There are now almost 400 ETFs in Canada. Each of them has a tale to tell. But as an investment advisor once noted, he could tell from client mutual fund portfolios that he took over which road show had been through the neighbourhood in what year with a story to tell (or sell).

As ETFs move from the traditional four-fund portfolio of bonds, Canadian, U.S. and international equities, they too need a story.

It could be a story about an index provider – S&P Dow Jones, Morningstar, FTSE, MSCI, NASDAQ, OMX or a rules-based proprietary methodology.

It could be a story about MERs. Or average daily trading volume (to guard against excessive bid-offer spreads). Or assets under management (to forestall an ETF closing). It could be a story about tax efficiency. Indexing isn’t as simple as it looks.

Index innovation leads to ETF proliferation. That can lead to a more precise targeting of client needs, for example, an allocation to high-yield bonds or preferred shares for income investors. The emphasis is less on matching the market return than on matching the client’s needs to a specific market.

There are advantages and disadvantages. Once there were assets (or asset classes) ignored by the broader equity and bond markets, and advisors beavered away to analyze the whole income trust, preferred share or high-yield market. Now an ETF can provide instant diversification for high-yielding Canadian (or U.S.) assets.

The disadvantage: competition brings forth new ETFs in each asset class. The burden of getting the fundamentals right for each issuer in a dividend or high-yield portfolio shifts to understanding the index the ETFs follows – and how it follows it.

TMX Group provides a basic screen. In collaboration with the Toronto Stock Exchange, so does Pur Investing. It’s a starting point to sort out the stories.

But not sufficient. In a new age of diversification, the old adage remains true: trust but verify.

Scot Blythe is a Toronto-based financial writer.
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