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Investors can often feel like they have limited control over their equity investments, even at the best of times. Add to the mix high inflation and market downturns, and investors can begin to feel like their investments almost have a mind of their own.
Part of this feeling of helplessness comes from the very nature of equities: understanding and predicting market sentiment (which often drives the supply and demand issues that dictate stock prices), is difficult at best and a fool’s errand at worst. On top of this, many investors fixate on “beating the market” or getting a specific return on their investment.
Given the unpredictable nature of equity markets, investors could be better served focusing on the aspects of equity investing that they can control and on making the investment decisions that can deliver them.
Ways to take back control
Asset allocation: this is the process of dividing your portfolio up into different asset categories, such as stocks (equities), bonds (fixed income) and cash/cash equivalents. The theory is that different asset classes move up and down in value at different times: by including all asset classes in your portfolio, you may protect yourself against significant losses.
Asset allocation is such an important factor that Brinson, Hood and Beebower published research in the 1980s, suggesting that it was the primary reason behind variations in a portfolio’s performance.
The good news is that investors can take full control of their asset allocation, with help from their advisor, both when creating their portfolio and adjusting it regularly.
Risk: Having a well-diversified portfolio is a simple step to minimizing risk. Holding fully transparent funds, so you know exactly what you’re investing in, is another important step. And having fully liquid investments, which you can easily buy and sell at a moment’s notice, is also important, particularly during volatile markets.
Cost: The expenses that come with the management of your investments can have an impact on your overall returns, and something over which investors have a high level of control. And by keeping costs down for much of the equity portion of their portfolio, investors can spend more on expensive options that can generate excess returns.
Taxation: While we can’t completely eliminate taxes from portfolios, we can focus on products that are tax efficient. Having funds with a limited turnover of assets (and therefore fewer taxable events, such as selling shares that have appreciated in value) can greatly reduce the tax payable on our portfolios.
How core index equity ETFs can help bring back control
Index equity ETFs can help deliver the kind of control that many investors want, as detailed above:
Asset allocation: Index ETFs can be used for the core of a “core and explore” portfolio-building strategy. With index ETFs, asset allocation is precise and streamlined. They often contain hundreds of companies from a wide range of geographical regions and sectors, so they can also provide easy and comprehensive diversification.
Building 50% of the equity portion of a portfolio with core equity index ETFs would allow for the other 50% to be “explore” or satellite investments, which is where actively managed options or single stocks can come into play (read more details on satellite equities). The core asset mix would be fairly static, while the satellites would be tactical.
Risk: Equity index ETFs are completely transparent — you always know exactly which holdings you own. They’re also very liquid and easy to buy or sell throughout the trading day.
Cost: A portfolio’s equity core can be constructed with index ETFs for a very low cost, with some equity ETFs having management fees as low as 0.04%. The savings can then be put towards more expensive satellite investing options.
Taxation: Equity index ETFs are designed to track an index, rather than outperform it. As a result, they have a low turnover of assets, which limits the number of times they cause a taxable event, because of capital gains.
Mackenzie’s core index equity ETF options
Mackenzie offers low-cost, core equity ETF options that cover a variety of geographical regions:
Canadian index equity ETFs (QCE and QCN): a choice of general or large cap Canadian equities, designed to have low transaction costs and low turnover of assets.
U.S. index equity ETFs (QUU, QUU.U and QAH): holding large cap U.S. companies, with ETF options in U.S. dollars or hedged to the Canadian dollar.
International index equity ETFs (QDX and QDXH): international companies with an option that’s hedged to the Canadian dollar.
Emerging market index equity ETF (QEE): emerging market companies from several continents and across a dozen sectors.
Learn more about how a core index strategy could give you more control over your portfolio. Advisors, please speak to your Mackenzie sales team. Investors, please talk to your advisor.
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This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of September 6, 2022. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.