ETFs provide diversification in rocky markets.Getty Images/iStockphoto
Investors hunting for bargain stocks after the recent sell-off may be hard-pressed to sort out the best buys from the bad bets.
You may be better off checking out exchange-traded funds (ETFs), which own a basket of stocks. The diversification could help limit future downside from rocky markets. ETFs also offer access to stocks in different countries or regions that may have better growth prospects. And today's ETFs have a variety of focuses, ranging from funds that own "low volatility" stocks to so-called "smart- or strategic-beta" ETFs that try to outperform traditional market-cap indexes.
With the registered retirement savings plan season (RRSP) in full swing, we asked three experts to recommend equity ETFs for both a conservative and an aggressive investor.
Daniel Straus, ETF strategist with National Bank Financial, Toronto
Conservative
PowerShares S&P 500 Low Volatility (Canadian-hedged)
ETF: ULV-TSX
Management expense ratio: 0.36 per cent
Friday's close: $29.66 a unit
52-week range: $26.76-to-$30.85 a unit
Annual distribution: 60 cents a unit
This ETF, which holds U.S. stocks with low-volatility attributes, is a way to diversify from the energy-heavy Canadian market hurt lately by low oil prices, said Mr. Straus. The fund tracks 100 stocks with the lowest historical day-to-day price movements in the S&P 500 index. The ETF owns names such as Coca-Cola Co. and Procter & Gamble Co. "ULV also has the advantage of hedging out the exchange rate between the Canadian and U.S. dollar," he added. One risk is that investors might miss out on higher-growth companies, while its higher weighting in utility and real-estate stocks could suffer in a rising interest-rate environment, he said. This ETF is better held inside an RRSP because U.S. dividends are taxed at the full marginal-tax rate outside a registered account, unlike the more favourably-treated Canadian payouts, he said.
Aggressive
iShares FactorSelect MSCI EAFE (Canadian-hedged)
ETF: (XFF-TSX)
MER: expected at around 0.51 per cent
Friday's close: $20.94 a unit
Range since Sept. 28, 2015: $19.68-to-$21.78 a unit
Annual distribution: 42 cents a unit
This fledgling ETF gives exposure to only about 200 stocks in the MSCI EAFE (Europe, Australasia, Far East) index, and aims to outperform the broader benchmark, said Mr. Straus. The ETF is invested in Japan, Britain and countries such as France and Germany, which should benefit from central bank policies aimed at stimulating their economies, he said. This ETF, which has a smaller-cap tilt, focuses on quality companies trading at low prices in relation to earnings, and whose stock prices have positive momentum. It is also currency hedged. The ETF also distributes foreign dividends that are better held in an RRSP to avoid the higher taxes compared with Canadian dividends when held outside a registered account. The ETF's bent to stocks with momentum, however, does inject extra risk into a portfolio, he added.
Christopher Davis, director of manager research at Morningstar Canada, Toronto
Conservative
iShares S&P/TSX Canadian Dividend Aristocrats
ETF: (CDZ-TSX)
MER: 0.66 per cent
Friday's close: $22.30 a unit
52-week range: $20.34-to-$27.50 a unit
Annual distribution: 94 cents a unit
This ETF invests in Canadian companies whose dividends have grown consistently over the past five years, said Mr. Davis. "Businesses that can do that tend to be more resilient, and have higher-quality balance sheets." This ETF has a smaller-company bias, and lower resource and financial weightings versus peers tracking the broader market. The dividend-focus means the ETF is more sensitive to rising interest rates (as investors may turn to less-risky plays like government bonds), he said. However, it may not be as affected as ETFs focused on high-yielding dividend payers, he added. If rising rates reflect a stronger economy, companies in the ETF may benefit and increase their dividends more quickly, he said. Top holdings include some real-estate investments, such as H&R REIT, that would be more rate-sensitive, he noted.
Aggressive
Vanguard FTSE Emerging Markets All-Cap
ETF: (VEE-TSX)
MER: 0.19 per cent
Friday's close: $26.02 a unit
52-week range: $24.55-to-$33.36 a unit
Annual distribution: 43 cents a unit
This emerging-markets ETF is a useful building block to achieve a diversified investment portfolio, said Mr. Davis. It is about 29 per cent invested in China, 14 per cent in Taiwan, 13 per cent in India and 9 per cent in South Africa. China's slower growth and the impact of plunging crude prices on oil-revenue dependent countries such as Brazil have weighed on the sector, he said. India, which benefits from falling oil prices, is now "probably the only real bright spot," he said. The ETF tracks an index, which trades cheaply at about 12 times trailing earnings, but it was even cheaper at 6.3 times earnings following the 2009 market crash, he noted. This ETF, the least expensive Canadian-listed fund in this sector, should make up no more than 10 per cent of an investor's portfolio because of the volatile nature of the sector, he added.
Tyler Mordy, president and chief investment officer at Forstrong Global Asset Management Inc., Toronto
Conservative
iShares Core MSCI All Country World ex-Canada
ETF: (XAW-TSX)
MER: 0.21 per cent
Friday's close: $20.08 a unit
52-week range: $19-to-$21.73 a unit
Annual distribution: 45 cents a unit
Investors with Canadian stock-heavy portfolios would benefit from diversification from this ETF with its exposure to more than 5,000 stocks outside this country, says Mr. Mordy. This fund is about 54 per cent invested in the United States, and 9 per cent in Japan. The recent market pullback provides an attractive entry point because "fundamentals have not materially changed since last year," he said. While global markets look poised for a recovery, "this is by no means guaranteed," he added. "Volatility has spiked … and investor psychology has grown increasingly jittery." This ETF has benefited from currency conversion because the Canadian dollar has depreciated against the U.S. dollar and other major world currencies. A rally in the loonie spurred by stabilizing or recovering commodity prices would erode returns, he noted.
Aggressive
iShares MSCI Japan
ETF: (EWJ-NYSE)
MER: 0.47 per cent
Friday's close: $11.50 (U.S.) a unit
52-week range: $10.64-to-$13.35 a unit
Annual distribution: 15 cents a unit
This ETF tracks more than 200 Japanese companies, including Toyota Motor Corp. and Softbank Group Corp. The Bank of Japan's stimulus program should provide support for riskier assets such as stocks, said Mr. Mordy. In 2013, the bank adopted a quantitative and qualitative monetary easing to kickstart its economy. The resulting depreciation of the yen has boosted exports, while Japan has benefited from falling crude prices, he added. Japan has introduced corporate governance reforms to make it more attractive to foreign investors. The country's large pension funds have increased their equity weightings by buying stocks in a newly created JPX-Nikkei 400 index, which focuses on companies with a high return on equity. Still, Japanese companies with sizable exposure to China could be affected by its slower growth, he added.