DIY Portfolios vs. All-in-One ETFs

All-in-One ETF products are a great deal for do-it-yourself investors who lack the knowledge, skill or discipline to build a portfolio from scratch.

Ian Tam, CFA 19 January, 2022 | 2:27AM
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Over the past 5 years, Canadians have witnessed a small explosion of new all-in-one ETF products. Of the 49 such products available from Canadian fund manufacturers, 39 of them were launched after 2017.

These products offer a new spin on a classic mutual fund product – balanced funds. (You can read more about what they are here.) The difference is in the way that they are marketed, how they are traded, and their underlying composition. Marketing aside, all-in-one ETFs offer the liquidity advantages of a stock, while maintaining positions in low-cost indexed components, together creating a formidable product that make effective diversification across asset classes and securities more accessible than ever before for the DIY investor in Canada. 

Taking the ‘DIY’ Out of the DIY Investor

Do-it-yourself, or DIY, investors have been around forever. And they have been creating their own portfolios using ETF components for many years. Do these products do a better job? And in doing so, do they take out the DIY portion of the equation?

For the new investor with a small amount to invest, often times the answers are yes, and yes.

Consider what you’d have to do as a DIY investor.

First, diversification. Creating a well-diversified portfolio that not only covers multiple asset classes (like stocks and bonds), but one that also exhibits geographic diversification, requires a reasonable amount of research.

Second, asset allocation. Ensuring that the asset allocation (mix between stocks and bonds) lines up with the amount of risk that you’re able to take on as an investor is a fundamental part of investing that requires some strict discipline in re-balancing at a reasonable frequency.

Third, risk. For those requiring a steady income from investments, structuring a portfolio to pay out said income (or withdrawing in a disciplined manner) also requires some homework.

If you don’t have the knowledge, skill, or discipline required for all of this, or even if the mechanics of placing regular trades within your discount brokerage account is a cause of grief, look no further – searching for an all-in-one ETF is likely a good place to start.

The Case for DIY-ing

Of course, for those of you who are inclined to do the work (or have an interest in doing so), creating your own custom balanced portfolio of products allow you three distinct advantages:

1. Picking the fund providers.

The scale of several large exchange traded fund providers means that they can offer most all-in-one ETF products at low costs. ETF providers who have these products have the distinct advantage of investing in their own underlying ETFs at scale, which not only helps the fund manufacturer, but allows them the option to pass savings onto investors who otherwise would pay a higher MER in buying component funds individually. However, not all fund manufacturers offer the best products across the different elements of an asset allocation.

2. Selectively Choosing Active/Passive

One of the great arguments for investing passively is that the market is generally efficient. That is, information is disseminated widely and any new information on companies is quickly priced into the price of a stock or bond. Hence, it is very difficult for a fund manager to beat the index in these markets and investing in the index itself may yield you better results, especially after the consideration of management fees (which are higher for active management). But, what about markets that are not efficient? Emerging markets (like Brazil, Russia, China South Korea, etc.) where information on companies is not as widely distributed, it can be argued that there is a bigger opportunity for fund managers to produce excess returns (also known as Alpha). The DIY investor who chooses their own components can opt to invest in actively managed ETFs in this space, or in an actively managed mutual fund if available through the discount brokerage (look for a “series D” version).

3. Sustainability

The increasing popularity/need for sustainable fund choices has clearly exhibited itself in Canada. Over the 2021 calendar year, assets in sustainable funds and ETFs from Canadian-domiciled providers doubled, further highlighting investor interest in this area. That said, amongst all-in-one ETFs, only a handful advertise themselves (through fund labelling and prospectus language) as sustainable investments. For investors interested in ESG incorporation, impact investing, or environmental themes, it seems like picking your own ETFs might provide more ample choice than what is contained in an all-in-one product at this point in time, though we suspect this will quickly change as more providers jump on the trend.

This article does not constitute financial advice. It is always recommended to conduct one’s own research before buying or selling securities.

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About Author

Ian Tam, CFA  Investment Specialist at Morningstar Canada. 

 

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