Making ETFs the foundation of your core equity portfolio

Exchange-Traded Funds (ETFs) have emerged as a fundamental component in constructing core equity portfolios. Their primary appeal lies in instant diversification, cost efficiency, liquidity and flexibility, enabling investors to customize their portfolios to their unique investment objectives and risk tolerance.

Small ETF tilts offer several advantages, including the potential for higher returns and improved risk management. They allow investors to add exposures to strategies, like dividend-focused or low-volatility ETFs, which can offer income or function as shock absorbers against market volatility. While trying to time the market or factors is challenging and not recommended, research shows that different areas of the market do outperform at various times. Using satellite exposures through ETFs is a practical way to capture these opportunities and fine-tune portfolio allocations based on valuations, sector outlooks, or geographic preferences.

ETFs also help Canadian investors overcome home bias, which is the tendency to overweight domestic assets in their portfolios. While Canadian equities have performed well in recent years, a diversified ETF portfolio enables investors to gain exposure to international markets and sectors that may outperform at different times. By using ETFs, Canadians can easily access US equities, international equities, and invest in specific sectors like technology or healthcare, reducing over-reliance on the Canadian market. This diversification helps manage risk and can improve long-term outcomes by capturing opportunities beyond the domestic market.

When implementing a core ETF strategy, alignment with client goals and risk tolerance is paramount. Investors may differ in their core ETF allocations. Some investors may prioritize defensive strategies like dividends and low volatility, while others, especially investors with longer time horizons, may seek higher growth exposures. Due diligence is essential. Not all ETFs with similar names offer the same outcomes or have the same cost. Investors should assess for liquidity, tradability, and understand the nuances of ETF trading, such as using limit orders and monitoring trading volumes. 

Continuous monitoring of portfolio performance ensures investment outcomes remain consistent with expectations. Maintaining a disciplined rebalancing schedule is vital for adapting to evolving investor needs. A rebalancing schedule also ensures that risk management and diversification methods remain effective. Disciplined rebalancing helps the portfolio deliver on its intended objectives and respond to changing market conditions.

ETFs should be seen as efficient delivery mechanisms for market exposure, like continuously priced mutual funds but with greater liquidity and cost-effectiveness. Their ability to be traded within the same day provides flexibility for investors to implement decisions promptly.

The decision to use ETFs is about selecting the best vehicle to achieve your desired exposure, based on your broader portfolio objectives. By providing a versatile and efficient foundation for core equity portfolios, enabling customization, risk management, and disciplined investment management, ETFs can play a pivotal role in modern investment strategies.

CIBC Global Asset Management is committed to providing market and investment insights. We want to help you find the right solutions to guide your investment journey. We invite you to learn more about CIBC Exchange Traded Funds Opens a new window..