This year marks 10 years for my ETF-based discretionary portfolios. During that period, I’ve seen plenty of innovation and growth in this part of the financial industry.
I began using ETFs after the 2008-2009 global financial crisis. As I transitioned to fee-based and then discretionary portfolios in the years that followed, ETFs became my core investment holdings.
The 2008-2009 recession was a pivotal moment for the ETF industry. The crisis highlighted the advantages of index investing. In the aftermath of the worst recession of my career, the active vs. passive data from S&P Dow Jones Indices — known in the industry as the SPIVA Scorecard — revealed that ETFs tracking broad market indices had outperformed many active managers. That reality changed the way I manage money.
In the years that followed, I have witnessed ETFs revolutionize the investment landscape.
Launching my portfolios
In 2013, my model ETFs portfolios were officially created, and I was able to start tracking those models’ returns. Everyone, including my husband, his company, our children, my mother and I, invested in my models, which were dynamic growth, growth, balanced and conservative.
When I launched my portfolios in 2013, I devoted a lot of time to educating clients on the virtues of ETFs. Initially, many investors were skeptical about the benefits of passive investing, believing that consistently outperforming the index was not a significant feat.
This skepticism was rooted in the notion that active management, with its potential for strategic stock selection and market timing, could deliver superior returns. However, as more data emerged (notably from SPIVA), showing that most active managers failed to beat their benchmarks over the long term, investor attitudes began to change. The transparency and performance of ETFs provided compelling evidence that passive investing could be a more reliable and cost-effective strategy.
When creating my discretionary portfolios, I created a detailed investment policy to be able to explain to clients the parameters of my portfolios: geographic allocation, asset allocation and risk guidelines. I use these parameters to rebalance, usually on a quarterly basis.
Having a strong investment committee to consult with is important. Also, your team members must buy in to the investment philosophy. I had to make important changes to my team to ensure everyone’s interests were aligned with what we were doing for our clients.
In the years following the launch of my portfolios, it became increasingly easier to interest potential clients in my models. More investors were learning about ETFs in the financial press and money was migrating to ETFs from mutual funds. According to the Investment Funds Institute of Canada, ETFs surpassed mutual funds in net annual sales every year since 2018, except for 2021. Canadian ETFs now represent more than $450 billion of assets under management.
The shift to ETFs was also driven by investors’ desire to lower fees and trade intraday, vs. simply at the end of the day as with mutual funds. This flexibility is particularly appealing to investors seeking to capitalize on market movements or adjust their portfolios swiftly.
These advantages were not lost on mutual fund dealers and the growing trend has seen more mutual funds reduce their management fees and offer funds in an ETF version.
The modern ETF landscape
Today, ETFs are a staple in both retail and institutional portfolios, helping expand the geographic investing frontier and offering retail investors many of the advantages of institutional investors. There are now more than 3,200 ETFs in the U.S. and more than 1,100 in Canada. The range of available ETFs has expanded to include smart beta and factor-based products, which aim to outperform traditional indexes by targeting specific investment factors such as value, momentum or volatility.
ETFs now cover niche markets and strategies, providing investors with unprecedented access to diverse asset classes and investment approaches, such as smart beta and thematic investing.
ETFs continue to bring diversification to the investment landscape. One area to watch is fixed income. Bond ETFs have grown in popularity, offering investors an efficient way to gain exposure to fixed-income securities. These ETFs provide liquidity, transparency and diversification benefits that were traditionally hard to achieve in the bond market, which is often characterized by lower liquidity and higher transaction costs compared to equities.
As bond ETFs continue to gain traction, they are expected to enhance price discovery and trading efficiency in the bond market. This could lead to greater accessibility for retail investors and potentially lower costs. I believe that this will lead to the end of “over the counter” trading of bonds within the next two to five years, much to the benefit of retail investors.
I have always kept my ETF investments “plain vanilla.” Sticking to my investment policy and using best practices for trading have produced robust returns over time. I tell my clients that I aim to be consistently first or second quartile in performance for all of my models. Persistence over time is the key.
I also believe that as more and more active investment strategies morph into an ETF wrapper, calm minds must prevail in building investment portfolios that help clients build wealth over the long term.
As I argue in my 2016 book, The Black Belt Investor, I firmly believe the full power of ETF investing is realized when all key money management factors are present: managing emotions through discipline, optimizing tax and financial planning, and having a high-quality client/advisor relationship.
This article was written with assistance from summer intern Mélissa Sabourin.