Investors are spoiled for choice when it comes to ETFs. Exchange-traded funds, which track indices such as the Dow Jones or S&P 500, now total about 510 in Canada and more than 6,000 worldwide.
Within this vast universe, investors looking to pursue off-mainstream strategies or investment themes will find plenty of pickings among specialty ETFs – portfolios that advance an alternate investment philosophy or provide exposure to assets not included in major indices or funds.
Jason McIntyre, head of distribution for Vanguard Investments Canada, says these products can provide a way for investors to complement a core position.
"When we talk to clients, we encourage them to look at a core-satellite position, where the core is built around market-cap-weighted passive strategies and, depending on their risk profiles and objectives, they may want to use some active specialty strategy around that," he says.
Kevin Gopaul, chief investment officer at BMO Global Asset Management, says changing investor demographics – notably aging baby boomers – are driving innovation in the ETF marketplace and leading to new products that meet the need for more income and protection in a low-growth, volatile environment.
"Last year, two-thirds of our flow from investment advisers went into specialty ETFs, and that trend will not abate this year," says Mr. Gopaul. "This is about advisers trying to meet their investors' needs."
So how do investors decide which specialty ETF to add to their portfolio? It can be challenging, given the variety of products in the market. Today's specialty ETFs run the gamut, from those focused on specific countries, sectors and market-cap segments to those with a particular mandate, such as investing in socially responsible companies.
"We encourage people to look at factors such as time horizon, tax consequences and transaction costs," says Mr. McIntyre. "With the number of niche and specialty products coming out, you have to understand what you're buying."
Here's a peek at a few of the specialty ETFs available to Canadian investors.
iShares Global Water Index ETF
Designed to track the S&P Global Water Index, this fund of small- to large-cap stocks gives investors access to 50 water-related businesses in 15 countries beyond Canada. Water utilities and infrastructure firms account for half the equity securities in the portfolio – which boasts a three-year return of 18.88 per cent – while water equipment and materials companies make up the remaining half.
Since its launch in 2007, the iShares Global Water Index ETF has outperformed the Canadian stock market, says Pat Chiefalo, managing director and head of iShares Canadian product at Tor-onto-based BlackRock Canada.
"Global supply of water is an increasing concern. To me, that's a theme that will be relevant over a few years," he says.
iShares Jantzi Social Index ETF
Benchmarked against the Jantzi Social Index, this portfolio – the first social index in the country – consists of 60 Canadian companies known for exceptional corporate social and environmental performance. Financial companies account for close to half of the fund, whose top holdings include Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia.
The iShares Jantzi Social Index ETF has delivered a 5.55-per-cent return over the past three years, and close to 2 per cent since its inception in 2007. "It has very much kept pace with the TSX market," notes Mr. Chiefalo.
BMO US Put Write ETF
Driven by options on securities in the S&P 500, Bank of Montreal's US Put Write ETF is an income-oriented strategy that provides a high level of exposure to uncorrelated investments – assets that each react differently to the same market forces.
The fund works by selling put options, which basically gives the contract owner the right to sell the underlying security at a set price, while investing in cash equivalents such as U.S Treasury bills.
"Investors in this product want downside protection, and they want yield," says Mr. Gopaul.
BMO India Equity Index ETF
This fund tracks the performance of the BNY Mellon India Select DR Index and gives investors exposure to the broad Indian equity market by investing in a basket of depository receipts – bank-issued financial securities that represent foreign companies' stocks.
BMO India Equity has been around for more than five years and has brought in a return of more than 3.5 per cent since 2010. Three-year returns to January of 2016 land at slightly below 13 per cent.
Mr. Gopaul says this fund is a way to invest in emerging markets using a more targeted approach.
"People are getting away from a broad view of emerging markets," he says.
Vanguard U.S. Dividend Appreciation Index ETF
Available in hedged and unhedged versions, this fund invests in 178 companies that have consistently increased their dividend in the past 10 years. The holdings cut across a range of sectors led by consumer goods, industrials and consumer services.
The 2.5-year-old fund has so far posted a net asset value return of just over 19 per cent since its launch in August of 2013.
"We see people using it because it's different from the Canadian market," says Mr. McIntyre. Investors in the fund get U.S. consumer goods, consumer services, technology, healthcare – companies that will help Canadians diversify their portfolios.