ETFs to match your investment personality

Something for everyone

Last time, I suggested three exchange traded funds (ETFs) for investors looking to participate in a rising market while generating some income. But the ETF market continues to grow with something for every time of investment personality. In fact, nine new ETFs were launched in March, bringing the total in Canada to more than 700. In this two-part series, I want to expand on my theme, and look at ETFs that match specific investment personalities.

Originally, ETFs were supposed to be a low-cost way to track the movement of major indexes such as the S&P/TSX Composite or the Dow Jones Industrial Average. Those plain-vanilla ETFs are still available and popular, but in recent years the industry has introduced new products of increased sophistication.

For example, one of the March launches was the Desjardins RI Emerging Markets Multifactor – Low CO2 ETF (TSX: DRFE). A report from National Bank says it “avoids companies with the highest carbon intensities and constructs an Emerging Markets equity portfolio out of companies with notably lower carbon footprints compared than traditional indices.”

That pretty much sums up the direction in which the ETF industry is heading: more specialization and greater complexity.

So how do you decide which ETFs to buy? Start by assessing your own investment personality. You need to know what your goals are and your degree of risk tolerance before making a choice. Here are some suggestions. I’ll only discuss Canadian-based ETFs, but of course the whole U.S. market is also open to you.

The penny-pincher

You never want to lose a cent. Anything you invest in has to make money or at worst break even. Your best bet is a CDIC protected GIC, but if you want to stick with ETFs here are three to consider.

iShares 1-5 Year Laddered Corporate Bond Index ETF (TSX: CBO). As the name suggests, this ETF invests in a portfolio of high-quality corporate bonds. One fifth of the securities mature each year, and the money is reinvested for a new five-year term. Distributions are paid monthly and are currently $0.041 per unit. The fund has made small profits for five consecutive years and is ahead 2.42% this year to April 30. The MER is 0.28%.

BMO Ultra Short-Term Bond ETF (TSX: ZST). This fund has never had a losing calendar year since it was launched in 2011. It invests primarily in corporate bonds that will mature or reset in less than one year. It won’t make you a lot of money – the average annual return since inception is only 1.78%. So far this year, it’s ahead 0.99% (to April 30). That’s the price you pay for safety. Monthly distributions are currently $0.12 per unit. The MER is a modest 0.17%.

Vanguard Short-Term Corporate Bond Index ETF (TSX: VSC). You’ll like the cost of this one: the MER is only 0.11%. The fund tracks the performance of the Bloomberg Barclays Global Aggregate Canadian Credit 1-5 Year Float Adjusted Bond Index – which, distilled down, means it invests in bonds with maturities of less than five years. This is another low-performance fund – the total return in 2018 was only 1.73%. But it has never lost money in a calendar year since it was launched in 2012.

The cautious investor

You’re willing to take a little risk – but not very much. If that describes you, check out these ETFs.

iShares Core Canadian Universe Bond Index ETF (TSX: XBB). If there’s one ETF that I believe belongs in every portfolio, this is it. The fund reflects the performance of the entire Canadian bond universe of corporate and government issues. It rarely loses money and has an annual return since inception (November 2000) of 5.11%. So far in 2019 it is ahead 3.78% to April 30. Distributions are paid monthly and are currently $0.074 per unit. The MER is 0.19%.

First Asset Canadian Convertible Bond ETF (TSX: CXF). This ETF provides market-cap weighted exposure to a portfolio of the largest and most liquid Canadian convertible bonds. These are bonds that can be switched into common shares if certain conditions are met, so they provide stock market exposure while generating interest income. This ETF, which receives top marks from two of Canada’s fund-rating agencies, has generated an average annual return of 4.42% since it was launched in June 2011. Distributions are paid monthly. The management fee is on the high side at 0.65%.

The income-seeker

To heck with capital gains! You want ETFs that provide cash flow, perhaps to feed your RRIF distributions. Here are two to consider.

BMO Canadian High Dividend Covered Call ETF (TSX: ZWC). This is a relatively new fund from BMO that invests in a portfolio of dividend-paying stocks and supplements the income by writing covered call options. It has been around only since February 2017, and its performance history so far has been volatile – down 9.85% in 2018, up 15.45% so far this year. So if you tend to worry about the day-to-day market price, this is not a good choice. But for cash flow, it’s one of the best. The current monthly payment is $0.11 per unit ($1.32 annually) to yield 6.6% recent prices. The MER is a high 0.72%.

First Asset Tech Giants Covered Call ETF (CAD Hedged) (TSX: TXF). This fund invests in a portfolio of the 25 largest American tech stocks, including companies like Apple, Facebook, Amazon, Dell, Microsoft, etc. The managers then generate extra income by writing covered calls. This fund, which has been around since 2011, has a terrific record. The average annual return since inception is 15.32%. As for cash flow, investors received $1.32 per unit in distributions in 2018. At recent prices, that translates into a yield of 8.1%. The management fee is on the high side at 0.65%, but in this case, you’re getting good value for money.

The tightrope walker

A high-wire artist needs perfect balance. That’s what some investors want in their portfolios – a risk-appropriate balance between stocks and bonds. Unfortunately, the ETF world hasn’t shown much interest in providing balanced offerings until recently.

Within the past two years, however, Vanguard has launched four balanced ETFs, with varying asset mixes. BMO has three and Blackrock (iShares) has two.

The iShares Core Balanced ETF Portfolio has the longest history, but until the end of December it operated under another name (iShares Balanced Income CorePortfolio Index ETF) with a somewhat different mandate.

This effectively means that all the balanced entries I looked at are very new, so we don’t have much in the way of track records to compare results. Still, here are three to consider.

Vanguard Balanced ETF Portfolio (TSX: VBAL). This fund aims for the classic asset mix balance – 60% stocks, 40% bonds. It invests in seven underlying Vanguard ETFs covering Canadian, U.S., international, and emerging markets stocks plus bonds from around the globe. The fund was launched in January 2018 and generated a respectable return of 7.8% over the 12 months to April 30. The MER is 0.25%.

BMO Balanced ETF (TSX: ZBAL). This fund also has a 60-40 stock-bond asset allocation at present, but it may not always be that way. The managers employ a strategic asset allocation strategy, rebalancing the portfolio quarterly. This may occasionally result in a deviation from the 60-40 split although it is not likely to be significant. Like the Vanguard ETF, this is a fund of funds, investing in seven underlying BMO funds that invest in stocks and bonds from around the world. This is a brand-new fund, launched this February, so we have no idea of how it will perform over time. The MER is slightly less than that of the Vanguard fund, at 0.2%.

iShares Core Balanced ETF Portfolio (TSX: XBAL). Because of the mandate change at the end of 2018, I would ignore past results. But so far in 2019, this ETF has been an impressive performer with a gain of 10.28%. It too is a fund of funds, investing in eight iShares equity and bond funds. The current weighting is 61.3% stocks, 38.6% bonds, and a small amount of cash. Distributions are now paid quarterly instead of monthly. The management fee is 0.18%.

Next time: I’ll look at more aggressive investor profiles and suggest some appropriate ETFs for them.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. This column originally appeared in The Toronto Star.

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Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.