Welcome to the ninth edition of the MoneySense ETF All-Stars, wherein we present the best ETFs available to Canadian investors. That largely means products trading on the TSX, but can include the odd ETF trading on American stock exchanges.

We’re happy to report that the “stay-the-course” approach to broadly diversified low-cost ETFs served readers well over the turbulent year of the COVID-19 pandemic. Despite increasingly volatile stock markets, ever-fluctuating economic conditions and never-ceasing blitzes of new ETF products, our seasoned panel of eight ETF experts scarcely budged in their selection of funds that can be bought and held for the proverbial long term. 

Call this the pandemic-recovery edition. We have 52 picks this year, counting 44 main panel selections plus eight individual Desert-Island Picks. That’s one for every week of the year! We are up two from the even 50 in last year’s edition. While there are seven new main picks, plus three new Desert-Island Picks, a handful of ETFs were also cut from the 2020 lineup this time around (read on to discover which!).

The panel is largely the same as last year’s, although we sadly bid adieu to portfolio manager Dave Nugent. In his place, we are happy to announce Mark Seed, the blogger behind My Own Advisor, which includes ETF coverage in blogs aimed at do-it-yourself investors who also invest in individual stocks. As we divide our experts into four pairs (to help speed consensus for the whole group), we paired Seed with Yves Rebetez, formerly of ETFInsight.ca and head of Credo Consulting.

Once each team had an internal consensus on which of last year’s picks to retain or replace, we voted as a group on each suggested fund. Five out of eight votes carried the day, with me serving as tie-breaker only in the case of 4-4 ties.

Returning to our panel for 2021 are the Ottawa-based PWL Capital duo of Cameron Passmore and Ben Felix; the PUR Investing team of Mark Yamada and Ioulia Tretiakova; and the blogging team of fee-only financial planner Robb Engen (Boomer & Echo), and former Tangerine advisor and fellow MoneySense columnist Dale Roberts (Cut the Crap Investing). 

Of necessity, the All-Stars list has evolved to include more names as the ETF space in Canada continues to expand each year. According to the Canadian ETF Association (CETFA), as of January 2021 there were 863 ETFs trading on Canadian exchanges, created by 39 different sponsors. Some $260 billion is invested in these products nationwide. 

While we keep adding modestly to the numbers of ETF All-Stars, it’s a fact that 52 picks chosen from 863 products amounts to only a little over 5% of the ETF universe. (That’s a lot of whittling down our experts are providing for MoneySense readers!) The Desert-Island feature introduced in our 2019 edition gives the more renegade panellists a bit of leeway by letting them champion 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.

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

Despite changes to the investing universe, our panel continues to share the philosophy established when Dan Bortolotti (then a magazine journalist and now a portfolio manager at PWL Capital) and I first conceived of the ETF All-Stars 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. And over the past year, this approach was vindicated by the unexpected quick recovery after the short-lived COVID bear market. 

From the get-go, the idea was to create a low-cost “set it and forget it” shortlist of ETFs that rarely needs tweaking. The goal was never to introduce change just for the sake of change, even in an industry famous for introducing marketing-oriented “flavour of the month” thematic funds.

As such, exposure to specialized asset classes—such as biotech, cloud or cyber stocks, gold or real estate—are largely limited to whatever the index weightings in our model portfolios hold in those sectors. That said, if you’re looking for a few novel ideas, we’ve got you covered with our Desert-Island Picks; we also discuss some of the newer funds and thematic products (such as “innovation-themed” funds and cryptocurrency funds) in this overview, even where the panel as a whole opted not to designate an All-Star pick.

As far as actual picks, keep in mind there may be some overlap in certain categories. By necessity, an iShares Canadian equity ETF like XIC will contain some duplication in any of the iShares Asset Allocation ETFs like XEQT or XBAL. The same would go for a Vanguard S&P 500 index fund, and VEQT or VBAL, and so on down the line. Those with financial advisors might want to discuss this before automatically choosing to invest in some number of All-Star selections—or any other ETFs, for that matter. 

How our panel approached the pandemic

Certainly, the exaggerated response of markets to the COVID-19 pandemic and hoped-for broad economic recovery made possible by widespread vaccinations gave our panel plenty to think about. In particular, they discussed the ongoing role of low-volatility ETFs and the growing availability of All-in-One asset allocation ETFs that can mitigate risk; we continue to add to the number of suppliers of All-in-One solutions. Below, we address these ideas, as well as the role of precious metals and real estate ETFs as inflation threatens to heat up.

Low-volatility ETFs

We added several low-volatility ETFs for the 2020 edition, and most, but not all, are back for 2021. While designed to dampen volatility over the long haul, low-vol ETFs aren’t meant to be short-term market beaters; indeed, they had a so-so 2020 and seem to be lagging as the recovery takes hold so far in 2021. 

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 almost 50 in Canada, with assets approaching $10 billion. BMO is the largest single player in the low-vol space, with $2.5 billion in ZLB alone (and a returning All-Star in the Canadian equity category.) We don’t break these out in a separate category; you can find them as part of the mix in our Canadian, U.S. and International equity categories. 

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

Readers should be aware of a distinction experts make between low volatility and minimum volatility. As panellist Yves Rebetez explains, both aim for the same objective: to reduce downside risk while participating as much as possible to the upside. “Low-vol tends to risk being more specific-sector heavy, while min-vol are more constrained as far as having broader sector diversification within pre-specified parameters and seeking to provide broader diversification.” Since markets are not all equal, one or another of these strategies may be better suited to particular investors, depending on their temperament and the market.  

The PUR Investing team has long made the case for including low-volatility ETFs in our list, and in the 2020 edition convinced enough of the rest of the panel to expand the offerings to include BMO’s suite of low-vol ETFs to our list (in addition to ZLB, the U.S. version is ZLU and international is ZLI.) Mark Yamada doesn’t view low-vol ETFs as a reaction to weak markets, saying,  “Reducing volatility allows a portfolio to compound more efficiently by limiting volatility ‘drag’.” 

Yamada’s partner, Ioulia Tretiakova, says that while low-vol ETFs missed a large part of the rally in late 2020 and early 2021, “by construction they still provide better downside protection compared to the traditional equities and have a place in certain investors’ portfolios.” Sector biases of low-vol ETFs can be a consideration for more active investors given the structural shifts in the economy caused by COVID, she adds. “However, in the long term, the volatility-dampening effect provided by the low-vol strategy will continue to play into the mathematics of compounded growth.”

Mark Seed of the My Own Advisor blog taps low-volatility ETFs for do-it-yourself investors like himself, who may use a hybrid strategy of ETFs and individual dividend-paying stocks. Low-volatility ETFs “can help save investors from themselves,” Seed says: “It’s really not the job for low-volatility ETFs to consistently beat the market, since they may not during some very bullish periods. Rather, I feel owning such ETFs can make great sense for some investors because the holdings in such ETFs may offer some downside protection and grace when markets correct or tank.” 

These products may also support investors by providing a modest income stream coupled with downside protection, Seed adds: “They tend to hold a mix of utility companies, grocery stores and real estate assets because companies in these sectors tend to provide long-term stability even when the market is bouncing about haphazardly. Companies in those sectors alone will not likely help investors trounce the index, but that’s not the point. These ETFs, as designed, can offer value beyond a pure total-return perspective; they deliver income when investors need it (for example in retirement) and can help investors stop tinkering with their portfolios at the worst possible time, when markets correct. This means they can take a buy-and-hold approach when they need that the most. There is a sleep-at-night factor that an investor must always consider when they invest.”

Seed’s panel partner Yves Rebetez also likes the concept—“but, empirically, last year’s savage bear resulted in them not exactly being spared. Possibly as a result, people were pulling money out of them to go back to more plain-vanilla and capture greater upside from the rebound.  

As we pointed out last year, the love for low-volatility ETFs was not unanimous. The PWL team of Felix and Passmore again voted against including them, citing this article 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.

Dividend ETFs

Up until now, the All-Stars have not drilled down on dividend ETFs, but this year they were under strong consideration. The team of Rebetez and Seed discussed the value premium some dividend ETFs provide and Dale Roberts has long been a fan of the Dividend Aristocrats ETFs available both in Canada and the United States. In the 2020 edition, Roberts chose the Vanguard Dividend Appreciation ETF (VIG/NYSE Arca) as his Desert Island pick. The panel was evenly split on adding it this year, so it didn’t quite make the cut. Nor did the Vanguard US Dividend Appreciation Index ETF (C$ hedged): VGH/TSX. 

As he did with low-vol ETFs, Mark Seed sees a place for dividend ETFs alongside individual stocks. He concedes that dividend fund MERs tend to be higher than the broader-based ETFs that mirror the entire TSX composite index, but “for investors seeking an income stream who also wish to avoid any individual stock selection in the process, I feel dividend ETFs deserve some consideration beyond any all-star list.”

Retirees in particular may want to consider dividend ETFs, seeing as bonds no longer deliver much meaningful income, Seed says. “A dividend ETF can offer an alternative from a total-return ETF whereby you get some higher yield today offset by some lower ETF price appreciation over time. That might not be a trade-off that investors in their asset accumulation years want to take; they may consider all growth all the time.… Yet, as any prospective retiree might attest, their goal is no longer to grow their portfolio aggressively nor deal with the uncertainty that a total-return approach may cause near-term. Instead, they can obtain today’s income needs in a manner that doesn’t need to fret about individual stock selection.” Seed suggests investors interested in this approach can start their search with such Canadian offerings as VDY, XDV, XEI and FDV (some of which were considered by the panel as possible All-Stars).

Yves Rebetez made the case for adding an international dividend ETF, as they often provide “superior yields to those available in the U.S., while also supplying a bit of a buffer against market volatility/downside risk.” Emerging market high yield/European or international dividend growers might also be considered, he added.

Asset allocation in a market in flux

While the bear market of early 2020 was mercifully brief, it clearly put a scare into older investors hoping to retire in an era of minuscule interest rates, as well as emboldening a new generation of Robinhood investors who grabbed stock bargains and then enjoyed seemingly ever-upwards surges in stock prices.

We feel confident the ETF All-Stars will hold up through this time of market flux. As former panellist Dave Nugent observed in last year’s edition, 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 said—advice that is just as relevant in 2021. 

Yves 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.” That said, Rebetez doesn’t wholeheartedly endorse the idea that your investment strategy/ETF mix shouldn’t change based on market conditions. It’s always incumbent on investors to assess current and future market conditions. While strategic asset allocation should usually be indifferent to interest rate levels, Rebetez isn’t averse to using occasional tactical tweaks to, for example, play the COVID-recovery bounce, even if that means being prepared to stomach greater cyclical risk in sectors like energy or materials (see the next section below).

If you’ve reached your 60s and are 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.  

Robb Engen is adamant about sticking to a long-term plan, and hence to most of our prior year’s picks.  “I know it’s an exciting time to invest when seemingly everything is going up. You feel dumb holding a boring portfolio of index funds while investing newbies strike it rich with GameStop, cutting-edge technology ETFs and cryptocurrency. But ask yourself: Do you want to be the greater fool who is willing to pay the highest price before a crash? Growth stocks fizzle out when earnings disappoint. Star fund managers fade when their assets become too large to maintain their advantage. As for bitcoin, that story is still being written, but the current price is more than three times higher than its last peak in 2017. That ended with a rapid 80% decline that took three years to recover. Maybe best to catch the next wave.…”

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

Recovery theme takes over from the stay-at-home factor

As occurred this time last year, COVID-themed trends kept shifting, even as the panel decided on this year’s picks. A year ago, travel-related stocks like airlines, hotels and cruise lines were the first to crater after the virus hit, as investors flocked to sectors more likely to hold up in a pandemic—especially technology companies that provide work-at-home solutions such as videoconferencing (Zoom), or laptops and peripherals (Apple, HP Inc.). 

By late February 2021, the reverse situation was prevalent, with a full year of COVID under investors’ belts and the rollout of vaccines stimulating the “recovery” play. That was good for airlines, cruise ship stocks, hotels and travel/leisure stocks, but technology stocks—the haven throughout most of 2020—started to fall from their once-lofty levels. Disney is part of the recovery theme, but pure work-from-homes, like Zoom, Slack and telemedicine firm Teladoc, seemed to fall out of favor. However, true believers would argue they are also built for a hybrid future where workers split their time between corporate headquarters and their remote home offices. 

Like the mutual fund industry before it, the ETF industry has been quick to jump on thematic trends that may help attract their share of investors’ wallets. In January 2021, Harvest ETFs announced the Harvest Travel & Leisure Index ETF (TRVL/TSX), as well as a U.S.-dollar version (TRVL.U), which invests in the recovery theme: airlines, cruise lines, resorts and gaming companies. It’s also seen as a play on the Boomer retirement demographic once they resume post-pandemic travel. By mid-March 2021, the fund had attracted $100 million in assets. 

While the panel as a whole passed on making TRVL an All-Star pick this year, Yves Rebetez sees “merit in the theme and the diversification to it provided by Harvest.” Rebetez says he personally was long some airlines and cruise stocks for most of 2020, and many of the ETF’s holdings have already rallied significantly off earlier bottoms, a trend reinforced by the arrival of vaccines. So while the travel theme “should have legs, with pent-up demand aplenty, meaningful gains from here might be harder to come by, or require more patience.” As an aside, Harvest has also announced its plans for a space ETF with the ticker ORBT.

A similar but more concentrated play than TRVL is the JETS ETF (JETS/NYSE), which owns the major American airlines (Delta, American, etc.), plus Air Canada and a smattering of international airlines and airports or airport services. This was a bit too focused and volatile for our panel to cite it as an All-Star ETF or even a Desert-Island Pick, but it was discussed.

We suspect this whole coronavirus experience has only served to accelerate a trend that was already picking up steam: a hybrid approach of commuting physically to corporate offices two or three days a week, while telecommuting and working from home the rest of the time. 

Last year, we mentioned in this context a Direxion ETF sporting the apt ticker WFH. Another we mentioned in passing a year ago had a banner year: the Next Generation Internet ETF from Ark Funds (ARKW/NYSE). It and several other specialized U.S.-based ARK ETFs were up 100% or more in 2020 but started to correct severely in the first few months of 2021, as the Recovery play took hold and investors redeployed profits from 2020 winners rotate from growth to value. ARKW tends to own large (often 10%) positions in a concentrated number of high-growth companies like Tesla, Splunk and Roku, which introduces the risk of ARK creating its own bubble, says Rebetez.

The panel debated adding the Canadian-dollar-denominated ARK sister funds from Emerge Canada Inc.: EARK and others. EARK is an ETF that provides a smattering of best ideas from the next-gen Internet, genomics, fintech and robotics ETFs. Rebetez says one reason for ARK’s equivalent U.S. flagship (ARKK/NYSE Arca) pullback was a repricing of growth stories in the context of rising yields and inflation fears, plus the market shifting toward reopening stories and away from richly-priced stocks.   

Even deep-value investment funds company Franklin Templeton opted to unveil an innovation ETF (FINO/TSX) early in 2021, modelled on its long-established Dynatech fund in the U.S. In essence, it’s a Nasdaq tech fund and has done well over the years. We will monitor these funds, but none attracted the five out of eight votes necessary to become an All-Star so soon after their release.

Those intrigued by value might also check out the PWL team’s two Desert-Island Picks this year: Avantis U.S. Small Cap Value ETF (AVUV/NYSE Arca) and Avantis International Small Cap Value (AVDV). Investors familiar with the DFA group of mutual funds may know that some ex-DFA executives left to form American Century Investments, and the Avantis ETFs use a similar set of screens to reap the long-term returns of tilting portfolios to small-cap and to value. 

As with any of our picks and near-picks, those so inclined can purchase them despite our reservations, or cherry-pick some of EARK’s or FINO’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 panellists are in favour of staying the course and sticking with the core approach this package has taken in previous years and not going overboard on specialized theme funds.  

Precious metals/gold and real estate/REITs

With inflation fears starting to percolate again, the debate around inclusion of two specialized ETF sectors continued among our panel members. While the panel is enthusiastic about our All-in-One ETF picks, keep in mind asset-allocation funds largely consist of different combinations of stocks and bonds, and tend to have only market weights in precious metals stocks or publicly traded real estate companies.

Like myself, Dale Roberts believes some investors might consider adding specialized gold or REIT ETFs, although other panellists declined to consider these as possible All-Star candidates. Some, including Dale and myself, also made the case for some of the new bitcoin and other cryptocurrency ETFs, which we own personally, as noted in this MoneySense article that ran earlier in 2021. While not designated an All-Star, Purpose’s new bitcoin ETF—the world’s first —was Dale’s Desert-Island Pick this year.

Personally, I’ve always believed in a 10% strategic allocation to the precious metals asset class, but—taking a cue from recent crypto converts like Stan Druckenmiller or Paul Tudor Jones—believe a 1% to 3% position in crypto is plenty. Roberts is willing to go for twice as much, as long as you take profits and rebalance on the way. 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 both gold and cryptos. The crypto runner-up to bitcoin is Ethereum, which Canadians can hold in registered accounts through The Ether Fund (QETH.U/TSX).  

The panel did consider including Purpose Investments (BTCC/B) as a possible All-Star, but it did not attract the minimum five votes out of eight required to qualify. As Yves Rebetez observes, “Bitcoin to me is not in any way a traditional ‘All-Star’ in that it doesn’t provide a high degree of, or broad, diversification. I see it personally as a 3% to 5% max position in an extremely volatile cash section, which…if you have a sizeable portfolio, you don’t mind losing while otherwise opting to go ‘long’ the optionality of it continuing to defy gravity.” Similarly, the PUR Investing team were thumbs-down on crypto: “I don’t see the fundamental growth potential, either as a currency or an asset,” says Ioulia Tretiakova, “To me, it’s a tulip bulb craze.”

As for precious metals, not all gold enthusiasts believe in electronic or paper gold, which is what you get if you buy gold bullion ETFs or gold or silver mining ETFs. 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

Rebetez does not however view gold ETFs as electronic or paper, to the extent their holdings usually consist of Gold bullion held in custody. He uses gold as a currency: “Gold and the U.S. dollar have behaved way better than other ‘currencies’.” Given the devaluation of many currencies, he likes the Horizons Gold Yield ETF (HGY/TSX), which provides gold exposure plus some covered call-writing that effectively turns it into a high-interest-rate savings account. 

Inflation fears have also strengthened the case for real estate and REIT ETFs. Dale Roberts argues 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%.

True, during the March 2020 meltdown, both Canadian and U.S. REIT ETFs proved to be no shelter from the storm as tenants had difficulty making rent. Failing businesses no longer need office space, which can impact industrial REITs; but other REITs focus on residential apartments, retirement living and specialized exposure like wireless tower REITs, data storage REITs and others, not all of which may be available in Canada. Whatever REIT ETF you consider, pay close attention to the sector holdings. “It’s an asset class with very unique qualities and it’s a very good portfolio diversifier,” Roberts concludes. For those interested, refer to some of the REIT ETFs flagged in last year’s edition.  

Watch: MoneySense – BMO ETFs – Sandra Martin – ETFs and Mutual Funds fees

Meet the MoneySense 2021 ETF All-Star panel

Yves Rebetez, CFA, is one of three partners at Credo Consulting, a brand analytics and research firm focussed on the Canadian financial services industry. Rebetez ran ETFinsight between 2011 and 2018: an independent website dedicated to the ETF space. Following a stint as CIO of a fintech company in 2019 to 2020, Yves is working on several ETFs and advisor engagement initiatives, including reviving ETFinsight.

Mark Seed is the blogger behind the My Own Advisor website, which caters to do-it-yourself investors and takes a hybrid approach to investing in both ETFs and individual securities.   

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 about advanced pension strategies with colleague Ioulia Tretiakova.

Ioulia Tretiakova is vice-president and director of quantitative strategies at PUR Investing Inc. She specializes in risk management and 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 Echo personal finance blog. He’s based in Lethbridge, Alta.

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

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. Passmore 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]

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