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Financial advisors can pursue any investment strategy and build a portfolio for clients made up entirely of ETFs.KITTIPONG JIRASUKHANONT/iStockPhoto / Getty Images

Exchange-traded funds (ETFs) continue to be a popular choice among Canadian investors. For financial advisors, choosing the ETFs and allocations that best suit clients’ needs can be especially challenging now that Canada boasts almost 750 ETFs from 35 sponsors. So, how can advisors build a well-balanced portfolio of ETFs?

To keep things simple, start by looking at the lowest-cost ETFs, says Justin Bender, portfolio manager at PWL Capital Inc. in Toronto.

“This approach will help to narrow down your choices to maybe about 20 ETFs. From there, you can decide how much you want in broad-market ETFs versus equities and bonds,” he says.

Mr. Bender cites products such as Vanguard Investments Canada Inc.’s all-in-one asset-allocation ETFs or similar offerings from BlackRock Asset Management Canada Ltd.’s iShares family of ETFs as examples of ways to achieve balance and diversification within one fund.

From that foundation, advisors can use ETFs strategically to gain exposure to certain sectors while reducing risk from individual stock picks.

Take gold, for example. If you have clients who want to take advantage of potential opportunities within that sector, you may want to steer them toward ETFs such as SPDR Gold Shares (GLD-A) or iShares S&P/TSX Global Gold Index (XGD-T), says Keith Richards, president, chief portfolio manager and technical analyst at ValueTrend Wealth Management Inc., in Barrie, Ont.

“Buy one of these or something similar instead of picking maybe one or two gold-mining companies and you’ve just bought the sector and eliminated the individual security risk,” he says.

This approach tends to work better with some sectors and funds than others, Mr. Richards adds. To know for which sectors that may be the case, advisors should look at how the underlying securities are weighted in an ETF.

For example, he says that in some technology ETFs, giants such as Alphabet Inc. or Inc. might account for up to 20 per cent of the fund. That leaves those ETFs more vulnerable to the impact of any price drops for these heavily-weighted stocks.

“Often, it makes sense to just pick the fastest racehorse rather than the sector,” Mr. Richards says. “Generally, we choose not to buy ETFs for technology. We prefer to pick our own stocks in that sector.”

Achieving a balanced portfolio of ETFs requires active management on advisors’ part, especially with today’s volatile markets, says Allan Small, senior investment advisor with the Allan Small Financial Group at HollisWealth, a division of Industrial Alliance Securities Inc., in Toronto.

“If you’re using ETFs to build a diversified portfolio, presumably you’re also actively managing the different ETFs and moving money in between. Because, in essence, you're betting on indices versus individual stocks,” Mr. Small says.

“In a good market, for the most part, it can be easy to make money even with passive management,” he adds. “But in a volatile market like, what we’ve seen in the past one-and-a-half to two years, good active management will outperform passive management.”

Mr. Small says it’s important for advisors to educate their clients on how best to invest in ETFs, and to underline the importance of monitoring and frequently reviewing their portfolios.

A 2019 study from the Canadian ETF Association found that ETF investors are much more likely than other investors to seek financial advice. The flip side? ETF investors are also more prone to leave an advisor if they don’t feel they’re getting what they need.

Thomas Tsiaras, an investment advisor at Aligned Capital Partners Inc. in Vancouver, says client education should involve one of the subtle benefits of ETFs versus an individual security or mutual fund.

“Investing in ETFs is actually more of a rational response, because it’s moving away from the thinking that you can beat the market to just matching the market,” Mr. Tsiaras says. “If the market goes down, people [invested] in ETFs will ultimately say, ‘Well that’s just the markets and we can’t do anything about them.’”

Still, Mr. Tsiaras also says that creating a well-balanced portfolio is a moving target.

“There may not be a perfect permanent ETF allocation,” he says. “You have to be nimble.”

By making timely adjustments, anything is possible. And with the vast universe of choices available in ETFs – which continues to expand – advisors can pursue virtually any investment strategy and build a portfolio for clients entirely of ETFs, Mr. Tsiaras says.