BMO targets do-it-yourself investors with new ETFs.
Built to work in concert with existing trends
TORONTO • Do-it-yourself investors, according to BMO, are making two mistakes that are costing them a chance at larger returns: Devoting too much of their portfolio to cash and failing to diversify as much as they think they are.
On Friday, BMO launched a series of new ETFs that are designed not to replace the equities and fixed income choices that these investors are making, but work in conjunction with them so that they can plug some of the holes in their strategy.
The new suite of asset allocation ETFs — BMO Conservative ETF, BMO Balanced ETF and BMO Growth ETF — resemble standard mutual funds, giving investors three options to choose from depending on the risk they’re looking to take. They’re made up of other BMO ETFs that will give investors exposure to not just Canadian and U.S. indexes, but those in international and emerging markets as well. Each ETF is also made up of a mix of Canadian aggregate fixed income, Canadian government bonds and U.S. corporate bonds.
Mark Raes, BMO ETFs head of product, isn’t trying to change investors’ minds about picking their own stocks. That’s fine, he said. The bank envisions 50 per cent of the typical do-ityourself investor portfolio still being made up of individual stock picks. A way to achieve the desired balance is to weight the other half towards one of their new products, he said.
“One of the things we like to do as individual investors is we like to pick stocks, pick names, pick exposures, which generally means we end up overly concentrated,” said Raes.
“What these new ETFs can do is they can complement some of those stock picks or ETF picks you’re making in your portfolio to give you a more well-rounded market exposure.”
Canadian portfolios, Raes said, are clearly biased on equities over fixed income while also preferring Canadian and blue-chip U.S. stocks over any international holdings. Do-it-yourself investors may just be sticking with the holdings they know best, but such a strategy leaves them at risk of seeing their portfolios tumble should the Canadian and U.S. markets enter a downturn. A bias toward bluechip stocks may also mean that investors do not have the exposure to multiple sectors, particularly defensive ones that would mitigate losses in a correction.
Finding that balance may not even require investors to lower their positions in other equities. According to a Pollara Strategic Insights survey, Canadians are keeping 51 per cent of their portfolio in cash. Unless they’re saving for a short-term goal, keeping such a high percentage of a portfolio in cash does not help balance a portfolio.
As far as Raes is concerned, it’s akin to leaving money on the table.
“If you look where someone is investing towards retirement goals, towards owning a home, anything of the long-term nature where they need to get their money to work then leaving it in cash for an extended period of time is going to make it much more difficult for them to reach those goals,” he said.
The ETFs may resemble mutual funds, Raes admitted, but a key difference is that investors will only be charged 0.18 per cent in management fees in comparison to three per cent MERs that they would find attached to mutual funds.
That doesn’t mean BMO is transitioning away from mutual funds, which were heavily outpaced by ETF sales in 2018. There’s still a market for them, Raes argued, and it’s “alive and well.”
Opposing the trend, some investors are still more comfortable knowing that mutual funds are actively managed and their managers can overweight certain sectors or make currency decisions based on where they see the market trending. The same service isn’t available to those who will invest in the asset allocation ETFs.
“If there’s a traditional mutual fund investor who’s looking to switch over to ETFs, we want to make sure we have a great solution for them to do so,” he said.