lower underlying costs of investment products.

“Diversification and low cost are the big benefits of ETFs,” says Gail Bebee, a Toronto-based author of No Hype: The Straight Goods on Investing Your Money, who also teaches courses on investing.

Because the major ETF providers continue to innovate and offer new funds based on fulfilling different investment goals, investors can go simple (with broadly diversified index-based funds) or complex (using leverage or more niche funds, for example), says Ms. Bebee.

Recent investment industry rule changes under the new CRM2 reporting guidelines have also put a new focus on investment fees. Canadians now receive much more information from their advisors as to just how much their investments cost and what returns they generate.

Given the cost advantage that ETFs have, more Canadians should consider them as part of their portfolio. It’s up to financial advisors to explore ETFs with clients as the lower costs can often give investors more “bang for their buck.”

Sponsored by Manulife

Commentary is for general information purposes only and should not be relied on for specific financial or other advice. Opinions expressed are subject to change based on market and other conditions. Commissions, management fees and expenses all may be associated with exchange traded funds (ETFs). Investment objectives, risks, fees, expenses and other important information are contained in the prospectus, please read it before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

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