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(Dominic Current/iStockphoto)
(Dominic Current/iStockphoto)

STRATEGY LAB

Indexing with muscle: Sizing up iShares’ Portfolio Builders ETFs Add to ...

Andrew Hallam is the index investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

A portfolio of classic action heroes has helped The Expendables film series kick some box office butt. The Sylvester Stallone-led mercenaries, including Jet Li and Arnold Schwarzenegger, are now filming their third instalment.

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It’s the kind of success iShares Canada was looking for when it decided in November, 2008, to roll many of its own ETF superstars into one of four funds. The Portfolio Builders series includes a Conservative Core fund (XCR), a Growth Core fund (XGR), an Alternatives Completion fund (XAL) and a Global Completion fund (XGC).

Each of these ETFs represents an entire portfolio wrapped into a single package, spanning Canadian and international equities, as well as bonds, REITs and commodities. iShares “rebalances” the funds from time to time to maintain what it considers the optimum allocation among these different types of assets. In theory, that means that an investor who bought one of these funds could remain on the sofa and never have to fiddle again with their portfolio.

Canadian investors, however, have so far snubbed the show. After attracting just $70-million in assets over five years, the Portfolio Builders ETFs might be more expendable than a cast of aging actors.

I’ll admit that I expected something different when I first read about these offerings. Vanguard USA has its series of passively managed Target Retirement Funds, and I thought iShares was offering something similar.

Vanguard’s target funds represent complete portfolios rolled into one. They’re automatically rebalanced once a year, providing Americans with a one-stop investment product.

Unlike Vanguard’s Target Retirement Funds, however, iShares Builders Funds use an active strategy to determine the funds’ allocations among different types of assets.

Mary Anne Wiley of iShares Canada says a portfolio team rebalances them to “take into account the extremes caused by investor behaviour while trying to maximize risk-adjusted returns.” Also factored in are political and economic conditions.

If that sounds more like active investing than traditional indexing, that’s because it is. But there’s no denying the low cost. While the typical actively managed balanced fund charges nearly 2.5 per cent a year, iShares charges between 0.6 per cent and 0.7 per cent for its Portfolio Builders series.

The biggest question is, how have these funds performed?

To provide some kind of benchmark, I wanted to see how $10,000 split equally between an iShares collection of Canadian stock, U.S. stock, international stock and Canadian bond ETFs would have done if it weren’t rebalanced.

I used the S&P/TSX 60 (XIU), the S&P 500 index (XSP), the MSCI EAFE Index (XIN), and the DEX Universe Bond Index (XBB). Such a portfolio would have provided investors with 50 per cent exposure to foreign content, so I considered it a reasonable benchmark for the globally diversified Builders ETFs.

Between Nov. 13, 2008 (the Portfolio Builders inception date) and Sept. 3, 2013, such an unbalanced collection of ETFs would have gained 48.2 per cent.

Did the iShares rebalancing team add value? I think so. Over the same period, the Conservative Core Portfolio gained 29.37 per cent, the Growth Core Portfolio gained 49.43 per cent, the Alternatives Completion Portfolio increased 55.49 per cent and the Global Completion Portfolio grew by 55.37 per cent.

Even with ETFs, however, active management can always be tricky. And iShares claims to use some individual securities and derivatives in their ready-made portfolios. Such speculative activity may have hurt them since May. While most global indexed portfolios have soared since the spring, these products have each dropped between 6 and 10 per cent.

They’re still, however, far better options than the majority of actively managed balanced funds. And the management team at iShares should be commended for a strong overall run since inception. They’re outperforming most of their actively managed peers, and based on their low cost platform, they should continue to do so.

Saying hasta la vista to actively managed mutual funds has never been easier.

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