Why asset-allocation ETFs still play a central portfolio role

Despite challenges to 60-40 portfolio, Mackenzie's VP ETF Product & Strategy stands behind balanced strategies

Why asset-allocation ETFs still play a central portfolio role

While volatility in the markets has brought pain to both equity and fixed income, raising questions about the future of the traditional balanced portfolio, it’s not time to write off asset-allocation ETF strategies just yet, according to Mackenzie Investments’ VP ETF Product & Strategy at Mackenzie Investments.

“This year, we've seen a tremendous amount of uncertainty and volatility in the market,” Prerna Mathews told Wealth Professional. “It’s interesting to note how resilient ETF flows have been through the course of this year.”

According to the latest monthly fund flows report from the Investment Funds Institute of Canada (IFIC), Canadian ETFs have garnered roughly $21 billion in inflows for the year up to September, compared to mutual funds that have seen $18.6 billion in net redemptions.

Digging deeper into the categories, Mathews says there’s been a tremendous amount of continued flow into asset-allocation ETFs; data from the National Bank ETF Flows report from September shows multi-asset ETFs took in $15 billion in net inflows year-to-date. Those flows, she says, are reflective of the benefit to both advisors and individual investors who use them for a diversified portfolio management approach.

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“We're seeing a shift in demographic trends reflecting that we’re all living longer, which means drawing down on our savings potentially across a longer time horizon,” Mathews says. “So having a diversified portfolio strategy is still very relevant today.”

The one-two punch of high inflation and rising interest rates has left the 60-40 portfolio reeling this year, raising questions about the usefulness of balanced ETF strategies. But according to Mathews, that ignores a crucial advantage they offer, especially in times of protracted market volatility.

“When we see turmoil in markets, particularly when it’s extended like what we've seen this year, advisors and investors may not take a measured approach in navigating portfolio strategies and allocations,” she says. “Fear can often result in very short-term decision making, and oftentimes poor investment decisions.”

Mathews encourages investors to take a fact-based, analytical approach to investing, which includes counterweighting near-term liquidity needs against the longer-term need to stay the course in the markets. Assuming an investor’s need for liquidity are met, she notes, it’s typically in their best interest to stay invested.

Looking to U.S. equities, she says that an investor who missed the 10 best days in the market over the past 40 years would see half the returns of someone who’d stayed fully invested. Similarly, someone who tried to time the market and missed the 10 best days of the last 20 years would have seen their returns cut in half compared to if they had just held on.

“The chances of you missing the 10 best days is quite high. Seven of the 10 best days in the last two decades occurred within two weeks of the 10 worst days,” Mathews says. “From a behavioural investing standpoint, it can be quite difficult for us to be disciplined in knowing when to go in and when to go out. What's really important is time in the market, not necessarily timing the market.”

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Many Canadian investors may be setting themselves up to make that mistake. For this year up to September, $4.8 billion has flowed into cash alternative ETFs; in September alone, investors put $1.6 billion into the vehicles, representing the largest monthly inflow into the category since the first Canadian high-interest savings account ETF was introduced in 2013.

Demand for GICs and high-interest savings accounts has similarly picked up, according to Mathews, reflecting an increasing trend toward sitting on the sidelines. However, that runs the risk of mistimed investments, as investors might re-enter the market only for it to fall further.

“The great thing about asset-allocation ETFs is they provide [diversification] for advisors and investors without the emotion,” Mathews says. “Most products in the marketplace now in Canada offer a very disciplined approach so they have a rebalancing built in to them. You're not necessarily riding the best categories, sectors, or geographies, and then having to pull back to a diversified approach.”

With automated diversification across a basket of securities spanning equity and fixed income, Mathews maintains asset-allocation strategies can play a central role in a core-satellite portfolio strategy.

“Advisors can spend more of their time thinking about what else makes sense to have exposure to in the client’s portfolio beyond that core asset-allocation ETF,” she says. “You’d have stability in the asset-allocation ETF, and you can look at potentially adding other allocations in real assets, liquid alts, or other alternatives.”