Which type of ETF investor are you?

This article looks at five different investor profiles and the types of ETFs that might be suitable for their investment portfolios.

Young, first-time investor

New investors often wrestle with two opposing dynamics. On the one hand, the younger the investor, the more risk they should be able to take on. Indeed, it’s sensible for an investor in their 20s to load up on 80% to 100% equities (stocks).

On the other hand, young investors may have less real-world experience of the ups and downs of the stock market than older investors. An all-equity portfolio comes with more volatility than a more balanced portfolio that holds a steadier dose of fixed income, such as bonds and guaranteed investment certificates (GICs).

It’s one thing to fill out a risk assessment with a financial advisor and claim to be fine with short-term portfolio losses of 20% or more. It’s another thing to experience it for yourself with your own money.

In his 1940 classic, Where Are the Customers’ Yachts?, author Fred Schwed Jr. wrote: “There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.”

It should also be noted that young investors often have many competing financial priorities and goals that are short-term in nature (one to three years away), and they should not be invested in riskier assets like equity ETFs. So, if you’re saving money for a new vehicle, a vacation, a home renovation or even a house down payment, a high-interest savings account or GICs are likely better options.

First-time investors should aim to gain experience and resist being scared off by a market correction or crash in their early years of investing. An appropriate balance between a conservative 60/40 balance portfolio and an aggressive 100% equity portfolio, then, is an 80/20 growth portfolio.

Thanks to the advent of asset-allocation ETFs, young investors often set up a globally diversified 80/20 portfolio with just a single self-rebalancing ETF.

Experienced, conservative investor

Some investors are less tolerant of risk than others. Just because you have experience in the stock market doesn’t mean you need a heavy allocation towards equities.

Conservative investors tend to hold more cash and fixed income products like government and corporate bonds, as well as dividends from large blue-chip stocks. This type of portfolio may be less volatile than holding the entire global market of stocks. 

Experienced investors tend to understand why they invest in certain asset classes. Bonds, for instance, tend to hold their value when stocks are declining. This allows investors to rebalance effectively by selling bonds and buying more stocks while they’re “on sale” (trading at a discount, or below their current market value).

Experienced, conservative investors often build their portfolio by using a Canadian dividend ETF, an aggregate bond ETF and a global equity ETF. They may break down their fixed income allocation even further, opting to hold a short-term bond ETF, a corporate bond ETF or even a high-interest savings ETF.

Experienced, more aggressive investor

Investors with a more aggressive mindset about growing the value of their portfolio are more likely to opt for a 100% equity portfolio. This can be done once again using a single, globally diversified asset allocation ETF, or by breaking that apart and owning individual equity ETFs representing Canadian, U.S., international and emerging-market stocks.

Savvy investors may also understand that certain characteristics—such as size (smaller companies versus larger companies) and value (lower-priced stocks versus higher-priced stocks)—can lead to outperformance. This phenomenon, known as factor investing, can be exploited using ETFs that tilt their holdings towards stocks with these characteristics (small-cap stocks and value stocks).

Experienced, balanced investor

The traditional approach to investing is the classic balanced portfolio made up of 60% stocks and 40% bonds. ETF investors who look for a balanced approach may build their own multi-ETF portfolio by using a Canadian equity ETF, a U.S. equity ETF, an international equity ETF, an emerging-markets ETF and an aggregate bond ETF.

A simpler approach may be to hold a single asset-allocation ETF with 60% stocks and 40% bonds. These all-in-one funds are akin to the ubiquitous balanced mutual funds that investors have used for decades—just at a much cheaper cost to the investor, due to lower management fees.

Investor approaching retirement or retired

Most investors will have a successful outcome by selecting an asset mix they’re comfortable with and sticking to it for the long-term, adding new money regularly along the way.

But investors approaching retirement may want to rethink their asset mix and investing approach as their goals and needs change.

Bobby Argitis, business development manager with National Bank Direct Brokerage, says many retired investors often have a “thirst for income” that he doesn’t see with younger investors.

“With these types of investors, we’re seeing more income-oriented products such as covered call ETFs and dividend ETFs, as well as alternatives to aggregate bonds such as municipal bonds, short-term bonds and corporate bonds,” he says.

Investors nearing retirement should also be thinking about their withdrawal strategy. Is the goal to only spend the dividends and interest from their portfolio? If yes, a portfolio built with dividend ETFs, monthly income ETFs, corporate bond ETFs and even covered call ETFs may fit the bill.

Alternatively, some investors may choose to adopt a total return approach, selling shares along with receiving investment income. This type of investor is less concerned about dipping into their capital—they want to spend their nest egg regardless of whether the income comes from capital gains, dividends or interest. In this case, holding a risk-appropriate asset-allocation ETF can be perfectly sensible.

Broad-based index-tracking ETFs own every stock in the index, dividend-paying or not. That means yields are often in the 2% range, rather than 4% to 5%. These investors should ensure their investing approach aligns with their retirement income strategy.

ETFs available to Canadians

There are a growing number of ETFs on the market to meet the unique needs of investors.

Young investors may have a more aggressive mindset and are comfortable with more concentrated and thematic ETFs, which may have a bigger pay-off.

Retired investors are hungry for yield-generating investments to meet their spending needs without dipping into their capital.

Those in the middle are mostly looking to maximize returns at an appropriate level of risk.

Which type of ETF investor are you?

Opening an account

MoneySense ranked National Bank Direct Brokerage the best online broker for ETF investing in 2021 and 2022. Use the promo code MoneySense when you open an account* and you’ll pay no commissions on transactions. In addition, National Bank Direct Brokerage has a free mobile app for iOS and Android. On your smartphone or tablet, you can trade stocks and ETFs online at $0 commission, create watchlists, set up alerts for specific stocks, transfer funds and more.

Read more about ETFs:

• How to choose ETFs for your investing portfolio
• How to evaluate ETFs based on financial reports
• What seasoned investors look for in an ETF prospectus
• How to start investing with ETFs in your 20s
• Switching from mutual funds to ETFs

About Robb Engen, QAFP

Robb Engen is a fee-only advisor who will work with you to achieve your financial goals by creating a financial plan with actionable steps along the way.