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Advisor ETFs How advisors can differentiate themselves among ETF investors

Armed with a better understanding of what drives core ETF investors, advisors need to consider a potential demand in the coming years: funds that move beyond following a generic market capitalization-weighted index.

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For financial advisors looking to appeal to the rising number of clients asking for exchange-traded funds (ETFs), knowing the profile of the investors who have embraced these products is of paramount importance.

The Canadian ETF Association (CETFA) recently released findings from a research project that helps advisors to develop a stronger understanding of core ETF users.

The findings reveal that ETF investors tend to have sole responsibility for household finances, with a critical chunk of them being in the wealth-accumulation phase of their lives (35 to 44 years of age). Interestingly, the research found that core ETF investors are more financially literate than non-ETF investors; specifically, ETF investors scrutinize their investments and value transparency.

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Furthermore, ETF investors also place a greater value on financial advice. The research found that 28 per cent of ETF investors say they are likely to seek advice from a financial advisor compared with 19 per cent of all other investors. However, those who invest in ETFs are more likely to leave their advisor if they’re not satisfied with the level of service they receive or their investment results.

With the emergence of the second phase of the client relationship model (CRM2), discussions around cost are a sore spot for the mutual fund industry. Clients are demanding more transparency and lower fees in their portfolios. ETFs are a great option when it comes to low fees. In fact, CETFA’s research cited low management expense ratios as the feature they like the most about ETFs, followed by their relatively low acquisition cost and the diversification they offer.

Armed with a better understanding of what drives core ETF investors, advisors need to consider a potential demand in the coming years: funds that move beyond following a generic market capitalization-weighted index. With the increasing flow of information available to investors, advisors must differentiate themselves; ubiquitous mutual funds or ETFs that track the same old indexes aren’t going to cut it.

The fourth quarter of 2018 brought one of the worst scares the market has seen for some time, with the S&P/TSX Composite Index declining by more than 10 per cent. Even though stock markets have been generally positive in 2019, this notable decline left an unsettling question around asset allocation: What should advisors do to help protect clients’ portfolios from volatility?

Jeff Weniger, director, asset allocation, WisdomTree Asset Management Canada Inc.

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Of course, a multi-asset portfolio should be the starting point for diversifying risk, but because Canadian equities are often such a large exposure, getting this part of the puzzle right is critical. One approach advisors can take is to look at ETFs that screen domestic stocks for quality metrics, such as profitability, and then weight the companies by their dividend policy.

Many factor-weighted strategies that emphasize quality, often a precursor of dividend growth, were able to outperform the S&P/TSX Composite Index during both the first-quarter and fourth-quarter stock market swoons in 2018, challenging the notion that a stock market capitalization-weighted index tracking “the market” is a slam-dunk.

In addition, dividend growth can be the driver of long-term compound returns. But what drives dividend growth? Corporate profitability. Data compiled by Professor Kenneth French at Dartmouth College’s Tuck School of Business showed that the top 20 per cent of stocks by profitability outperformed the bottom 20 per cent by 385 basis points a year (11.6 per cent versus 7.5 per cent). Does it come as a surprise that healthy companies generated higher returns than less profitable ones?

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What this all means for advisors is that those who consider factor-based ETFs for their clients’ portfolios are likely to thrive.

Jeff Weniger is director, asset allocation, at WisdomTree Asset Management Canada Inc.

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