The ETF Solution – November 2011
When I joined PI Financial in 2009, I had just experienced the worst stock market correction of my career which coincidentally started at the same time of the last great stock market correction in 1987. The ’87 collapse which led to the margin calls and panic selling on infamous “Black Monday” displayed volatility unlike the market had seen in years. This time around the collapse was caused largely by the sub-prime mortgage debacle resulting from the US banking system lowering its lending standards in an effort to drive earnings and make profits - combined with the economy which was at the end of the boom cycle. The fallout continues today with the seemingly never ending sovereign debt crisis, high unemployment, geo-political uncertainty and global unrest.
Like so many, I’d experienced a lost decade on the stock market and seen billions of dollars of Canadian investors’ money invested in mutual funds faced with bad returns, high fees, and an uncertain economic future. The vast majority of actively managed mutual funds had underperformed the S&P/TSX Composite Index, while charging investors an average of 2.5% in fees. I knew that there had to be a better way to manage money then to sit back and pay somebody else to underperform. I visited the age old debate between active and passive investing and took a hard look at the statistics. There had to be a better way.
Using Exchange Traded Funds (ETFs), I found the solution. I call it The ETF Solution. It seems Canadian investors agree with me as today in Canada there are over *222 ETFs with over $41.3 billion in assets. This year alone, ETFs have seen cash inflows of over $5.6 billion in new monies.
Using index tracking ETFs, I build a foundation for portfolios with exposure to stock markets in Canada, the US, Europe, and Emerging Markets. This is the Core of a portfolio, and with ETFs, I can make tactical moves in and out of certain global regions as opportunities dictate.
With ETFs that track specific sectors like energy, oil & gas, agriculture, metals and minerals and others, I make tactical trades to overweight that sector. Using gold ETFs and commodity ETFs, I ensure portfolios have exposure here for the natural inflation hedge. These are the Satellite investments that combine with the Core to complete the portfolios.
The strategy has worked with solid returns since September 1, 2009 on my Core Balanced Portfolio with stock and fixed-income funds as well as my Growth Model that is all equities and commodities, and my Balanced Income Model that provides an attractive monthly income stream (4.7% yield). The growth model is up over 25% since September 1, 2009 because of being in the right sectors and owning gold. Neither of which any investor can easily do, without using ETFs. Once again, history repeats itself – 80% of portfolio returns stem from being invested in the right sector.
All of my experience has led me to this point. I’m convinced that this strategy will continue to provide solid returns and a cost effective approach to managing money. As with any equity investment, ETFs do have market risk and some synthetic ETFs have counter-party risk. It’s important to ensure that you understand what you own and any risks associated with it. That’s one of the places where a professional advisor can add real value to your portfolio.
I look forward to writing regular blogs on my site to update my clients and those interested in my ETF Solution.