ETF Fundamentals. Chris McHaney, CFA Vice President & Portfolio Manager BMO Global Asset Management. PMAC February 26, 2013

Transcription

1 ETF Fundamentals Chris McHaney, CFA Vice President & Portfolio Manager BMO Global Asset Management PMAC February 26, 2013

2 Industry Insight ETFs have the potential to recast the traditional ways of building client portfolios and are in the process of altering the competitive and economic landscape of the business Investor Economics Source: BMO Asset Management Inc.

3 Industry Insight - ETF growth has multiple drivers Cost efficiency. Low fees are the largest driver of ETF popularity Diversification. Reduce single stock or bond risk Transparency. All holdings outlined (know your exposures) Hard to access exposures. eg: Gold or covered call strategies Scalable. Can be implemented for small and large plans Tax efficiency. More tax efficient than other types of investments Simplify investment decisions. A growing range of products allows investors to use ETFs for very focused sector, asset or geographic coverage.

4 ETFs help create more diverse portfolios 250 ETFs in Canada and over 1000 in the US New types of portfolios can be created given more: asset classes international options sectors factors strategies

5 ETF Liquidity Trading tips: When entering a trade always use a limit order Avoid trading ETFs immediately after market open or prior to market close Throughout the day, ETFs closely track NAV except for at these times

6 Trading volumes of the underlying = ETF liquidity Average bid/offer spread

7 ETF Liquidity

8 Type of Weighting Schemes Market Capitalization Weighting Fundamental Weighting Revenue Weighting Dividend Weighting Beta Weighting Equal Weighting Sectors Broad Indices Price Weighting

9 Types of ETFs Equal Weight Equal weighting for mature sectors Source: BMO ETFs, Bloomberg

10 The Lost Decade? Depends on how you look at it From a market cap perspective, sure. Equal weighting and fundamentally weighted indices however showed very solid returns

11 When Is Each Index Methodology Appropriate? Market-Cap Weighted Methodology Fundamentally Weighted Methodology Equal Weighted Methodology When To Use When the market favours growth oriented companies When large caps outperform small caps When market favours companies trading at attractive valuations When market cap weighted indices heavily favour a certain country, sector or company When market cap weighted indices heavily favour a certain country, sector or company When market favours companies trading at attractive valuations When small caps outperform large caps When To Avoid When markets are overvalued When the index is heavily weighted towards a certain country, sector or company When small caps outperform large caps When the market favours growth oriented companies When a certain country, sector or stock is significantly outperforming When small cap companies are illiquid When market wants to avoid company specific risk

12 Index Selection Keys to look for when selecting a benchmark: Investability Completeness Clear, Published Rules and Governance Accurate and Complete Data Acceptance by Investors

13 Understanding ETFs Demographics Households that hold ETFs are on average wealthier - Investible assets are on average above $180k vs $102k ETF holders have a higher income (90k vs 67k) Average age is 53 74% of all investors will switch or consolidate to an advisor within 10 years of retirement Source: Investor Economics March 2010 & BMO Retirement Institute

14 ETFs vs. Mutual Funds Mutual funds are conducive to smaller, more frequent transactions Long term investors may not require intraday liquidity The structure of ETFs helps investors control when they realize capital gains

15 How Are ETFs Being Used By Institutions? Tactical asset allocation and transition management continue to be the main use of ETFs We are also seeing a increasing number of Canadian institutional investors using ETFs

16 Transition Management During a manager search, unmanaged assets can significantly deviate from the plan benchmark and objectives, potentially creating a mismatch to liabilities ETFs can be used to maintain market exposure Manager A ETF Manager B

17 Use ETFs Minimize Trading Hour Differences Since some ETFs are listed on a number of different exchanges and a number of different time zones, investors can get international exposure in their own time zone Like futures, ETFs provide price discovery in markets when their underlying markets are closed

18 Disclaimer 18