Over the last few years, ETFs (short for exchange-traded funds) have become an attractive addition to the portfolios of many individual investors and institutions. According to the Canadian ETF Association, total Canadian-listed ETFs under management crossed the $200 billion mark at the end of 2019. Still, market penetration in Canada is only 7 to 8 per cent, says Pat Dunwoody, executive director of the CETFA. The reasons are often based on myths about ETFs, not facts. This article debunks three of the most popular ETF myths, so you can feel more confident about including ETFs in your investment mix.

Do ETFs beat the market?

Myth: ETFs never beat the market.

 

Many investors believe that funds must be actively managed to achieve benchmark-beating performance. As a result, they believe using ETFs, which tend to be passively managed, means you’ll never do better than the index. That’s a myth.

 

Fact: Active management of ETFs has a goal of outperforming the market.

 

First, there are now a number of “active ETFs” whose goal is to outperform the market, rather than track it, at a lower cost than traditional actively managed investment options such as mutual funds and stocks. Second, the performance of a single ETF in a portfolio isn’t necessarily the key to outperforming the market. Portfolio managers who use a core-satellite approach with ETFs are actively managing passive investments to maximize performance and minimize volatility. This increases the likelihood that overall portfolio returns will be better than the indices the specific ETFs track.


 

I'm worried about liquidity with ETFs

Myth: ETFs aren’t liquid enough.

 

Liquidity is an important aspect of risk management. Unfortunately, there’s a misperception that during a market downturn or selling wave, you won’t be able to find a buyer for your ETFs. 

 

Fact: ETFs can be more liquid than stocks.

 

The reality is that ETFs can be more liquid than stocks for two reasons. First, ETF shares can be issued or withdrawn on the secondary market as required. (The secondary market is where trading in shares that already exist takes place). Second, ETFs can access liquidity through the primary market, where ETF sponsors, dealers and market makers create the ETFs. As a result, ETFs tend to be less vulnerable to price fluctuations than stocks are, even when an ETF has a small volume of assets under management or a low daily trading volume.


 

ETFs don't meet my complex investment needs

Myth: ETFs are too simplistic. 

 

Many investors are familiar with having advisors who build portfolios of stocks. Stock picking is seen as a sophisticated service that adds value, while passively managed ETFs are misunderstood as simple investments that don’t require third-party expertise. 

 

Fact: The simplicity of ETFs is their strategic advantage. 

 

The fact is, a portfolio manager can build a portfolio of ETFs that are chosen according to a sophisticated strategy just the same as a portfolio manager can choose a portfolio of stocks. Today’s ETFs can give investors access to almost any market, sector, industry, commodity, currency or investment style. And because ETFs are relatively simple, a skilled portfolio manager can very efficiently and at low cost tactically rotate to get exposure to markets that are performing well and reduce exposure to those that aren’t.


 

Given every investor’s desire to manage risk and maximize return, you’re right to be suspicious about the new kid on the investment block. But don’t let myths about performance, liquidity and simplicity keep you from including ETFs in your investment portfolio. The truth is, ETFs in combination can beat the market. They’re just as liquid as most stocks. And their simplicity helps you meet your objectives for asset mix, geographical sector, diversification and risk at a lower cost.

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Disclaimer

Confidential and proprietary information. The contents hereof may not be reproduced or disseminated without the express written permission of Bellwether Investment Management Inc. (“Bellwether”). Bellwether is registered as: an investment fund manager in Ontario and Quebec; a portfolio manager in Manitoba and Saskatchewan; and as a portfolio manager and exempt market dealer in Ontario, British Columbia, Alberta, Quebec, New Brunswick, Nova Scotia and Prince Edward Island.
These materials do not purport to be exhaustive and although the particulars contained herein were obtained from sources Bellwether believes are reliable, Bellwether does not guarantee their accuracy or completeness. The contents hereof does not constitute an offer to sell or a solicitation of interest to purchase any securities or investment advisory services in any jurisdiction in which such offer or solicitation is not authorized.

Forward-Looking Information. The contents hereof may contain “forward-looking information” within the meaning of the Securities Act (Ontario) and equivalent legislation in other provinces and territories. Because such forward-looking information involves risks and uncertainties, actual performance results may differ materially from any expectations, projections or predictions made or implicated in such forward-looking information. Prospective investors are therefore cautioned not to place undue reliance on such forward-looking statements. In addition, in considering any prior performance information contained herein, prospective investors should bear in mind that past results are not necessarily indicative of future results, and there can be no assurance that results comparable to those discussed herein will be achieved. The contents hereof speaks as of the date hereof and neither Bellwether nor any affiliate or representative thereof assumes any obligation to provide subsequent revisions or updates to any historical or forward-looking information contained herein to reflect the occurrence of events and/or changes in circumstances after the date hereof.

General information regarding returns. Performance is expressed in CAD unless otherwise indicated, gross of applicable management fees. Indicated returns of one year or more are annualized. Past performance is not indicative of future performance.

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