How big an impact are ETFs having on investors’ portfolios and how can they be combined with robo-advice? Wealth Professional
sat down with Randy Cass
, CEO and founder of Nest Wealth, the first subscription based investment service in Canada, to discuss these issues and more.
Paul Lucas: The global ETF market is now worth $3 trillion - why do you think it’s enjoyed such a surge in popularity?
: It’s funny you call $3 trillion a ‘surge’ in popularity. I think the better way of looking at it is why it hasn’t been more popular. ETFs are better products sold at a lower cost. Put that combination together in any other industry and its game over… yet in financial markets, at least in Canada, ETFs still represent less than 10 per cent of the overall market compared with mutual funds.
Paul Lucas: Do you use ETFs regularly within your clients’ portfolios?
: ETFs are all we use at Nest Wealth. The objective data of passive, low-cost investing generating higher risk adjusted returns for individual investors is just too all-encompassing to ignore. Trying to promise your clients out-performance with high-fee actively managed mutual funds in Canada is like entering a boxing match with one hand tied behind your back.
Paul Lucas: What are the advantages of constructing portfolios with ETFs?
: These days it’s hard to think of any disadvantages. They have liquidity, low fees, diversification across any and all possible spectrums. It’s never been a better time to be a portfolio manager. It’s like being a kid in a candy shop.
Paul Lucas: What is your opinion on the recent uptake in interest in smart-beta ETFs?
: I understand there will always be a search for better-than-market returns and low-cost smart-beta ETFs are better than most ways to pursue that goal. However, let’s be honest, this is active management. Just because the portfolio strategy is being run by quantitative algorithms doesn’t mean it’s not making calls that are active. We used to manage portfolios with algorithms 15 years ago in the Quantitative Investment group at the Ontario Teachers’ Pension Plan and nobody, for a second, thought we were passive. Calling some of these products smart-beta is not only misleading but entirely inaccurate.
Paul Lucas: What are your thoughts of the use of ETFs by the new class of robo-advisors?
: I think it’s the best combination of two things since peanut butter and jelly. At Nest Wealth we merge the best products in the market place with the best technology available and now have an easy way for regular investors to have personalized, professionally constructed, diversified portfolios comprised of low cost ETFs. What’s more they get these portfolios managed and re-balanced by professional portfolio managers using the same sophisticated math and formulas used by the largest and smartest institutional investors around.
Paul Lucas: What does the future of ETFs hold?
: I hope it doesn’t look a whole lot different than the present. The biggest risk we stand as an industry is trying to complicate something that is almost perfect in its simplicity. Give a man cheap, liquid market exposure and you have accomplished great things.