Crisis ETFs

Shelter from the storm

March 9 marked the 30^th anniversary of the birth of exchange-traded funds (ETFs). What many people don’t know is that Canada was the originator of what has become an international investing phenomenon.

The first-ever ETF was known as Toronto Index Participation Fund (TIPS). It tracked what was then the TSE 35 Index, which measured the performance of the largest 35 companies on the Toronto Stock Exchange. The first units started trading on March 9, 1990.

At the time, only a few investors were interested. But that changed as prominent money managers like John Bogle (founder of The Vanguard Group) began aggressively promoting the low-cost, transparency, and simplicity of these new securities. Investors no longer had to pay hefty mutual fund commissions or trailers. ETFs could be bought and sold through discount brokers at the click of a mouse.

It took some time, but the concept eventually caught on. According to Fundata Canada, there are now more than 840 ETFs listed in Canada, which accounted for more than $211 billion in assets under management (AUM) as of Jan. 31.

In AUM terms, mutual funds still lead by a wide margin. But ETFs are growing faster. Over the year to Jan. 31, mutual fund assets increased by 12.5%, according to the Investment Funds Institute of Canada. ETF assets were up 28.5%.

The original ETFs tracked the performance of widely-followed indexes, such as the Dow Jones Industrial Average and the S&P 500 Composite Index. Your profits or losses were directly tied to how the underlying indexes performed. If you have money in any of those ETFs today, you know the pain that a market meltdown can inflict.

But ETFs have diversified over the years. There is a whole range of options available, some of which offer protection from the market storms we are currently experiencing (as demonstrated in the Fundata Analytics' March 30 article in Fund Library). Here are some ETFs that would look good in any portfolio right now.

iShares Core Canadian Universe Bond Index ETF (TSX: XBB). The fund tracks the performance of the total investment-grade Canadian bond market, including government and corporate issues. It tends to perform well when interest rates are falling – like right now, as central banks struggle to deal with the coronavirus shock. The annual cost is a minimal 0.1%.

iShares Core U.S. Aggregate Bond ETF (NYSE: AGG). This is the American equivalent of XBB, except it tracks the U.S. bond market. It’s even cheaper to own, with an expense ratio of only 0.05%.

SPDR Gold Shares (NYSE: GLD). This is the world’s largest gold ETF. Gold sold off recently as investors raised cash, deflation concerns took hold, and the U.S. dollar soared. But the precious metal is widely seen as a safe-haven investment in troubled times, which these certainly are. The management expense fee is 0.4%.

BMO Equal Weight Utilities Index ETF (TSX: ZUT). Some stocks perform better than others in falling markets. Utilities have held up reasonably well in the general market collapse because they are interest-sensitive. When rates rise, they suffer. But when rates fall, these stocks tend to hold their value or rise in price. This ETF invests in a portfolio of 16 Canadian utilities, including Fortis, Brookfield Renewable Partners, Boralex, Algonquin Power & Utilities, Hydro One, and Canadian Utilities. It gained 35.8% in 2019. The management expense ratio is 0.61%.

CI First Asset High Interest Savings ETF (TSX: CSAV). You won’t get rich with this ETF, but if preserving what you have and earning some interest in the process is your goal, then this new fund is worth a look. The money is invested in high-interest savings accounts at five Canadian banks – CIBC, RBC, BMO, Scotiabank, and National Bank – at above-average negotiated rates. The unit price hardly ever budges from the $50.00-$50.10 range, but you receive monthly distributions, the most recent being for $0.0807 per unit. The management fee is 0.14%. There’s nothing exciting about this fund, which makes it a good choice for those who want a little stability in their financial lives.

For more information and the latest updates on this rapidly evolving story, go to www.BuildingWealth.ca.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.