Best ETFs in Canada for 2020

Overview Canadian U.S. International Fixed-Income All-in-One Desert-Island Picks

Call this the bear-market edition. Never fear: our panel of eight experts continues to seek buy-and-hold, low-cost and well-diversified ETFs that will stand up through all kinds of markets, and certainly for the next year. 

The panel is largely the same as last year’s, although we sadly bid adieu to portfolio manager Alan Fustey, who had been with us almost from the beginning.

Returning for 2020 are the Ottawa-based PWL Capital duo Cameron Passmore and Ben Felix; Robb Engen, a fee-only planner and blogger for Boomer & Echo; former Tangerine advisor Dale Roberts (the blogger behind Cut the Crap Investing); Mark Yamada, CEO of PUR Investing and his colleague Ioulia Tretiakova; Yves Rebetez, formerly of ETFInsight.ca and CIO of Pascal Financial; and Dave Nugent, chief client officer at Wealthsimple for Advisors. 

Given the almost 800 ETFs now trading on Canadian stock exchanges, we divided our experts into four teams: the PWL team, the PUR team, the blogger team of Engen and Roberts and, last but not least, team Nugent and Rebetez. Once each team had a consensus on which of last year’s picks to retain or replace, we voted on each one. Five out of eight votes carried the day; in the event of a tie, I was the tiebreaker. Other than that, we relied on our experts for input.

The goal: low-fee, diversified, tax-efficient portfolios

The panel continues to share the philosophy that the ETF All-stars established when Dan Bortolotti, then a magazine journalist and now a portfolio manager at PWL Capital, and I first conceived of it back in 2013. Our core principles remain low cost, broad diversification and tax efficiency—whether in a roaring bull market, a bear market or something in between. 

From the get-go, the idea was to create a low-cost “set it and forget it” shortlist of ETFs that rarely needs tweaking. As such, exposure to specialized asset classes, such as technology, gold or real estate, is limited to whatever the index weightings in our model portfolio hold. (But if you’re looking for a few specialty ideas, we’ve still got you covered with our “desert island” picks.)

Of course, the All-stars list has evolved to include more names as the ETF space in Canada exploded year over year. According to the Canadian ETF Association (CETFA), as of this January there were 766 ETFs trading on Canadian exchanges, created by 37 different sponsors. More than $211 billion is invested in these products nationwide.

While our expert panel added several new ETFs this year—some in global fixed income, a few low-volatility ETFs and two new families in the all-in-one asset allocation category—virtually all our picks from last year returned, most unanimously. The only 2019 selection that was removed for 2020 is BMO’s Laddered Preferred Share Index ETF (ticker: ZPR), with the panelists agreeing that preferred shares don’t make sense in a long-term passive core portfolio.

This year-to-year consistency seems to validate our long-term approach. Our list now contains an elite 42 All-star picks—a big jump from 25 last year. We’ve also retained the “desert island” feature introduced in the 2019 edition, where each panelist suggests a single ETF they’d be comfortable holding for the long run if they were stranded and couldn’t reach the mainland to contact their brokerage.

That’s 50 recommended ETFs in total, which should be a good start for readers looking to narrow down the wealth of possible options in this growing cornucopia of choice. 

The coronavirus effect

The crash that began in March 2020 certainly coloured some of our panelists’ views this year.  

Recall that within a matter of weeks of COVID-19 hitting North American shores, the Dow Jones Industrial Average plummeted from nearly 30,000 to under 20,000, with considerable volatility thereafter. As of mid-April, markets had rallied well above 20,000 again, but whether this proves to be a bear market rally or a genuine recovery remains to be seen. 

While this decline was sharp and fast, bear markets are nothing new and—so far, at least—this one hasn’t been anything special, as PWL’s Felix notes in a YouTube video. On average, past U.S. bear markets have experienced declines of 30% over a period of 13 months, and recovered within 27 months from the bottom.

Nevertheless, the market situation created fodder for our panelists to consider many things, including low-volatility ETFs, inverse ETFs, how all-in-one ETFs can mitigate risk, whether investors should change their asset allocations, and how some ETFs may be poised to capitalize on the telecommuting and stay-at-home trends. Below, we address all these ideas, as well as the role of precious metals and real estate ETFs.

Low-volatility ETFs

The case for low-volatility ETFs became stronger after February, as global markets suffered the aforementioned biggest one-week meltdown in recent history. And, as of mid April, it appears stock market volatility—in both directions—is likely to be with us for some time.

As the moniker implies, low-volatility ETFs rank stocks based on their volatility and select those on the lower end, with imposed limits to promote diversification and limit concentration. As a result, they tend to capture less upside than the broader stock market, but also less of the downside. The first low-vol ETF was launched in 2011; there are now 44 in Canada, with assets exceeding $8 billion.

Who should own them? Long-term investors not looking to “time” markets can improve their returns by substituting low-vol ETFs for broad market ones. They may be slightly more expensive, but they do their job over time.

The PUR Investing team has long made the case for including low-volatility ETFs in our list. 

“Ioulia and I have been advocates for low-vol ETFs every year and don’t see them as a reaction to weak markets,” says Yamada. “Reducing volatility allows a portfolio to compound more efficiently by limiting volatility ‘drag’.”

This year, several other panelists pushed to add BMO’s suite of low-vol ETFs to our list (Canadian: ZLB; US: ZLU; and international: ZLI), which opened the door for low-vol ETFs from other suppliers. 

“I’m typically skeptical of products that offer ‘downside protection,’ but BMO’s suite of low-volatility ETFs has produced an incredible track record in good times and bad,” says Engen. “In fact, both ZLB and ZLU have trounced their respective indexes dating back many years since the funds’ inception. Lower volatility and outperformance? What’s not to like?”

But the love for low-volatility ETFs was not unanimous. The PWL team of Felix and Passmore voted against including them, citing this piece from PWL’s director of research, Raymond Kerzérho, which points out the average MER of low-volatility ETFs is 0.46%, compared to just 0.15% for core ETFs. Kerzérho does concede, however, that the Canadian low-vol ETFs have indeed kept their promise of less volatility than the broad market, and more than half the low-vol ETFs he studied produced five-year total returns above their benchmarks. They also have decent tax efficiency. 

In a blog post/video on the topic, Felix argues low-volatility stocks result in less diversification, higher costs, more portfolio turnover and time-varying exposure to the factors that explain differences in returns. A more efficient approach, he concludes, would be targeting those factors directly to maintain consistent exposure. 

In the end, the panel did add the three BMO low-volatility funds to our picks, as well as four other U.S. and global low-vol ETFs. Check out the individual sections for Canadian, U.S. and International ETFs to find out who made this year’s list.

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Inverse ETFs

Another bear market product that didn’t make the All-star cut deserves a mention: inverse or reverse ETFs that profit as certain major stock indexes plunge. In Canada, the ETF family best known for these products—assuredly not for the faint of heart—is Horizons ETFs. These products provide inverse 1:1 exposure to the S&P/TSX 60 and S&P500 respectively: BetaPro S&P/TSX 60 Daily Inverse ETF (HIX) and BetaPro S&P 500 Daily Inverse ETF (HIU).  

For the truly brave (or foolhardy?), there are also two double-inverse ETFs: HXD and HSD. (Memory aid: with HXU, the U means you’re betting the market is going up; with HXD you’re betting it goes down.) For example, the Horizons Beta Pro S&P/TSX 60 Bear Plus ETF (HXD) gives you 200% of the daily inverse in the TSX 60. 

Roberts likes the idea of inverse ETFs, but warns they’re intended for use by experienced investors or those with very savvy advisors. ETFs levered doubly or triply to up or down moves in the market are particularly explosive in the wrong hands and circumstances. Most of the other panelists were against including any inverse ETFs in our All-stars list. 

“It’s a market timing tool, and I tell clients we can’t time the market,” says Felix, who is particularly wary about inverse ETFs. Engen is equally skeptical: “The notion of shorting ETFs and picking defensive sectors runs counter to a lot of our advice to clients and readers.”

Rebetez believes inverse ETFs aren’t appropriate for most individuals, and those who are concerned about further downside from here can simply lower their allocation to equities, which can be achieved through asset allocation ETFs and robo-advisors.   

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Using All-in-one asset allocation ETFs to mitigate risk

Our three All-star all-in-one ETF families, which have asset allocations that range from 100% stocks to 20% stocks/80% fixed income, help investors handle this volatile environment, since they take care of rebalancing automatically.

Say, for example, you’re invested in VBAL/XBAL/ZBAL, which most closely resemble the classic balanced fund or pension fund with 60% stocks to 40% bonds. If the market sell-off pushes stocks down to 50%, the ETF would automatically sell some bonds to bring stocks back to 60%. On the other hand, if the bull market resumes it would do the opposite, selling stocks to bring them down to 60%, and adding to bonds to keep them at 40%.

If you have belatedly reassessed your risk tolerance, but still want to invest at least partially in the market, you could sell whatever asset allocation ETF you’re in and switch down to the fund that’s one or two risk levels below. For example, switch from VBAL or XBAL (60% stocks) to VCNS or XCNS (40% stocks), which may be appropriate for retirees in their 60s. Those in their 70s may prefer the most conservative one, VCIP, which is only 20% in stocks. Obviously, you can own more than one asset allocation ETF, depending on whether it’s an RRSP, TFSA or non-registered account.

Given the low rate environment, Rebetez is opposed to one-ticket solutions if they have more than 65% or 70% bonds.

Asset allocation in a bear market

A bear market can be viewed as a long-term positive for younger investors, who have less money to lose and several decades to get it back. We feel confident the ETF All-stars will hold up over that kind of timeframe. 

“Opening statements perhaps may not be useful for a while,” says Nugent, adding that investors should try to remove emotion and not get caught up in all the noise. How? Set a plan, save regularly, keep costs low, diversify and don’t pick stocks. “If you follow those rules, you’ll achieve your goal,” he says.

Rebetez concurs. “Unless the COVID-19 crash brought to light a mismatch as far as allocation versus risk tolerance/capacity, stay the asset allocation course,” he says. “Look at rebalancing into stocks, though consider not doing it all in one go given the context.”

For older investors—especially those who didn’t pay attention to risk management and appropriate asset allocation—this crash has probably been a traumatic experience. Their time horizon to recoup losses has dwindled.

If you’ve reached your 60s and are either retired or considering it, we would urge you to think strongly about asset allocation and how the All-stars fit into it. We have several fixed-income picks, as in previous years, and the all-in-one asset allocation ETFs provide a range of options for all ages and risk tolerances.  

My own advisor has long counselled those in the “retirement risk zone” to be somewhere between 50% and 60% fixed income (cash, GICs, bond ETFs). Cautious investors should keep in mind the old adage that fixed-income exposure should roughly equal your age. So, a new retiree who is 65 would be 65% fixed income and 35% in stocks. This rule of thumb applies just as well to younger investors: a 30-year old would have 30% in fixed income and 70% in stocks and so on. 

Of course, a 65-year-old retiree could live for another three decades, and the longer you live, the more inflation can be a problem. The longer a bear market drags on, the more central banks will strive to keep interest rates close to zero, which means you won’t even be able to count on 2% returns from GIC rates if the trend holds up. Fixed-income ETFs, however, are a different story, as are asset allocation ETFs that hold various proportions of fixed income. 

For his part, Robb Engen is adamant about sticking to a long-term plan, and hence most of our prior year’s picks. “What about sticking to a sensible strategy of low-cost, globally diversified ETFs? What about emphasizing the need to have an appropriate asset mix and to rebalance?” he asks. “Did our previous year’s picks suddenly become losers because they got clobbered [in March]? Don’t passive investors embrace the idea that they’re accepting market returns, which includes the distinct possibility of losing large sums of money during falling markets?”

Or, as Felix sums it up: “The investment strategy/ETF mix shouldn’t change based on market conditions.” 

The stay-at-home factor

While travel-related stocks like airlines, hotels and cruise lines have cratered since the virus hit, investors have been flocking to other sectors, especially technology companies that provide work-at-home solutions such as videoconferencing (Zoom), and laptops and peripherals (HP Inc.). 

It certainly seems that home entertainment stocks (Netflix and possibly Disney, although perhaps less so because its theme parks have been closed) have bright prospects, and firms such as Amazon and Walmart have benefitted from customers wanting essential items, including groceries, to be delivered to their doorsteps. 

Some recent IPOs, such as Zoom, Slack and telemedicine firm Teladoc, also appear to have held up well even if all the attention they’ve received this year has made them look increasingly pricey. (Zoom fell back in March over security concerns as millions of users flocked to it during the crisis.)

We suspect this whole coronavirus experience has only served to accelerate a trend that was already picking up steam: telecommuting and working from home, if only some of the time. 

It’s believed that Direxxion ETFs is about to launch an ETF to capitalize on this trend, perhaps under the apt ticker WFH. In the meantime, about the closest may be the Next Generation Internet ETF from Ark Funds (ARKW/NYSE). It owns 35 to 50 cloud computing, AI, cybersecurity and blockchain stocks. Top holdings include Splunk, Roku, Tesla, and social media stocks like Twitter. 

Those so inclined can cherry-pick some of ARKW’s holdings as individual stocks. After all, while some readers may see the All-stars as a “core” holding for their portfolios, we know others take more of a “core and explore” approach. Generally, however, our panelists are in favour of staying the course and sticking with the core approach this package has taken in previous years.  

Precious metals/gold and Real Estate/REITs

While the panel is enthusiastic about our All-in-one ETF picks, keep in mind these asset allocation funds largely consist of different combinations of stocks and bonds, and tend to have only market weights in precious metals and real estate.

Like myself, Roberts believes some investors might consider adding specialized gold or REIT ETFs, although the other panelists declined to consider these options as All-star candidates.

Personally, I’ve always believed in a 10% strategic allocation to the precious metals asset class. Now that the U.S. federal reserve has announced what amounts to QE Infinity, the printing presses are going into overdrive, which should be a plus for gold. 

Accordingly, I have been adding to a few pre-existing positions, mostly TSX-listed gold miners like Barrick and Newmont, and ETFs holding similar companies, such as the iShares S&P/TSX Global Gold Index ETF (XGD/TSX). Apart from the gold miners, you can own gold bullion through vehicles like the GLD ETF and a mutual fund, BMG Bullion Fund, which holds all three of gold, silver and platinum bullion. BMG’s case for gold can be found here. 

Still, not all gold enthusiasts believe in electronic or paper gold, which is what you get if you buy gold ETFs or gold mining stocks. Some believe only actual gold or silver bullion and/or coins can provide true wealth preservation if times get really tough. People who view this as a way to preserve wealth could check out the Hard Assets Alliance. 

“Gold and the U.S. dollar have behaved way better than other ‘currencies’,” concedes Rebetez, who uses gold as a currency. “This should unwind some as we get through this.” Given the devaluation of many currencies, he likes the Horizons Gold Yield ETF (HGY), which provides gold exposure plus some covered call writing that effectively turns it into a high-interest-rate savings account. 

As for real estate and REIT ETFs, some panelists, including Roberts, argue that the sector’s attractive yield, inflation-fighting characteristics and partial correlation to stocks may be reason enough for some investors to have more than index exposure to real estate. The major North American indexes have roughly 3% exposure to real estate, but many ETF portfolio builders top-up their REIT exposure with another 5% to 10%. 

“It’s an asset class with very unique qualities and it’s a very good portfolio diversifier,” says Roberts. For those interested, refer to some of the REIT ETFs flagged in last year’s edition (2019) of the ETF All-stars. 

Still, during the March meltdown, both Canadian and US REIT ETFs proved to be no shelter from the storm as tenants had difficulty making rent. Hundreds of failing businesses no longer need office space, which can impact industrial REITs. 

Engen gave REIT ETFs a “hard pass.” 

Meet the MoneySense 2020 ETF All-star panel

Yves Rebetez, CFA, is former editor of ETFInsight.ca and CIO of Pascal Financial, a FinTech company that launched recently with an initiative called Prevail.

Dave Nugent is Chief Client Officer for Wealthsimple for Advisors. He was a cofounder of Wealthsimple. 

Mark Yamada is CEO of Toronto’s PUR Investing Inc., which provides the ETF Screener for the TMX Money website. He writes about investment issues for Advisors Edge/Advisor.ca, appears regularly at ETF conferences and publishes academic papers with colleague Ioulia Tretiakova about advanced pension strategies.

Ioulia Tretiakova is vice-president and Director of Quantitative Strategies at PUR Investing Inc. She specializes in risk management, quantitative portfolio construction, and is lead author of several peer-reviewed papers in the Rotman International Journal of Pension Management and the Journal of Retirement.

Robb Engen is a fee-only financial planner and founder of the award-winning Boomer & Echo personal finance blog. He’s based in Lethbridge, Alta.

Dale Roberts is a former investment advisor with Tangerine and founder of the Cut the Crap Investing blog.

Ben Felix is a Portfolio Manager with PWL Capital in Ottawa. He joined the firm in 2013. Ben has a bi-weekly YouTube series called Common Sense Investing, and co-hosts the weekly Rational Reminder podcast. PWL is a Canadian wealth management firm managing $3 billion in client assets using low-cost ETFs and index funds.

Cameron Passmore joined PWL Capital in 1997. He is a partner in the firm as well as a Portfolio Manager in Ottawa. Cameron co-hosts the Rational Reminder podcast.

Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence  Day and co-author of Victory Lap Retirement. He can be reached at [email protected].

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.

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