The benefits of using ETFs for strategic allocation

Portfolio manager explains why efficiency is key when making investment decision

The benefits of using ETFs for strategic allocation

Efficiency is at the heart of why investors should use ETFs for strategic allocation, according to a BMO portfolio manager.

Paul Taylor, Managing Director, Portfolio Manager and Investment Strategist, BMO Asset Management Inc., said that the beauty of utilizing ETFs this way is that a single purchase provides the investor with broad diversification in whatever asset or asset class they choose, with two key benefits.

Firstly, he said, there is the advantage of getting implementation at a reasonable price in terms of the management expense ratio. Taylor explained that the second benefit is access to a market from a liquidity perspective, allowing the investor to trade outside of a recognized exchange, for example over-the-counter bonds or preferred shares.

He said that individuals can tap into the expertise provided by this type of portfolio construction.

“An individual investor doesn’t necessarily have the expertise to implement a strategy and the ETF provider has funnelled that and made it accessible for the individual within the individual ETF or through a mutual fund that holds the ETF.

“A specific example: we at BMO offer covered-call bank ETFs and mutual funds, where we buy a basket of Canadian banks and then go in and sell out-of-the money calls against the stock position as a way of generating income.

“That is a strategy that the individual investor would find difficult to replicate themselves and it’s bundled into an ETF or mutual fund to make it easy and accessible for an investor.”

Taylor added that another example would be the preferred shares ETF – or in BMO terminology, the ZPR *– which enables an individual investor to have a much more diversified basket than if they tried to build a balanced portfolio themselves.

“It can make their life easier,” he said. “For example, we offer an India-only ETF and often an investor had to go in and buy individual Indian securities, which would be challenging.

“So there are many benefits, including access to unique strategies, access to unique assets, and again providing liquidity to investors in areas that they need access to.”

On the institutional investors’ side, Taylor said the benefits also revolve around being efficient in taking assets and investing them in areas that are problematic to trade.

He said that using ETFs within a mutual fund is very cost-effective for advisors, especially at a time when compliance is getting tighter.

He said: “For financial advisors, I think ETFs play a very specific role. Advisors are much more sensitive to the end fees that a client pays, especially in Canada in a world post-CRM2, where clients have a much better sense of the overall fees they are paying in blended portfolio.

“So, as an advisor, for them to be able to build a multi-asset portfolio with building blocks, those being ETFs, that have very reasonable expense ratios, they can put together a balanced portfolio that is very cost effective to clients but yet still retain the ability to implement active decisions to add value and in a volatile environment like this, to very quickly move to more defensive or less defensive positioning at short notice.”

*  ZPR: BMO Laddered Preferred Share Index ETF

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp. and BMO’s specialized investment management firms. BMO ETFs are administered and managed by BMO Asset Management Inc., an investment fund manager and portfolio manager and a separate legal entity from the Bank of Montreal.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

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