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Blog Series: Solving your investment problems
Part 2: Achieving comprehensive diversification

Naseem Husain, CIM, FCSI,  

Vice President ETFs


April 28, 2021

 

Advisors and investors have a variety of concerns when it comes to growing wealth. Typically, they involve:

  • Low bond yields, which bring the temptation to reduce fixed income exposure
  • A bewildering choice of potential investment solutions
  • Products being presented in different ways, making them hard to compare

This series of articles, “Solving your investment problems,” will explore those key concerns and suggest some of the best solutions for each one.

Part 2: Achieving comprehensive diversification 

The problem: Achieving a more affordable comprehensively diverse portfolio.

One solution to consider: Asset allocation ETFs  


Individual investors only have so much time to research global stocks and bonds. While it makes sense to stick to areas of the stock and bond markets where they may have an edge, it also makes sense to outsource those decisions in areas where they don’t have an advantage. 

Buying only individual assets can also make it difficult for investors to achieve a truly diverse portfolio. It’s expensive to buy and sell individual stocks and you would need to buy dozens (or even hundreds) to achieve a safe level of diversification, in terms of location, industry and an appropriate split between equities and fixed income.

Plus, not all asset classes move in the same direction, so holding non-correlated assets can help protect your portfolio when markets are volatile. Rebalancing during times of volatility can lead to outperformance when markets recover. For individual investors and advisors with clients holding small portfolios, there are ETFs that provide asset allocation, wide product selection and rebalancing; all at low management fees.
 

Asset allocation ETFs: affordable, comprehensive diversification

One efficient solution is asset allocation ETFs. Over the last 90 days (up to March 10, 2021), $1.5 billion has flowed into this space1. Half of that amount was in the growth asset allocation, closely followed by balanced asset allocation funds.

Asset allocation ETFs are essentially “ETFs of ETFs”, that is, they’re a collection of sub-ETFs, sometimes containing as many as a dozen ETFs and in turn, hundreds of assets.

There are several compelling reasons why asset allocation ETFs are seeing such considerable inflows:

They collectively provide a whole portfolio's worth of assets, including equities and fixed income, in just one ETF. They usually offer exposure to North America, global developed and emerging markets

  • They bring immediate, significant diversification of regions, assets and industries
  • They’re regularly rebalanced to maintain target risk levels and asset allocations
  • Low-cost options (they typically have low managements fees)
  • Options are available to suit your investment style/risk preference, meaning you’re bound to find one to suit you

There are typically four types of asset allocation ETFs to suit different risk tolerances:

  • Conservative: 40% equity and 60% fixed income
  • Balanced: 60% equity and 40% fixed income
  • Growth: 80% equity and 20% fixed income
  • Fixed income: 100% fixed income – for investors managing the equity portion of their portfolio, this can provide 100% of their fixed income exposure
     

Mackenzie’s asset allocation ETFs

Mackenzie offers four asset allocation ETFs:

Mackenzie Conservative Allocation ETF (MCON)

Mackenzie Balanced Allocation ETF (MBAL)

Mackenzie Growth Allocation ETF (MGRW)

Mackenzie Global Fixed Income Asset Allocation ETF (MGAB)

The chart below shows the equites/fixed income ratio of each one:

Mackenzie asset allocation ETFs AODA copy. Four circle charts on page 2:  MCON is made up of 60% fixed income and 40% equities, MBAL is made up of 40% fixed income and 60% equities, MGRW is made up of 20% fixed income and 80% equities, MGAB is made up of 100% fixed income

The built-in diversification of these funds means that, even when the equity ratios are higher, the risk level is still only low to medium. As with the sector as a whole, these asset allocation ETFs saw a lot of investment over the 90 days up to March 12, 2021:

 

        ETF Category Flows ($millions)
Asset Allocation ETFs Category Average
90 day Value Traded
Category AUM
($ millions)
# of
Competitors
3-day 5-day 10-day 90-day
MCON $2,921,000 $469.80 6 $5.10 $5.90 $11.30 $125.80
MBAL $11,524,000 $1,750.50 5 $5.70 $15.40 $54.00 $544.30
MGRW $21,048,000 $2,187.80 7 $17.10 $47.40 $118.00 $87.30
MGAB $2,616,000 $551.50 8 $0.00 $1.00 $5.10 $26.70
Source: Bloomberg, Mackenzie Investments, Data as of March 12, 2021   Total Asset Allocation ETFs Flows past 90 Days (millions) $1,484.1

The chart below details the kind of holdings found in these asset allocation ETFs – this is for the Fixed Income Asset Allocation ETF (MGAB). This fund is designed as all-in-one fixed income solution, combining the benefits of broad fixed income diversification (it contains 11 Mackenzie Fixed Income ETFs) with strategic asset allocation provided by the Mackenzie Investments Fixed Income Team. The ETF is regularly rebalanced on a quarterly basis to help maintain exposure to target allocations and risk levels.
 

Contents of MGAB: 

Investment ranges

Min

Max

Current

Canada

 

 

 

Canadian aggregate bond

5%

50%

15%

Candadian corporate bond

5%

25%

10%

Canadian short bond

5%

50%

5%

United States

 

 

 

U.S. aggregate bond

5%

50%

20%

U.S. corporate bond

5%

25%

12.50%

U.S. high yield bong

1%

25%

5%

U.S. TIPs

1%

15%

7.50%

Floating rate bonds

0%

10%

7.50%

Global ex-North America

 

 

 

Developed ex-NA aggregate bond

5%

30%

7.50%

EM Debt - hard currency

1%

15%

2.50%

EM Debt - local currency

1%

15%

7.50%

Source: Bloomberg and Mackenzie Investments. Portfolio Characteristics as of January 31, 2021. Portfolio Holdings as of January 31, 2021. *These are the target allocations, rebalanced quarterly and are subject to change by the portfolio management team. Please refer to prospectus for more detail. *Other/NR – Credit breakdown look-through does not capture currency exposures, forwards and certain non-rated bond issues or any ratings lower than B.

Asset allocation ETFs bring many benefits to both individual investors and advisors looking for broad diversification options for clients with smaller portfolios:

  • They collectively provide a whole portfolio's worth of assets, including equities and fixed income, in just one ETF
  • They typically offer exposure to North America, global developed and emerging markets
  • Immediate, significant diversification by region, asset class and industry
  • The teams regularly monitor and rebalance the funds to maintain target risk levels and asset allocations
  • They are low-cost options

 

Find out more about how asset allocation ETFs can provide broad diversification at different risk levels. For advisors, speak with your Mackenzie sales team; for investors, talk to your financial advisor.

1 Source: Bloomberg, Mackenzie Investments. Data as of March 12, 2021.

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