Investors seeking to enhance returns for their retirement portfolio might consider a core-satellite strategy to build a nest egg.
Low-fee, broadly diversified stock-and-bond index exchange-traded funds (ETFs) make ideal long-term, core holdings. Some examples include iShares Core S&P/TSX Capped Composite ETF XIC-T, BMO S&P/TSX Capped Composite ETF ZCN-T and Vanguard U.S. Total Market ETF VUN-T.
But adding thematic, smaller-cap, industry sector or developing-market equity ETFs can provide the extra fuel to potentially beat market indexes. In some cases, they are also better as shorter-term, tactical plays.
As there are no guarantees such satellite investments can always outperform, investors might want to keep these ETFs to below 10 per cent in a registered retirement savings plan (RRSP) – depending on their risk tolerance.
We asked three ETF experts for their top satellite picks for an RRSP portfolio.
Ben Johnson, director of global ETF research, Morningstar Research Services LLC
The pick: iShares MSCI Minimum Volatility Emerging Markets ETF XMM-T
Management expense ratio (MER): 0.42 per cent
This ETF is suitable for investors seeking diversification from higher-growth emerging markets, but can’t stomach the bumpy ride, Mr. Johnson says. “Its volatility has been 24 per cent less relative to a broad-based emerging-markets index.” This fund, which is 35 per cent invested in China and 16 per cent in Taiwan, has exposure to about 300 names. Top holdings include Taiwan Mobile Ltd., Alibaba Group Holding Ltd. BABA-N, Saudi Telecom Co. and Infosys Ltd. INFY-N. This ETF can offer some downside protection but will not participate fully when markets rally, he says. It has lagged as emerging markets have spiked higher in recent months. “The biggest risk is that investors throw in the towel … having forgotten that what they are signing up for is a better risk-return proposition,” he says, adding that the ETF’s fee is competitive within the broader group of emerging-market funds.
The pick: Vanguard FTSE Emerging Markets All Cap ETF VEE-T
MER: 0.24 percent
This emerging-markets ETF is compelling because of its lower fee, broad diversification and prospect for above-average returns, Mr. Johnson says. “As of today, the starting point is relatively depressed valuations relative to developed markets.” This ETF tracks more than 5,000 names, which include Taiwan Semiconductor Manufacturing Co. TSM-N, Tencent Holdings Ltd. TCEHY, and Alibaba Group. A risk with this market-capitalization weighted ETF is its significant allocation to Chinese stocks, which make up 43 per cent of the ETF, he says. Many of them rank among the largest positions and are also state-owned enterprises with motives and incentives that might not always align with individual investors, he says. This ETF is suited to investors with a “healthy risk appetite” and can stomach the volatility in emerging-market equities, he adds.
Daniel Straus, director of ETFs and financial products research, National Bank Financial Inc.
The pick: Evolve Innovation ETF EDGE-T
MER: 0.55 per cent
Investors might consider this ETF for exposure to innovation trends, but can’t decide on which to bet on, Mr. Straus says. It tracks an index that invests in themes involving cybersecurity, e-gaming, cloud computing, automobile innovation, genomics, 5G, robotics and blockchain. This fund, which holds Evolve thematic ETFs and stocks, is suitable for younger investors because it’s still a risky equity play, he says. Its most recent strong performance was driven largely by the cloud computing and data service part of its portfolio. The ETF’s fee is very reasonable compared with the 1.15-per-cent feed charged by Canadian-listed Emerge Ark Global Disruptive Innovation ETF EARK-NE, he says. The Emerge ETF gained 131 per cent last year versus 64 per cent for the Evolve ETF, but the former is also a bet on an active manager, he says, whereas the Evolve fund is more diversified and suitable for an RRSP.
The pick: Vanguard Small-Cap Value ETF VBR-A
MER: 0.07 per cent
This very low-fee ETF is appealing because it can be a bet or hedge against the mega-cap stocks that have dominated the U.S. market since the global financial crisis, Mr. Straus says. Those names include the so-called “FAANG” – Facebook Inc. FB-Q, Amazon.com Inc. AMZN-Q, Apple Inc. AAPL-Q, Netflix Inc. NFLX-Q and Alphabet Inc. GOOGL-Q (formerly known as Google) – stocks. A value ETF could be described as a natural satellite position because it would be distancing from “big and expensive” to “small and cheap stocks,” he notes. This ETF, which tracks more than 900 names, counts IDEX Corp. IEX-N, ON Semiconductor Corp. ON-Q and Molina Healthcare Inc. MOH-N among its top holdings. This fund is suitable for a younger investor with a long time horizon because it will underperform should mega-caps continue to dominate for a while longer, he adds. A major recession or a huge market shock would be risks to this ETF.
David Kletz, vice-president and portfolio manager, Forstrong Global Asset Management Inc.
The pick: iShares MSCI Global Metals & Mining Producers ETF PICK-A
MER: 0.39 per cent
This ETF, which focuses on industrial-metals stocks, should benefit from the early stages of a global economic recovery, Mr. Kletz says. These metals, which include copper, steel, and aluminum, will be in demand as infrastructure spending ramps up globally. The fund is invested heavily in mining conglomerates based in Britain and Australia, but have assets around the world. Top holdings include BHP Group Ltd. BHP-N, Rio Tinto PLC RIO-N and Vale SA VALE-N. This ETF is suitable for investors who can tolerate risk because it can be volatile. It should be viewed as a tactical play for the short to medium term to ride a cyclical, global upturn, he says. The risk to this investment stems from any roadblocks to economic recovery. The ETF’s fee, he adds, is reasonable to get targeted exposure to industrial metals.
The pick: CI Wisdom Tree Emerging Markets Dividend ETF EMV-B-T
MER: 0.42 per cent
This dividend ETF is compelling because it provides exposure to the growth potential of emerging markets, but it is also a yield play, Mr. Kletz says. “Emerging markets will represent an increasing proportion of global growth that we expect to accelerate over the next few years.” Owning dividend-payers means holding more mature and stable companies, so “it’s like having a quality screen,” he adds. China and Taiwan-based companies make up half of the ETF. Taiwan Semiconductor Manufacturing and Samsung Electronics Co. are among the top names. This ETF is suited to young or middle-aged investors who have a long-term horizon, he adds. A risk stems from a slower economic recovery due to more COVID-19 lockdowns or disruptions in vaccine distribution, he says. The ETF’s fee is reasonable compared with its non-market cap-weighted peers, he adds.