Vanguard Canada is using fixed income ETFs and a suite of ‘ETFs of ETFs’ to make a case for return to investment fundamentals
Cash sounds like a tempting path to safety in today’s climate of uncertainty. Investors might take one look at the bond markets and run scared to a bank account, a high-interest savings ETF, or a shoebox under their mattress. Vanguard, though, doesn’t just take one look at the bond market.
Tim Huver, head of sales for Vanguard Investments Canada, thinks that investors need to be selective with the right products after a decade-long bull run. He sees a changing climate where portfolios that are now overweight equities need a rebalance, adding the kind of ballast you can still only get from fixed income. With the right product, fixed income should still be more appealing than cash.
Vanguard Canada offers a suite of fixed income ETFs providing ballast on their own. They’ve been integrated, as well, into the firm’s asset allocation ETFs, “ETFs of ETFs” that the firms calls a "single ticket solution." Despite the innovations inherent in both product lines, Huver sees these strategies as a return to the fundamentals of investing. Downside protection is the first part of that equation.
“What we remind investors is that cash when we do see a market downturn, will act as cash,” Huver told WP. “It won’t provide the same diversification benefits that fixed income ETFs will provide in terms of downside protection.”
He thinks fixed income ETFs are a means to skirt the opacity and fragmented nature of the traditional bond market. Those ETFs provide a liquidity and diversification that bonds lack, they access thousands of different bonds at a low management fee. Also, because they trade on a secondary market, fixed income ETFs are more transparent than their traditional counterparts.
Within the suite of fixed income ETFs that Vanguard offers, Huver is seeing a greater shift towards higher credit quality investment grade bonds. He thinks it’s an important distinction as investors seeking only a higher yielding bond might seek an actively managed strategy.
The high yield fixed income space, in Huver’s mind, can-have equity market-like behaviour. So in the event of a downturn in equities, high yield bonds may not provide the type of stable support that investors are looking for with a traditional bond portfolio. Vanguard’s fixed income ETFs are built of higher investment quality bonds to offer what investors are actually seeking when they invest in the bond market: downside protection.
That fixed income ETF strategy is being integrated into their wider asset allocation ETFs. These “ETFs of ETFs” aim to provide the core of an investors' portfolio at the traditionally low management fees Vanguard offers, thanks to the firm’s ‘mutual-ownership’ structure. Right now they offer asset allocation ETFs at a range of risk tolerances. They run from 20/80 equity to bond, through the traditional 60/40 split, all the way to a 100 percent equity product.
“We provide global diversification with that product. We invest in global bonds. And if you look at the portfolio in totality, you would have access to over 25,000 equities and fixed income instruments from around the world,” Huver explained. “Our portfolio managers will handle the rebalancing and take that responsibility on for investors and advisors. All for the low cost of of 22 basis points.”
Huver sees asset allocation ETFs as a compliment to advisors. Like FinTech tools and other passive products, he sees these kind of products as a means to help advisors shift from single stock selection towards what represents the future for financial advisors: holistic financial planning and relationship building with clients. Asset allocation ETFs may provide a simple solution for a lower balance account, or they can form the core of an investment strategy.
“Advisors will be able to add satellites to the core ETF and provide other tilts or other ways to tailor and customize a portfolio for the end investor,” Huver said.
Overall, he sees Vanguard’s approach to fixed income and their asset allocation ETFs as a return to the fundamentals of investing: sustained growth, downside protection, and low cost.
“I think there's a need for greater simplicity,” Huver said. “Investing doesn't have to be complicated. So when we talk to advisors, it's really just being that calm presence in the storm. That’s an area that we're focused on for next year, especially in periods of what could be heightened volatility.”