How to build your own ETF portfolio

Exchange-traded funds, or ETFs, offer low-cost exposure to indexes and sub-indexes on many stock markets throughout the world. In Canada, there are 340 exchange-traded products listed on the Toronto Stock Exchange. And you can expect many more to reach the market in the months and years to come.

That means, like mutual funds, ETFs require a strategy. You can use some of the broadest as a core, adding industry and geographic emphasis with others, or even with regular mutual funds.  iShares S&P/TSX 60 Index (TSX–XIU), for example, is a core ETF that tracks the index of the same name and is made up of 60 of the largest and most liquid equities in the S&P/TSX Composite Index. iShares S&P/TSX 500 Index (TSX–XUS) offers similar exposure to the largest publicly-traded companies in the U.S.

Now, however, BlackRock Asset Management Canada Ltd., the firm that provides iShares ETFs, wants to pick and manage your ETFs for you. Last year, the firm launched a family of balanced mutual funds that invest in various iShares ETFs according to different investor profiles.

Here’s BlackRock’s balanced offering

The BlackRock Balanced Portfolio (BLK110 (FE), BLK310 (LL)), for instance, seeks to provide its unit holders with a balance of long-term capital growth and income by investing in a diversified and balanced portfolio that has exposure to Canadian and global equity securities and, to a lesser extent, Canadian fixed-income securities. The fund invests in iShares ETFs that are managed by BlackRock Canada.

Here’s how the fund’s portfolio breaks down: iShares S&P/TSX 60 Index ETF, 21.3 per cent; iShares MSCI Emerging Markets Minimum Volatility Index, 15.4 per cent; iShares S&P/TSX Capped REIT Index, 10.1 per cent; iShares Core S&P 500 Index, 9.2 per cent; iShares MSCI EAFE Minimum Volatility Index, 5.0 per cent; iShares Canadian Universe Bond Index, 23.1 per cent; iShares Canadian HYBrid Corporate Bond Index, 6.0 per cent; iShares S&P/TSX North American Preferred Stock Index, 5.0 per cent; and iShares 1-5 Year Laddered Corporate Bond Index, 5.0 per cent.

The fund’s management fee is 1.40 per cent.

Long-time readers of this publication know we generally don’t recommend balanced mutual funds. So it should come as no surprise that we don’t like balanced mutual funds that contain ETFs.

The main reason we advise you to invest in individual ETFs over a portfolio of them, however, is cost. Since you won’t outperform indexes by investing in ETFs — except by accident — the big appeal of these securities is their low cost. And the lower the cost the better. We calculate that by buying the individual ETFs in the BlackRock Balanced Portfolio, your management fee for the entire collection of them would total just 0.37 per cent. That’s 103 basis points less than the management fee for the BlackRock fund. Our advice? Build your own ETF portfolio. 

 

Canadian Mutual Fund Adviser, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846