Daniel Straus, head of ETF research and strategy at National Bank Financial
Focus: ETFs

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MARKET OUTLOOK

2018 has been an eventful year so far, with long-anticipated equity market turbulence finally starting to stir, but the ETF industry keeps growing at a fast pace.

There's a record number of ETFs. The number of regular class ETFs in Canada pass the 700-count milestone. As of May 15, there were 703 ETFs in Canada.

The number of ETF providers in Canada has grown to 28. Brompton Group and Bristol Gate are the latest to join the fray, but in recent months we've started to see small signs of consolidation. Evolve acquired Sphere and the Redwood brand of ETFs consolidated under parent company Purpose.

There's thematic ETF innovation. The Canadian ETF market is a bubbling cauldron of innovation, with new product categories and investment ideas emerging on a regular basis. In 2018, we saw the first blockchain technology ETF debut from Harvest (HBLK.TO), and now there are three on the market with more on the way. With the popularity of Horizons’ Marijuana Life Sciences Index ETF (HMMJ.TO), there are now three other “strains” of product on the market: one for Junior Growers (HMJR), and two active funds, one from Purpose (MJJ) and another from Evolve (SEED.TO).

Inflow to Canadian ETFs is strong year-to-date with $8.4 billion created so far. In the U.S., the pace of asset-gathering has slowed moderately due to increased volatility in the market since February, but at $94.1 billion in flows year-to-date, the numbers are still impressive. ETF assets stand at $153 billion in Canada and US$3,488 billion in the U.S. as of April 30.

It may be a late-cycle push, but the global economy is continuing to expand, despite some cooling in the euro area. National Bank’s tactical asset allocations strategists are drawn to emerging market equities, which have had a choppy year so far despite a booming calendar 2017. The recent fortunes of emerging markets have been affected by weakness in some tech heavyweights, trade tensions, and U.S. dollarstrength, but this short period of underperformance doesn’t buck expectations. Our strategists continue to believe that emerging markets will end the year as leaders, and Canadian investors should take pause to consider them for several reasons:

  • Emerging markets have grown from less than 1 per cent of world equities to 12 per cent, four times larger than the Canadian stock market.
  • The emerging markets have matured from export-focused manufacturing towards local consumption and an expanding tech sector.
  • Emerging market indexes and the S&P/TSX composite have shown similar volatility in the past few years, and the emerging market/Canadian dollar currency pair is relatively less risky than emerging market/U.S. dollar, given that a global investor “flight to safety” would affect the Canadian dollar too.

TOP PICKS

Daniel Straus' Top Picks

Daniel Straus, head of ETF research and strategy at National Bank Financial, shares his top picks:

ISHARES CORE MSCI EMERGING MARKETS IMI INDEX ETF (XEC.TO)

Given the above commentary and our strategists long-term bullish view on emerging markets, we land on one of our core “starting points” for this asset class in our model portfolios. XEC directly replicates its reference “investable market” index, which includes mid-cap and small-cap emerging market companies. At a management expense ratio (MER) of 0.26 per cent, it’s an extremely affordable vehicle for passive exposure to this increasingly important market.

VANGUARD GROWTH ETF PORTFOLIO (VGRO.TO)

At National Bank’s ETF Research and Strategy Team, we spend a lot of time analyzing ETFs and seeing how they fit together to create well diversified, low-cost balanced portfolios covering all the world’s major asset classes and securities. For investors who want a one-ticket “balanced” portfolio-style ETF, Vanguard recently launched a series of three low-cost asset allocation ETFs-of-ETFs for three different risk profiles. All of them are built from Vanguard’s suite of passive index-tracking ETFs for Canadian, U.S., and international equity, as well as both domestic and foreign fixed income. VGRO has a stated fee of 0.22 per cent and a stock/bond breakdown of approximately 80/20, rendering it suitable for younger or more risk-tolerant investors.

ROYAL CANADIAN MINT GOLD EXCHANGE TRADED RECEIPTS (MNT.TO)

Our model ETF portfolios allow for anywhere up to 15 per cent allocated to “alternative assets” depending on the risk profile. Ideally, these are assets that should be uncorrelated with both stocks and bonds. National Bank’s investment strategy committee just revised the definition of this category to reflect the reality that “true alternatives” are actually very difficult to find. Most hedge fund performance indexes have been pretty market-correlated, while funds trafficking in infrastructure and real estate have no choice but to invest in the public equities of those sectors’ large companies, which are already present as components of most mainstream indexes. Physical commodity ETFs that hold gold bullion are still an option for those investors who want to allocate a fraction of their portfolio to alternatives. Gold can also act as inflation hedge in the long term. This product isn’t strictly an ETF (technically, it’s an exchange-traded receipt), so it will have premium/discount effects that are important to monitor. There are lots of gold bullion ETFs to choose from between exchanges in Canada and the U.S., all with slightly different fees and features. Despite its closed structure, MNT is a good low-cost way to hold a beneficial share of gold bullion stored at the Royal Canadian Mint in Ottawa.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
XEC N N N
VGRO N N N
MNT N N N

 

PAST PICKS: JAN. 13, 2017

Daniel Straus' Past Picks

Daniel Straus, head of ETF research and strategy at National Bank Financial, reviews his past picks: MSCI Multifactor USA Index ETF, BMO MSCI EAFE Index ETF, and Purpose High Interest Savings ETF.

ISHARES EDGE MSCI MUILTIFACTOR USA INDEX ETF (CAD-HEDGED) (XFA.TO)

  • Then: $23.47
  • Now: $27.70
  • Return: 18%
  • Total return: 20%

BMO MSCI EAFE INDEX ETF CAD-HEDGED (ZDM.TO)

  • Then: $19.57
  • Now: $22.19
  • Return: 13%
  • Total return: 17%

PURPOSE HIGH INTERST SAVINGS ETF (PSA.TO)

  • Then: $50.02
  • Now: $50.03
  • Return: 0.02%
  • Total return: 2%

Total return average: 13%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
XFA N N N
ZDM N N N
PSA N N N