YOUNG CLIENTS

Help­ing mil­len­ni­als set up an ETF strat­egy to get a head start on re­tire­ment sav­ings.

Investment Executive - - FRONT PAGE - BY JADE HEMEON

etfs are pro­lif­er­at­ing rapidly as more providers en­ter the field, and the range of choices avail­able al­lows fi­nan­cial ad­vi­sors to con­struct a well-di­ver­si­fied, low­cost re­tire­ment port­fo­lio us­ing only ETFs.

In­vest­ment Ex­ec­u­tive asked two port­fo­lio man­agers with ex­per­tise in ETFs — John De Goey at In­dus­trial Al­liance Se­cu­ri­ties Inc. in Toronto and Ray Dra­gu­nas of the Ray Dra­gu­nas In­vest­ment Con­sult­ing team with Aligned Cap­i­tal Part­ners Inc. in Lon­don, Ont. — to as­sem­ble model re­tire­ment port­fo­lios for a mil­len­nial client sav­ing for re­tire­ment.

The imag­i­nary client is about 35 years old, em­ployed in a well-paid job, up­wardly mo­bile and ex­pects in­come to in­crease with age. He or she is max­i­miz­ing RRSP con­tri­bu­tions, and the goal for the ETF port­fo­lio is pri­mar­ily growth, but not too ag­gres­sive, con­sid­er­ing this is re­tire­ment money.

Both port­fo­lio man­agers lean strongly to­ward equities in their rec­om­mended port­fo­lios due to the client’s long-term time hori­zon and the abil­ity to with­stand some in­evitable bear­ish pe­ri­ods in re­turn for the su­pe­rior long-term growth po­ten­tial of stocks.

“An up­wardly mo­bile mil­len­nial ought to be tilt­ing his or her port­fo­lio to­ward equities due to volatil­ity work­ing in his or her favour,” De Goey says. “Peo­ple who can get into the habit of putting a lit­tle aside on a reg­u­lar ba­sis — such as monthly — might ac­tu­ally pre­fer a bouncier ride be­cause it pro­vides op­por­tu­ni­ties to buy on dips.”

De Goey al­lo­cates only 20% of the port­fo­lio to fixed-in­come, with the choice of iShares High Qual­ity Cana­dian Bond In­dex ETF. Dra­gu­nas’s port­fo­lio ex­cludes any ex­po­sure to tra­di­tional fixed-in­come. He in­cludes Red­wood Emerg­ing Mar­kets Div­i­dend Fund ETF to gen­er­ate some in­come in the port­fo­lio and act as a sta­bi­lizer.

“The fo­cus on eq­uity in this hy­po­thet­i­cal port­fo­lio is based on the as­sump­tion that the time hori­zon is at least 25 years for this client,” says Dra­gu­nas. “Al­though equities mar­kets ex­hibit volatil­ity over the short term, over longer time hori­zons, equities should pro­vide a bet­ter re­turn. Also, given that we are nine years into a bull equities mar­ket, some div­i­dend-pay­ing ETFs are rec­om­mended to try to smooth out some [ex­pected] volatil­ity.”

At this point in the mar­ket cy­cle, Dra­gu­nas says, cen­tral banks ap­pear to be em­bark­ing on a tighter mon­e­tary pol­icy, which may put in­ter­est rate-sen­si­tive in­vest­ments such as bonds un­der pres­sure. There­fore, there isn’t any fixed-in­come al­lo­ca­tion in his port­fo­lio.

“Over the past 35 years, we have seen in­ter­est rates fall from dou­ble-dig­its to ef­fec­tively zero,” Dra­gu­nas says. “If re­cent in­creases in in­ter­est rates con­tinue, this will af­fect fixed-in­come prices neg­a­tively. Also, in­ter­est rate in­creases im­ply a strength­en­ing econ­omy, which is good for equities.”

On the equities side, both port­fo­lios are di­ver­si­fied geo­graph­i­cally, with a mix of Cana­dian, U.S., in­ter­na­tional and/or emerg­ing-mar­kets ex­po­sure. Dra­gu­nas in­cludes some eq­uity ETFs that fo­cus on capped or equal-weighted stock hold­ings, thereby min­i­miz­ing the con­cen­tra­tion risk that comes with tra­di­tional mar­ket cap­i­tal­iza­tion-weighted strate­gies.

Both port­fo­lio man­agers in­clude niche ex­po­sure. For ex­am­ple, Dra­gu­nas rec­om­mends a 5% weight­ing in Evolve North Amer­i­can Gen­der Di­ver­sity In­dex ETF, a re- spon­si­ble in­vest­ment strat­egy spon­sored by Evolve Funds Group Inc. of Toronto, and a 10% weight­ing in First As­set Tech Gi­ants Cov­ered Call ETF, spon­sored by First As­set In­vest­ment Man­age­ment Inc. De Goey in­cludes a 16% hold­ing in BMO Global In­fra­struc­ture ETF, spon­sored by BMO As­set Man­age­ment Inc. of Toronto.

“In­fra­struc­ture is a sort of tan­gi­ble as­set that’s weakly cor­re­lated to tra­di­tional fi­nan­cial assets, such as plain-vanilla stocks,” De Goey says. “Most peo­ple ought to have at least a lit­tle in­vested in coun­ter­cycli­cal, in­fla­tion-hedge prod­ucts that grow over time and of­ten zig when tra­di­tional mar­kets zag.”

Both port­fo­lio man­agers in­clude ex­po­sure to emerg­ing mar­kets, al­though they chose dif­fer­ent ETFs in this cat­e­gory.

A com­mon se­lec­tion is BMO Shiller Se­lect U.S. In­dex ETF, which is based on the re­search of Robert Shiller, pro­fes­sor of eco­nomics and fi­nance at Yale Univer­sity. This ETF of­fers ac­cess to Shiller’s cycli­cally ad­justed price/earn­ings (CAPE) method­ol­ogy, an equal-weight­ing strat­egy that com­bines value and mo­men­tum. CAPE is de­signed to un­cover com­pa­nies with a long his­tory of earn­ings but are un­der­priced while avoid­ing com­pa­nies that may be well priced but are mired in dol­drums or are a “value trap.”

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