It’s a marriage that few would have bet on happening, but as the investing landscape has evolved, the exchange-traded fund (ETF) and the mutual fund have started to join forces.
Companies such as Mackenzie Investments have started launching mutual funds that hold ETFs. These products give investors an opportunity to get a professionally managed all-in-one suite of products at a low cost.
“These aren’t the balanced funds from 30 years ago, where you would put together stocks and bonds,” says Michael Schnitman, senior vice-president of product at Mackenzie Investments. “They’re multi-asset portfolios that leverage sophisticated pension-plan-style asset allocation.”
Mackenzie’s five ETF Portfolios, which launched in January, range from conservative to growth and are the only suite in Canada that hold a full range of ETFs, including passive, smart-beta and active options. While the allocation to each ETF will vary based on the portfolio the investor chooses, Schnitman says that portfolio construction is enhanced when all three approaches are incorporated. These mutual funds hold many the company’s ETFs, such as the Mackenzie Canadian Equity Index ETF and the Mackenzie International Equity Index ETF.
These aren’t the balanced funds from 30 years ago… they’re multi-asset portfolios that leverage sophisticated pension-plan-style asset allocation.— Michael Schnitman, senior vice president of product at Mackenzie Investments
While, in theory, investors could create their own basket of ETFs, constructing a portfolio that considers risk tolerance, fees and asset allocation can be as difficult as stock-picking, says Mr. Schnitman. With these funds, security selection is done by professional managers.
Investors are also learning that it’s not good enough to just buy a couple of ETFs that track North American indices. There can be concentration risk in some types of ETFs, while investors also need overseas equities, fixed-income securities and other types of strategies, like low-volatility or income investing, to reduce risk while maximizing returns. Owning a professionally managed basket of active, passive and smart-beta ETFs gives investors exposure to everything, says Mr. Schnitman.
“There are thousands of ETFs out there,” he says. “People can benefit by taking a holistic approach. That’s what these multi-asset solutions do.”
A mutual fund with the benefits of an ETF
In some ways, combining ETFs and mutual funds seems counterintuitive. ETFs have specific benefits that mutual funds do not – for instance, in many cases, you can easily see what securities an ETF holds, it can be traded when the market’s open and fees are lower than the average mutual fund fee.
However, Mr. Schnitman points out that investors aren’t losing out
on those advantages. People can still see what’s in each passive and smart-beta ETF the mutual fund holds, active managers can alter a fund’s exposure to certain geographies or asset types as they see fit and investors get “cost certainty,” meaning they can be confident in knowing that they’re getting sophisticated managed portfolios at a low cost.
“If you were to create a portfolio like this using actively managed mutual funds, then it would not have the cost-effectiveness delivered by a portfolio of exclusively ETFs,” he says.
Pension plan style investing
These funds have an added benefit: pension-plan-like asset allocation. The five ETF Portfolios are overseen by a 10-member asset allocation team, led by Alain Bergeron, an experienced investment professional who spent a decade at the Canada Pension Plan Investment Board.
He’s brought that pension style approach to Mackenzie’s Asset Allocation Team, which manages these ETF-holding mutual funds. Similar to how pension plans operate, these funds provide exposure to a wide variety of return sources, to help reduce risk and generate returns.
For instance, they hold Mackenzie’s smart-beta ETFs, which are strategy-based securities that provide balanced exposure to momentum, low-volatility, income and many other styles of investing. Each provides greater diversification than is available in the broader markets, and that can create a smoother ride for investors.
These funds may also hold actively managed fixed-income ETFs, where managers choose which types of bonds – floating-rate loans, investment-grade corporates, government and high-yield – to hold. That’s important in today’s rising rate environment, where investors can lose money as yields climb.
It’s all overseen by Bergeron’s asset allocation team, says Mr. Schnitman.
A core holding in any portfolio
Mackenzie’s ETF Portfolios can be considered core mutual fund holdings, he adds. However, they shouldn’t constitute one’s only holding. Investors in their mid-30s might buy the company’s growth ETF portfolio, which is the most stock-heavy of the five, and then supplement that by purchasing products that align with more specific market views.
For example, if someone thinks China’s growth will continue, they could buy an ETF or mutual fund that holds Chinese stocks. Older Canadians who need dividend income could purchase an income-generating solution to supplement a more conservative core holding, he says.
It’s always a good idea to work with a financial advisor, who knows how to add other portfolio pieces to a core holding. As well, as an investor ages, an advisor can help move a client from one of the more aggressive portfolios into a more conservative one.
No matter how they’re used, though, these mutual funds let investors own a balanced portfolio of ETFs at an attractive price – and they don’t have to figure out what to invest in themselves.
“This approach is better than just putting together equity and fixed-income pieces and calling it a day.” says Mr. Schnitman. “It’s a better way to think about a balanced multi-asset portfolio.”
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