Reg Jackson has never looked back after moving his investment focus to exchange-traded funds (ETFs) more than a decade ago.
“Our big shift started in 2002,” says Jackson, senior investment advisor, vice president and portfolio manager for the JMRD Wealth Management Team at National Bank Financial Ltd. (NBF) in London, Ont.
Jackson and his team moved from the brokerage arm of one of the bigger chartered banks to NBF mainly because NBF offered a basket-style ETF investment program, which provides model portfolios of complementary ETFs. NBF also allows Jackson’s team to customize and brand its own ETF baskets. The JMRD team now has 11 members and more than $900 million in assets under management (AUM).
Jackson, who has been a financial advisor since 1996, launched the all-ETF JMRD Exchange-Traded Fund Basket with his team almost as soon as the team made its move to NBF. “Clients had been asking for an alternative to higher-cost mutual funds,” says Jackson, “and this was our solution. All these years later, this basket is still going strong and we have grown from one portfolio to four.”
In addition to the lower cost of ETFs, clients like their simplicity – they are liquid and tend to be more transparent than many other securities.
JMRD now does 20%-25% of its business in ETFs. “And this has been growing steadily over the years,” Jackson says.
Mixing etfs with other models
Jackson designs model portfolios for clients using ETFs as individual building blocks to achieve various degrees of exposure to different asset classes: “We consider [ETFs] the same way as individual stocks and bonds,” he says.
For each client, Jackson develops a detailed financial plan, then decides which ETF model portfolios are most suitable for the client’s individual financial requirements and risk tolerance. “We want to know as much about the person as possible to put forward an appropriate portfolio, ” Jackson says. “Then, we make an asset allocation.”
By using ETFs, he adds, “we incorporate all asset classes into our models.”
Jackson and the JMRD team’s basket approach to building ETF portfolios for clients aims to provide diversified securities portfolios that produce moderate income and allow capital to appreciate.
With this approach, clients allocate some of their assets to one or more of JMRD’s ETF baskets, while other assets still are managed on a non-discretionary basis using a traditional commission model.
Jackson and his team use a top-down approach to picking ETFs. The team starts by evaluating the economic climate; from there, they look at geographical areas, then sectors within these areas, deciding which regions and sectors to include in an ETF basket and which to leave out.
Wide range of assets
When the JMRD team finds a region and sector they like, they overweight that sector vs the sector’s weighting in the benchmark index. For example, if the team views Canada and gold companies as good prospects, Canadian gold ETFs will be overweighted in the baskets.
Jackson’s team keeps the range of assets wide when assembling an ETF-based portfolio. Asset classes include: cash; bonds; high-yield investments; floating-rate products; preferred shares; Canadian, U.S. and international stocks; precious metals; and alternative securities such as real estate income trusts. Changes are made only for rebalancing or if the economy is changing.
“We like the ability to invest in specific sectors. We also like the ability to hedge,” Jackson says.
The team also looks for either growth or value in the specific ETFs chosen for the baskets. “We are income-oriented advisors, so the dividend-payers are top picks for us. We also like the straightforward ETF plays, through which we can buy an index,” Jackson says.
The JMRD team considers ETFs a tool, not a doctrine. “We don’t sit down and say, ‘Let’s convert all of our non-ETF investments to ETFs.’ But we are finding that a lot of our business development is geared toward ETF investing. We really like them; if they grow [as a portion of our business], that’s great; but we don’t have a target.”
Best for hands-off clients
Even with all the advantages that ETFs offer, they’re not for every investor. “They work best for a hands-off type of client – someone who wants to work with an advisor who comes up with a plan and then leave it with the advisor to put that plan into place,” Jackson says. “[ETFs] work less well for stock-pickers, market junkies.
“I don’t want to suggest that pros only buy individual stocks and bonds,” he adds. “But, from my experience, traders like to make specific bets.”
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