Canada’s ETF industry is a Krakatoa of new-product eruptions – 23 new exchange-traded funds in February alone and 813 in total.
Kudos to investors for keeping their heads amid all this commotion. Sales trends for the first two months of the year show a preference for prudent, cautious investing that is very much in keeping with the uncertainty being caused by a slowing global economy. Here are four things ETF investors are doing right.
Focusing mainly on aggregate bond ETFs
Aggregate bond ETFs are meant to be your one and only bond fund and, thus, provide a diversified mix of short-, medium- and long-term government and corporate bonds. The benefit of this diversification can be seen in what’s happened in the bond market in the past few years.
We’ve gone from falling yields in the bond market to rising yields and back to falling. If you built a conservative bond portfolio of short-term bond funds, you’ve done well when yields were rising and lagged when yields fell. Long-term bonds excel when rates fall, but get clobbered when rates rise. The aggregate bond fund is a perpetual balance between the two. Buy and forget.
Putting money into both bonds and stocks
Total inflows to bond ETFs totalled $805-million, while inflows to equity ETFs totalled $654-million. With bond yields heading lower and concerns rising about an economic slowdown, bonds have some appeal. As for stocks, investors did the right thing by digging in after the market plunge that ended 2018.
Buying multi-asset ETFs
Balanced ETFs combine different assets – basically, stocks and bonds – into diversified portfolios pegged to different risk tolerances and investing goals. They are ideal for ETF novices who need structure and for experienced investors who value a simple, low-cost approach.
Almost $355-million flowed into multiasset ETFs in the first two months of the year, which suggests balanced ETFs are being welcomed by investors. That’s progress.
Buying low-volatility and dividend ETFs
In choppy stock markets, dividend-payers and low-volatility stocks (they fluctuate up and down in price less than the broader market) can potentially offer a less bumpy ride. A total $576-million went into ETFs of these two types in the first two months of the year. This cautious approach may help investors stay with their equity ETFs rather than succumbing to the urge to sell if stocks fall hard.
Many dividend stocks were hit hard when interest rates rose in 2017-18, and low-volatility stocks should be expected to lag in a raging bull market. Neither of those outlooks seems very likely right now.
Rob Carrick