There is a time not to love ETFs, says ETF champion

With a vaccine here and an investment shift taking place, portfolio manager says it's vital to know when to ditch an index for a manager

There is a time not to love ETFs, says ETF champion

ETFs have been a boon for investors in many ways but the smarter advisors also know when to enlist the help of a money manager, according to one portfolio manager.

Ken MacNeal is a Calgary-based investment advisor at Richardson Wealth, and a winner of WP’s ETF Champion of the Year award. No one can doubt his love of the investment vehicle but MacNeal, who has been in the business more than 45 years, is an experienced and savvy operator.

He told WP it's imperative to know when to own an ETF in a certain area and when to own a manager. Of course, one of the attractions of an ETF is the low cost because you’re not paying a manager to select stocks. The alternative, a mutual fund or actively-managed ETFs, means the MDR is increased. However, he told WP that at times the cost of expertise is a necessary investment.

“Even though I love ETFs, there's a time not to love them," he said. "They’re super useful but you have to know those times – it’s important.”

The 72-year-old pinpointed the Vanguard Growth ETF (VUG) ETF as a prime example. It’s FAANG friendly and weighted that way. Up until the vaccine, these tech stocks were outperforming and he said VUG was a great thing to hold.

MacNeal explained: “Holding Tesla when it goes up for four or five-fold is not rational, so managers are not likely to be holding that kind of winner through the piece. But now we have a different situation where on the growth side, there's various governments attacking the FAANG area, maybe they're overdone, etc. Here, I believe a manager is better.”

MacNeal, therefore, has pivoted and is using the Fidelity Global Innovators fund and hailed Mark Schmehl as an “amazing growth manager”. Crucially, since the vaccine, growth has underperformed the market but Schmehl has outperformed by not owning the areas that are getting damaged. It’s classic active management and well worth the extra money, according to MacNeal.

He said: “His ability to adapt to this new environment is amazing. We pay him a little over 1% but could make that back in spades.”

On the fixed-income side, MacNeal also believes a manager is needed in this environment. Before the pandemic, he had no credit quality concerns and was using ZPR, the BMO Laddered Preferred Share Index ETF. Again, though, things have changed – banks are redeeming their preferred shares, which causes them to spike up, and there are potential credit quality issues now the economy is doing so poorly. MacNeal believes you need protection from owning everything.

He’s switched to the Lysander-Slater Preferred Share ActivETF, an ETF that basically owns the mutual fund. At just 25 bps more than ZPR, he gets a manager, Doug Grieve, who, in the past five weeks has outperformed that market by 2%.

He said: “In this new preferred world, where management is important, 2% is huge because you’re looking at a potential 5% or 6% yield over a year. I believe that I want a manager at this time – and he's doing great.

“To tell you the truth, I was willing to underperform with the comfort of knowing that he was watching the credit quality through this period because that's my objective with preferred shares and fixed income in general - to have somebody watching for problem companies.

“The same thing would hold true with a junk bond ETF versus a manager in that area. I would certainly, at this time, go with a manager for the same reasons; I want somebody analyzing [the area].”