How you invest, and how much you invest, will determine your income after your regular paycheque stops.Getty Images/iStockphoto
The popularity of exchange-traded funds has never been higher. The industry just passed the $100-billion mark in assets in Canada, and a recent poll conducted by the Journal of Financial Planning and the Financial Planning Association Research and Practice Institute indicated that ETFs were the most popular retirement product among advisers.
Eighty-three per cent of 283 advisers said they currently use or recommend ETFs to clients, while 80 per cent of advisers said the same about mutual funds.
Moreover, 46 per cent said they plan to recommend ETFs more frequently over the next 12 months, compared to stocks and mutual funds, which came in at 23 and 21 per cent, respectively. (The percentages do not add up to 100 as advisers may recommend different products simultaneously.)
"One thing to think about is that the institutions that are generally hired to manage your pensions or retirement portfolios are making extensive use of ETFs, so individuals should also definitely consider them in their portfolios," says Kevin Gopaul, senior vice-president and chief investment officer, global structured investment, for BMO Global Asset Management in Toronto.
Mr. Gopaul talks of the investment considerations facing people planning for retirement in the current climate, such as low expected returns, low yields and increased volatility. Innovation in fund products means that there are now more tools to build specific exposures in a portfolio to help people plan for retirement, he says.
If investors are looking at fixed-income exposure, when it comes to diversifying their portfolio he recommends that they consider buying emerging market debts to do so.
"Fixed income is still going to be a very large portion of retirement planning, but maybe diversification of fixed income can help increase the yields and increase the diversification of the portfolio," he says.
For instance, given our longer life expectancies, and the resultant higher health-care costs, Mr. Gopaul says some clients are hedging themselves by buying health-care-focused ETFs, such as BMO's Equal Weight US Health Care Hedged to CAD ETF (ZUH).
"Individuals say, 'Well, if I'm going to face higher costs, those companies are going to earn more money and I'm going to try and get more money from my investment,'" he says.
According to Atul Tiwari, the Toronto-based managing director and head of Vanguard Investments Canada Inc., the number one reason to include ETFs in a retirement portfolio is simply lower fees.
Many studies suggest that nothing is a better predictor of future performance than cost, he adds.
"Every year those additional costs eat away at your returns and that compounds over a lifetime, so when you get to retirement, if you've created a portfolio with low-cost instruments, you're going to have more money in your pocket at the end of it all," he says.
Mr. Tiwari also says that when it comes to long-term planning, such as for retirement, indexed investing will always do better than active investing because over the long haul, no person can make decisions that are consistently going to beat the market. "There's definitely an advantage to sticking to low-cost indexed ETFs over the long term."
Planning for retirement is rarely easy, and worrying about financial security does not make it any easier.
Pat Chiefalo, managing director and head of iShares Canadian Product at BlackRock in Toronto, says that people on their way into retirement still have a need for equity-like returns to build their portfolio, but that is countered with a desire to reduce risk.
For that purpose, Mr. Chiefalo recommends looking into low-volatility ETFs.
He adds that over a market cycle these products have performed well for investors, but over a short one-, two-, or three-month period when the market cranks higher, they do not keep pace as well.
"What they are really aimed to do is over a full market cycle deliver you very strong equity returns and at the same time make the risk profile of that exposure much more modest and much more palatable to investors more sensitive to risk," he says.
For investors either in retirement or approaching it, Mr. Chiefalo says fixed income is an important asset class to consider for a couple of reasons. One is that it helps reduce the overall risk of the portfolio, providing balance when equity markets become a little more volatile. Second, it can provide some income.
Mr. Chiefalo says that an ETF is one of the best vehicles to gain exposure to fixed income.
"What you get is a very broad, diversified basket of fixed-income securities, as opposed to buying individual bonds yourself, which can be extremely costly and time consuming and it's really hard to get the diversity you can get in a broad, liquid ETF."
Paul Attfield