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Investors can use the range of ETF choices to tailor the right balance of holdingsGetty Images

There was a time when exchange-traded funds (ETFs) included a few dozen offerings that passively tracked the broadest of market indices. Now, name a sector, factor or asset class, and an investor is almost certain to find the exposure they’re after.

There are approximately 3,000 U.S.-listed ETFs and another 1,000 or so ETFs operated by Canadian managers, according to Statista. The array of options has made ETFs a tool of choice for many of today’s investment professionals, enabling efficient, liquid and tactical exposures for clients of any risk tolerance.

“We believe in active management, but there is a big role for ETFs. You can have a portfolio built around these funds that can tilt in so many ways,” says Colin Ryan, portfolio manager and advisor at Colin Ryan Wealth Management in Winnipeg, part of Wellington-Altus Private Wealth Inc.

Choices include income, growth, value, ultrashort-duration fixed income, long corporate bonds, U.S. energy, emerging-markets technology, Canadian banks and more. So, how can you build the right ETF portfolio from scratch?

Multiasset ETFs can provide a low maintenance, one-size-fits-all portfolio for novice investors. Many managers are using ETFs to construct balanced portfolios that give clients some income generation as well as growth through stocks, rounding out their holdings with an aggregate bond allocation, and perhaps a small weighting to alternative investments.

Canadian and U.S. equities represent a solid mix of dividend cash flow and growth, says Mr. Ryan (notwithstanding the pressures on both the past few years), and should represent the typical investor’s core exposure.

A diversified fixed-income investment in something like an aggregate bond index ETF completes the conventional 60-40 approach – 60 per cent holdings in stocks, 40 per cent in bonds.

“As a start, you would probably want to have a broad-based Canadian equity fund, a broad-based U.S. equity fund and a broad-based bond fund,” Mr. Ryan says.

Fixed-income funds that have held longer-dated bonds have been hurt by stubbornly high inflation and elevated rates. Products like aggregate bond funds, which hold bonds across the yield curve, have performed poorly. But with the rate cycle seemingly at an inflection point, and fixed income paying real yields not seen in years, advisors suggest that the classic 60-40 approach is an optimal mix once more.

“We’ve just gone through a bout of runaway inflation where bonds didn’t cushion the stock market weakness. But fast forward to where we are right now, and cash is earning nearly 5 per cent while fixed income is again earning in the 4 per cent to 6 per cent range, which is a healthy starting point,” says Zach Davidson, advisor at Fairway Wealth Management in Toronto, part of National Bank Financial.

He says the stock portion of a diversified portfolio doesn’t have to do as much of the lifting, compared with recent periods of low rates where investors weren’t earning much on their bond portfolios. “So it’s a good time to look to that 60-40 portfolio,” Mr. Davidson says.

Jeanette Power, advisor at the Power Investment Team in Mississauga, part of CIBC Wood Gundy, is more emphatic about the wisdom of the conventional portfolio approach. “It’s more alive now than it’s ever been. With interest rates where they are, at least for the short-term, clients are capturing a better return with less risk.”

Still, there are reasons to tweak the 60-40 portfolio concept to find the right balance. Many investors want a more diversified strategy that includes some international exposure, government bonds, investment-grade corporate bonds and high-yield corporate bonds. Their advisors are now carving out space for alternative assets like gold, commodities, and private debt or equity.

Because many alternative investments are uncorrelated to public markets, they help guard against the kind of widespread upheaval experienced in 2022, and for stretches through 2023. Some options such as structured notes can generate elevated returns.

Within a balanced model, “there is a place to have some alternative holdings,” says Ms. Power.

Many advisors suggest a 5 per cent to 15 per cent weighting in private markets or in gold, an asset class with multiple ETFs. For investors leery of terms like “private markets,” Ms. Power has a reassuring example that most clients can relate to.

“I often refer to Canada Pension Plan,” she says, which holds more than half of its portfolio in private assets like infrastructure, real estate and credit.

“If I look at the CPP allocation to those areas, their weighting is considerably higher than what I would have, but it’s an easy reference so that I can show them exactly what the country’s pension plan is doing.”

“We view [alternative allocations] as a key differentiator between most of the popular off-the-shelf multiasset portfolio ETFs that are around,” says Mr. Davidson. “We think that does add value to the 60-40 portfolio.”

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