Building a retirement nest egg with low-cost exchange-traded funds (ETFs) has become more popular in recent years.
Although passive, market-weighted index funds dominate this space, investors may want to consider adding some actively managed ETFs for diversification or, potentially, to beat their benchmarks.
Actively managed ETFs include funds run by stock or bond fund managers, or they can be quasi-active in resembling an index but indulging in active management. The latter can include ETFs that follow a set of rules to create an index or use computer-driven, quantitative strategies to screen for securities.
These ETFs are pricier than passive index offerings, but typically cheaper than mutual funds. Keep in mind, though, that management and other fees can still eat away at returns. For example, in a registered retirement savings plan (RRSP), foreign stock dividends from Canadian-listed ETFs are subject to a withholding tax before the distribution is passed on to investors.
We asked three analysts for their top picks among Canadian-listed actively managed ETFs for an RRSP.
Daniel Straus, vice-president, ETFs and financial products research, National Bank Financial Inc.
The pick: BMO Monthly Income ETF (ZMI-T)
Management expense ratio (MER): 0.61 per cent
This ETF, which invests in higher-yielding ETFs, offers a one-ticket solution for investors seeking income, Mr. Straus says. “This multiasset ETF has a long track record in delivering respectable returns for Canadian investors. It has a 12-month yield of about 4.3 per cent.” Launched in 2011 by BMO Asset Management Inc., the ETF has an asset mix of about 60-per-cent equities and 40-per-cent bonds. Its fee is pricier than some of its peers because it owns some ETFs using a covered-call strategy to get additional income, including BMO Europe High Dividend Covered Call ETF (ZWE-T) and BMO US High Dividend Covered Call ETF (ZWH-T), he notes. The risks stem from having a 50-per-cent equities exposure to the resources-oriented Canadian stock market and using a covered-call strategy, which can limit upside potential.
MER: 0.39 per cent
This ETF, which owns short-term Canadian government and corporate bonds, is suitable for investors who are risk averse or approaching retirement, Mr. Straus says. “Should interest rates increase, then a shorter-term exposure is the way to go.” The ETF is overseen by RBC Global Asset Management Inc.’s PH&N fixed-income team, which has a strong record in the space, he adds. The fee for this ETF, which provides a monthly distribution, is in line with its active peers. Active bond managers have a better chance of beating a passive benchmark because their asset class, unlike listed stocks, is more opaque, he notes. The risk stems from credit calls made by the fund managers. Bonds are better held inside an RRSP as interest income is taxed fully outside a non-registered account.
Edmund Fernandez, senior product analyst at Industrial Alliance Securities Inc.
The pick: PIMCO Monthly Income Fund (PMIF-T)
MER: 0.85 per cent
Income-seeking investors may want to consider this bond ETF, Mr. Fernandez says. “The ETF strives to generate monthly income equal to about 4 to 4.5 per cent annually, with a mix of higher-yielding assets and more defensively oriented positions.” U.S.-based Pacific Investment Management Co. (PIMCO), which manages US$1.9-trillion in client assets and is an expert in the bond space, manages the fund. Although the ETF can hold up to 50 per cent in high-yield and 20 per cent in emerging-market bonds, PIMCO’s analytical strength mitigates the risks, he says. The ETF is a version of bond fund launched in 2011. The ETF’s fee is above the median among its Canadian-listed global fixed-income peers, but the long-term outperformance of its strategy justifies the price, he says.
The pick: BMO US Dividend ETF (CAD) [ZDY-T]
MER: 0.34 per cent
This ETF, which invests in U.S. dividend-paying stocks, can provide Canadian investors with diversification to other sectors not represented in the domestic market, Mr. Fernandez says. “We are fans of BMO Asset Management’s dividend mandates because it uses a rules-based approach that not only assesses companies based on their dividend growth rate, but also on the sustainability to meet dividend obligations.” The stocks are weighted based on dividend yield. Top holdings include AbbVie Inc. (ABBV-N), International Business Machines Corp. (IBM-N) and Wells Fargo & Co. (WFC-N). The risk stems from the ETF’s concentration in certain sectors, such as financials, which could hurt the fund if they underperform. The ETF’s fee, he adds, is among the lowest in the active U.S. equity ETF category.
Alex Bryan, director of passive strategies for North America at Morningstar Inc.
The pick: BMO Low Volatility US Equity ETF (ZLU-T)
MER: 0.33 per cent
This U.S. equity ETF appeals to more risk-averse investors because it gives exposure to defensive stocks, Mr. Bryan says. The fund, which uses a rules-based strategy, screens for about 100 large-cap stocks in the S&P 500 that have had the lowest sensitivity to market fluctuations over the past five years. The ETF should give “good downside protection” in market downturns, he notes. Top holdings include Consolidated Edison Inc. (ED-N), McDonald’s Corp. (MCD-N), Waste Management Inc. (WM-N) and Johnson & Johnson (JNJ-N). This ETF has a reasonable fee and provides a fairly diversified portfolio, he adds. The risks are that the fund is overweight in sectors such as utilities, which can get hurt when interest rates rise, and it will also likely underperform when markets rally strongly.
MER: 0.71 per cent
Investors seeking income may find this U.S. dividend ETF appealing, Mr. Bryan says. “The yield offered by this fund is in the 5- to 8-per-cent range depending on the year.” The ETF targets companies whose dividend payments are sustainable and it earns additional income from call-option premiums. It uses a set of rules to screen for stocks, which include AT&T Inc. (T-N), General Motors Co. (GM-N) and Verizon Communications Inc. (VZ-N), while its portfolio managers oversee the options strategy. Because the ETF tends to overweight value stocks, that could hurt performance when that investment style is out of favour, he says. Although a covered-call options strategy limits the ETF’s upside potential, it can offset losses in a market downturn. The fund’s fee, he says, is still reasonable for an actively managed ETF.