Rethinking core equity in modern portfolios
Exchange traded funds continue to offer diversification benefits and should act as the “engine” of a core equity portfolio, says Greg Gipson, managing director and head of ETFs, CIBC Asset Management.
“ETFs as a portion of the core equity portfolio offer an ability to really have a liquid and flexible component,” he said in a March 2 interview. And the ability to make modest ETF tilts can meaningfully enhance long-term investment outcomes, he said.
Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.
Gipson pointed out that over the past six years, a small tilt toward growth stocks or the Nasdaq could have added significant value to a portfolio, with the Nasdaq outperforming the S&P 500 by up to 60%. These small tilts offer various advantages [like] enhanced returns, risk management or diversification by adding exposure to strategies like dividends or low-volatility.
“It also allows an investor to really fine-tune their portfolio to meet their unique investment objective — so that ability to curate a more bespoke solution for each investor’s needs,” he said.
Tax implications
He also pointed out that investing in Canadian-listed ETFs can offer tax efficiencies. Covered-call ETFs, in particular, are gaining popularity for their tax-efficient nature.
“Being able to realize that distribution, or component of that distribution that comes back in the form of capital gains, can be efficient,” he said.
The first step to building a core ETF strategy is to ensure the portfolio aligns with the investor’s goals and risk tolerance, Gipson said. For instance, an investor with a lower risk tolerance might have a core portfolio including dividends, cash flow or low-volatility strategies. An investor with a longer time horizon might be able to withstand more risk, so his core portfolio might have more exposure to equity markets or growth assets.
Advisors must also do their due diligence because not every product with a similar name has the same potential outcome or cost, he said. It is critical to assess the liquidity, tradeability and volume of the ETFs before investing.
“Whether it’s executing in the market using limit orders or trading at a day and price, understand how each portfolio of ETFs is implemented,” he said.
He also advised financial advisors to monitor performance and maintain disciplined rebalancing to keep investment outcomes aligned with expectations and evolving needs.
“Ensuring that risk management, risk oversight and diversification are properly addressed when building a portfolio for investors is extremely important,” he said.
Once that core part of the portfolio has been designed, then think of the tilt as a value add. Using a car analogy, Gipson said the tilt is similar to adding a more advanced GPS to navigate a smoother trip.
“This could be something like a dividend strategy, a low-volatility strategy that really helps to absorb the volatility or variability in markets, and provide perhaps a smoother ride for the portfolio over time,” he said.
This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.
