The best ETFs for 2017

Overview Canadian U.S. International Fixed-Income Full list

Ordering a pizza online always involves more work then you expect. First you pick the flour or spelt and the thickness of the dough. Then it’s the sauce and baking instructions. And that’s all before you pick from a list of 75 toppings. Unfortunately, no matter how much you try to design the perfect pizza, you discover that too many toppings results in a soggy, undercooked pie. We think endless choice is better, but that’s just not the case with pizza. And guess what, it’s the same with ETFs. According to the Canadian ETF Association there are more than 450 exchange-traded funds (ETFs) trading on the Toronto Stock Exchange with more being added on a regular basis. As if that not daunting enough, there are thousands more for to choose from on U.S. and foreign exchanges. But the average investor needs far fewer ingredients to cook up a portfolio that is as magnifico as a Pizza Quattro Stagioni. How many? You could make the case for building a portfolio of just four ETFs, providing you with a healthy mix of Canadian, U.S. and international equities as well as your fixed-income needs. best etfs

The 2017 edition of the MoneySense ETF All-Stars does just that, providing three recommendations in each of the three major equity categories, plus five in the fixed-income category. Selecting from this short list, either on your own or with a trusted advisor, should be a straightforward exercise. Regular readers of MoneySense will recognize this as a classic “Couch Potato” approach to investing: Create a simple investible portfolio that can be held for the long term, is broadly diversified, highly tax-efficient and yet carries minimal investment management costs. In effect, this four-fund portfolio is the equivalent of a global balanced fund, but with a much lower cost. As in prior years, our mandate to the panel was to focus only on ETFs trading on the Toronto Stock Exchange, which simplifies the currency issues that arise if Canadian investors buy ETFs trading on U.S. or foreign stock exchanges. That said, our picks include both ETFs that provide both direct unhedged exposure to foreign equities, as well as some that hedge back into the Canadian dollar (but all still trading on the TSX).

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This is the fifth instalment of the All-Stars: the first was published in February 2013. Only three of the 14 ETFs identified in that original report remain on our list. New products and increasing competition have been a win for investors. Nowhere is this more obvious than in the management fees charged by our All-Star funds. A balanced portfolio made up of the original ETFs would have had an MER of around 0.3%. The same portfolio mix comprised of our current ETF All-Star today would have an MER half that amount. That might not sound like a big deal until you consider how that would affect a portfolio over time. The difference on a $100,000 portfolio earning 3% a year would more than $7,000 in additional fees over 25 years. Readers will be happy to discover 12 of last year’s 14 picks are back (sporting an even slimmer overall MER). So too is our panel, which was almost unanimous in making the two tweaks to the previous line-up, affecting our top picks in US equities and fixed income. In both cases, slightly lower cost was the motivating factor. Yves Rebetez, a member of our esteemed panel and editor of ETF Insight, notes these changes “further reduce the overall MER of the All-Stars as a package.”

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From the get-go our goal was not to feature the ever-changing ETF flavours of the month, but to create a low-cost core portfolio of broadly diversified investments that could serve for years if not decades. With so many products now on the market, it’s not surprising that do-it-yourself investors operating in a vacuum could end up with a very messy and foul-tasting ETF pizza. If anything, it’s remarkable that the panel was able to agree on as much as it did. True, it’s not always easy sticking to a low-cost, highly diversified, approach that stays away from market timing and top-down calls. Some like Rebetez would have liked to see a value screen for U.S. equities, given the high valuations that have arisen in the Trump rally. Similarly, he would have liked the panel to consider a dividend orientation for European equities, both to minimize volatility and to generate cash flow. But before you make any changes to your portfolio, you should heed the advice from Mark Yamada, CEO of PUR Investing. Minor switches motivated by small fee differentials may not always be worthwhile, especially in taxable portfolios, he says. “Folks who have an existing portfolio from previous articles should consider the costs of switching before trading. New positions in the lower-cost vehicles will make sense over time.”

OUR ETF ALL-STAR PANEL

JUSTIN BENDER is a portfolio manager with PWL Capital in Toronto, and DAN BORTOLOTTI is an investment advisor at the firm. They use ETFs for their full-service clients and also help do-it-yourself investors set up their own ETF portfolios. TYLER MORDY is president and chief investment officer at Vancouver-based Forstrong Global Asset Management. The firm specializes in global ETF portfolios for retail and institutional clients. MARK YAMADA is CEO of Toronto’s PUR Investing, which builds ETF portfolios for both individuals and institutional clients. YVES REBETEZ, CFA, is the editor of ETF Insight. Prior to launching the website, he was vice-president of ETFs/Structured Products with RBC Dominion Securities from 2004 to 2011. ALAN FUSTEY is a portfolio manager at Index Wealth Management in Winnipeg. He’s been using ETFs with clients for more than a decade.

Jonathan Chevreau is founder of the Financial Independence Hub and co-author of Victory Lap Retirement. You can reach him at [email protected] Read also:

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.