ETF Screening Tools
The proliferation of Exchange Traded Funds makes ETF choices as confusing as mutual funds.
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IN SUM
The proliferation of Exchange Traded Funds (ETFs) is making ETF choice and selection as confusing as mutual funds. There are 385 ETFs in Canada, so says the TMX ETF selection tool. According to ETF.com there are 1191 ETFs listed state-side. How is an investor (any investor) to decide which ETF is best for their portfolio? Of all the ETF tools, only iShares and Vanguard are worthwhile.
DETAILS
An abundance of ETF selection tools
A WSJ online article says “A flood of new products is making screening for the best ETFs a bit overwhelming at times, even for more experienced investors.” An ETF.com article provides a listing of 50 ETF tools. (That’s 50. 5-0). Individual investor’s might feel overwhelmed.
Only a few ETF selection tools are helpful. Many simply offer a list of ETF products. Some are for Traders not Investors. Only the iShares tools provide help with portfolio construction. And proper portfolio construction is critical. Remember, getting the Asset Allocation right is key. Recall what the CFA folks have to say about portfolio construction: “… Institutional investors have, to a large extent, concluded that asset allocation decisions … account for the largest part of returns …” “Institutional investors know that they get the most value (80 – 90 percent) through asset allocation rather than through the asset manager.” (CFA Research foundation, Investment management after the Global Financial Crisis, October 2010, page 21).
Fewer ETF selection tools. More portfolio construction tools
What is needed is an ETF portfolio construction (not just selection) tool that investors can use to construct a global, broadly diversified portfolio with exposure to (within reason) asset classes, regions, currencies and maybe even sectors. (Bonus points if an individual’s tax situation could be incorporated). Of all the ETF tools, only iShares (with a good ETF portfolio construction tool) and Vanguard (with a very worthwhile ETF comparison tool) have stepped up.
Here are a few ideas that are less about selling ETF product and more about building a portfolio.
First, it’s always healthy to educate oneself. On May 22nd, the folks at Hahn Investment Stewards are hosting a webinar named “Building Globally Diversified Portfolios with Exchange-Traded Funds”. They have been managing portfolios using ETFs exclusively for nearly a decade. True active management of passive investments. Their track record is good too. If you want to learn something about constructing and managing a portfolio using ETFs, this webinar is for you.
Second, investors might consider iShares.ca multi-asset-class portfolios. iShares also has a useful Core portfolio builder tool and a Portfolio Construction tool. Use these tools as a good starting point to get the asset mix ‘in the ballpark’. Then use Vanguard’s ETF comparison tool to sort through ETF alternatives. Vanguard Canada too, has a fund comparison tool.
Third, if you are not comfortable doing your own ETF research, building your own ETF portfolio and using an ETF selection tool, you can always refer to Canadian Couch Potato Model Portfolios or refer to the Pension Investment Association of Canada (PIAC) asset mix of the average pension plan.
See here for several ETF selection / screening tools.
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Next time? More Risk Management.
Doug Cronk CFA PRM is Pension Investment and Risk Management Officer
Institutional Investing for Individual Investors 
My first rule of ETF selection is that when I see an article with a title like “7 ETFs to help you beat inflation in 2014”, any ETF on the list that I haven’t heard of before is worthless and I will never buy it 🙂
My approach has always been to decide what I want to own first and then go find the best ETF for it. This usually ends up being a choice between 2 – 5 ETFs. I compare fees, taxes, and trading costs to pick the top one. Like you said asset allocation is everything so I don’t leave that to chance. My asset allocation priorities are risk diversification and broad indexes.
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Yup. That’s the idea.
I prefer the basic ETFs that provide exposure to the broad indexes. Some of the newer ETFs are simply too specific.
That’s also why I suggest investors look at PIAC and use it as a starting point then try to sort through the many options using an ETF screen. Vanguard is still, I think, the best.
Cheers.
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With the surprising amount of competition in the Canadian market recently, sometimes even the fifth-best option is close enough that you wouldn’t notice the difference. Most Vanguard funds are an excellent choice for any investor of course.
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I think you’re spot on. Canada is such a small market that ETF differences in many cases are negligible.Most globally oriented portfolios are well served with a blend of VAB (bonds) XRE (real estate) XIC (TSX composite) in the Rsp and XDV (dividends) for non-Rsp.(Altho’ I like the beaten down XGD and XMA).
I too am a Vanguard fan. I like the iShares recent MER reductions. (XIC in particular). The only SPDRs I like is DWX.
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