Page 19 - Demo

STRATEGIES
share ETF) — “a little bit more assertive than your traditional 60/40, recognizing that rates are lower right now,” he says. Furthermore, he suggests investors embrace the tried-and-true GIC asset class as part of their fixed-income mix (along with government and corporate bonds). The best five-year GIC rate on ratehub.ca was 2.3% in mid-August.
Filling out the rest of the fixed-income allocation requires creativity because of low interest rates. Brown suggests preferred shares, as long as the weighting is relatively small. Preferred shares are safer than equi- ties, but aren’t a substitute for fixed-income, Brown says.
While Brown recommends a preferred-share ETF (Horizons Active Pre- ferred Share ETF [HPR]) in his portfolio, he notes that selecting individual companies is more advantageous because only a handful of preferred-share ETFs have a rate reset feature (meaning they pay a fixed dividend rate, as opposed to a floating rate, until the reset date). About two-thirds of HPR’s holdings are fixed-floating, paying a fixed dividend for an initial period.
Brown also considers environmental, social and governance (ESG) factors. “Environmental leadership is going to become an increasing focus among investors,” as will social awareness, he says. For example, investors may consider companies with values that align with the United Nations’ sustainable-development goals or that demonstrate progressive values, such as a social media company that monitors hate speech.
Brown layers an ESG focus throughout the portfolio as much as pos- sible, considering that active portfolio management is required to apply ESG methodology. Among the large-cap tech companies Brown favours, some do better on ESG standards than others, he says.
Brown’s portfolio also keeps home bias in check. For example, HPR, which invests primarily in preferred shares of Canadian companies, makes up 5% of the portfolio. The weighting reflects Canada as a propor- tion of the global investing universe, he says.
Emerging markets are absent because “they’re even more risky right now,” Brown says.
Building on principles
Alfred Lee, director of BMO ETFs, investment strategist and portfolio manager with BMO Global Asset Management in Toronto, says a bal- anced, recession-proof portfolio should be based on three principles: defensive growth, diversification and a core-satellite strategy.
“Managing downside risk is very important in this kind of a market,” where volatility can occur unexpectedly, Lee says. “If you lose 5% in any asset, it takes more than 5% to get back to break-even.”
The market doesn’t reward ultra high-risk investing, as it did prior to 2008, so Lee prefers defensive growth — “larger-cap, more mature companies that have a steady and predictable income stream.”
The second principle is diversification. The portfolio has to be “stable in many different macroeconomic environments,” Lee says — such as when central banks raise rates or taper quantitative easing. If the entire portfolio performs well at the same time, that’s not a good sign, Lee says. He suggests an asset allocation of roughly 50% equities, 30% bonds and 20% non-correlated assets.
The third principle is using a core-satellite strategy. The core — roughly 80% of the portfolio — represents longer-term secular ideas using broad beta or factor ETFs. The remaining 20% is thematic, with potential for gen- erating alpha. The latter are short-term positions that can keep investors engaged, Lee says.
To address defensive growth, Lee chooses two low-volatility ETFs — one exposed to Canadian equities (ZLB) and one focused on the U.S. (ZLU). These ETFs invest in names with lower beta that are less sensitive to market movements. Rounding out his core holdings is a global ETF (ZGQ) pro- viding exposure to blue-chip names.
One thematic choice is an iShares equity ETF (CEW) with exposure to Canadian banks and insurers. The ETF makes up for the low exposure to banks in the core positions, he says. The other thematic ETF, a global robot- ics and artificial intelligence fund (BOTZ), provides alpha potential.
Among bonds, Lee chooses an aggregate bond ETF (ZAG) for broad exposure — it’s relatively cheap at eight basis points, he says.
He also chooses thematic positioning within fixed- income: exposure to non-BBB, or higher-quality, corporate bonds in Canada (ZQB) and the U.S. (QLTA). These ETFs avoid the negative interest rates out- side North America.
In the non-correlated asset class, he chooses a gold ETF hedged to the Canadian dollar (CGL). “The Canadian dollar tends to be correlated to gold prices,” Lee says. “Any time the U.S. dollar weakens, you want that negative correlation between the U.S. dollar and gold.”
A long-term U.S. treasury bond ETF (TLT) acts as a hedge against sell-offs. “Any time risk assets sell off, long-duration U.S. treasuries perform really well,” Lee says.
A market-neutral anti-beta ETF (QBTL) that uses a long/ short strategy can hedge against market declines — in this case, because it’s long on volatility stocks and short on the market. During March’s sell-off, this ETF performed well, Lee says.
Brown’s sample portfolio
ETFs
Ticker
Weight
Asset class
Horizons Active Preferred Share ETF
HPR
5%
Hybrid
RBC 6-10 Year Laddered Canadian Corporate Bond ETF
RMBO
15%
Bonds
BMO Government Bond Index ETF
ZGB
10%
Bonds
iShares NASDAQ 100 Index ETF (CAD-hedged)
XQQ
5%
Equities
BMO S&P 500 Index ETF
ZSP
30%
Equities
FTSE Developed Europe All Cap Index ETF (CAD-hedged)
VEH
15%
Equities
FTSE Developed Asia Pacific All Cap Index ETF (CAD-hedged)
VAH
5%
Equities
iShares Edge MSCI Min Vol Global ETF
ACWV
10%
Equities
GIC
Five-year GIC
N/A
5%
Fixed-income
Lee’s sample portfolio
ETFs
Ticker
Weight
Asset class
BMO Low Volatility Canadian Equity ETF
ZLB
15%
Equities
BMO Low Volatility U.S. Equity ETF
ZLU
15%
Equities
BMO MSCI All Country World High Quality Index ETF
ZGQ
15%
Equities
BMO Aggregate Bond ETF
ZAG
20%
Bonds
iShares 20+ Year Treasury Bond ETF
TLT
7.5%
Non-correlated
iShares Gold Bullion ETF (CAD-hedged)
CGL
7.5%
Non-correlated
AGFiQ U.S. Market Neutral Anti-Beta CAD-Hedged ETF
QBTL
5%
Non-correlated
BMO High Quality Corporate Bond Index ETF
ZQB
4%
Bonds
iShares AAA-A Rated Corporate Bond ETF
QLTA
4%
Bonds
iShares Equal Weight Banc and Lifeco
CEW
5%
Equities
Global X Robotics and Artificial Intelligence ETF
BOTZ
2%
Equities
Investment Executive’s ETF Guide 2020 19