Mutual funds and ETFs in harmony

Benefits of blending two instruments

When it comes to choosing financial products for a portfolio, many investors feel as though they have to make a choice between ETFs and mutual funds. If you own one, you can’t own the other. For a while, that was the case among industry players, too – many advisors shied away from ETFs, and the ones who did buy them sold out of their mutual fund holdings.

As the industry has evolved, though, that thinking has started to change. Now, many advisors own both ETFs and mutual funds – some want to invest in mutual funds that hold stocks in hard-to-access areas at the same time as owning liquid ETFs that can be bought and sold during the day, for instance – while some products, such as actively managed ETFs, combine mutual fund-like active management within an ETF structure.

For example, over the last few months, Mackenzie Investments has started to bridge the gap between mutual funds and ETFs even further. In January, our company launched a suite of ETF Portfolios, which are mutual funds that contain passive, smart beta and actively-managed ETFs. These five balanced funds – all contain stock and bond ETFs – are also tailored to different risk profiles, such as conservative, moderate and growth. The ETF Portfolios deliver the added value of strategic and tactical asset allocation plus active currency management.

It may seem unusual to combine mutual funds and ETFs in this way, but when you look at the benefits of both it starts to make sense. The most obvious advantage is that it gives advisors and investors a way to easily own a basket of ETFs. Rather than having to create a portfolio of these securities on your own, which can be time consuming, portfolio construction is done by a team of professional managers.

Investors can also ensure that their portfolio is well diversified. Most people tend to buy passive products, which work well in some areas, but not in all. For instance, in a rising rate environment, owning an actively-managed bond ETF can be appropriate. The manager of that fund would choose bonds that are impacted less by rising yields, or they might purchase securities, such as corporates, with better income potential.

Add to that smart-beta funds, which are ETFs that follow a specific rules-based strategy, such as low volatility, momentum, or dividend investing, and you get a highly diversified portfolio that can perform well in a variety of market conditions.

In some ways, ETF Portfolios, like some of Mackenzie’s other retail funds, are managed similarly to pension funds, in that they hold a variety of asset classes to keep risk low without sacrificing performance. Mackenzie’s Asset Allocation team, which is run by Alain Bergeron, a former portfolio manager at the Canadian Pension Plan Investment Board, is also allowed to make tactical decisions, which is hard for retail investors to do.

Of course, there are many benefits to ETFs themselves – many are low cost, most are transparent, and they can be traded at any time of the day – and they’ve become as popular as they have for good reason. Similarly, ETF Portfolios can be less expensive than a mutual fund-of-funds, while investors can still see what’s in many of the ETFs that these funds hold.

While there are still many people who see ETFs and mutual funds as opposites, as the industry continues to innovate the walls that have separated these two products will come crumbling down. We’re already seeing how mutual funds and ETFs can work together – it’s only a matter of time until all investors see both as core parts of a well-diversified portfolio.

Michael Cooke is Senior Vice President and Head of Exchange Traded Funds, at Mackenzie Investments. This article first appeared in the Spring 2019 issue of Your Guide to ETF Investing, published by Brights Roberts Inc. Reprinted with permission.

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