This article appears in the November 2020 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Investor interest in asset-allocation products has picked up steam in recent years and fund companies are bringing more products to market as a result.
Asset-allocation funds, which fall under the umbrella of multi-asset products, are designed to deliver a diversified investment portfolio within a single vehicle. Multi-asset funds accounted for 3% of the Canadian ETF market as of September 2020 — a month in which eight asset-allocation ETFs launched, according to a report from National Bank of Canada.
“Now that the need has been identified for ‘one-ticket’ solutions, all the ETF providers are rushing to meet that need,” says Daniel Straus, director, ETFs and financial products research, with National Bank.
Recent launches in the asset-allocation space include a retirement income ETF from Vanguard Investments Canada Inc., four sustainable ETFs from RBC iShares and four ETFs from Mackenzie Investments.
Vanguard’s new Retirement Income ETF Portfolio has a target payout of 4% per year with the possibility of capital appreciation. The fund invests in four Vanguard equity ETFs and four Vanguard fixed-income ETFs, and has a management fee of 0.29%.
While asset-allocation funds have been around for some time, they began taking off in 2018, when Vanguard launched three portfolio products (conservative, balanced and growth versions) that were far cheaper than similar funds on the market.
“When Vanguard launched these three products, I don’t think even they were expecting them to grow as much as they did,” Straus says. The three funds had more than $3 billion in assets under management among them as of Sept. 30.
RBC iShares’ four new asset-allocation ETFs focus on environmental, social and governance (ESG) criteria, which continue to be popular among investors. “The demand and interest in [ESG] have been riding to a head recently,” says Straus, pointing to increasing flows into ESG ETFs.
The new iShares funds include the iShares ESG Conservative Balanced ETF Portfolio, the iShares Balanced ETF Portfolio, the iShares ESG Growth ETF Portfolio and the iShares ESG Equity ETF Portfolio. The management fee for each is 0.22%.
Because there is no standardization for what constitutes ESG and how it’s measured, Straus says, trading in ESG ETFs requires due diligence to understand a fund’s underlying methodology. For example, ESG funds may include oil companies. If an investor prefers to avoid the energy sector, they’ll need to research what they’re buying, Straus says.
“When you dig deeper, you can understand the reasoning behind [ESG decisions], and then it’s just a matter of deciding which methodology is the trend you’re going to hitch your wagon to,” Straus says.
Mackenzie brought four asset-allocation ETFs to market in September: the Mackenzie Global Fixed Income Allocation ETF, the Mackenzie Conservative Allocation ETF, the Mackenzie Balanced Allocation ETF and the Mackenzie Growth Allocation ETF. Management fees range from 0.17% to 0.25%.
Inflows into asset-allocation funds seem to be coming from do-it-yourself (DIY) investors and financial advisors, Straus says.
Prior to 2018, there was a sense in general that being a DIY investor meant building a customized portfolio yourself, Straus notes. But interest in asset-allocation products has proven that many DIY investors are happy to “set it and forget it.”
Advisors, Straus says, seem to be interested in asset-allocation funds as placeholders for cash in some accounts or as a starting point for very small accounts that will eventually be built into a more customized portfolio over time.