In today’s environment, many expect they’ll need ways to supplement the income they’ll earn from pension plans with other investments. In doing so, they’re increasingly recognizing that the benefits of ETFs — low cost, transparency, liquidity and easy diversification — also make them an ideal part of a well-diversified retirement portfolio.
ETFs are growing rapidly as an investment tool, and now is a great time to explore the flexibility and value ETFs offer. The majority of investors want their advisors to come to the table with fresh investment ideas and products that will serve them well into the future.
And as we near the start of another RRSP season, it’s the perfect time to revisit retirement plans and a natural opportunity to incorporate new investment ideas and strategies that will help clients reach their goals. ETFs have a lot to offer, regardless of whether clients need to grow their portfolio, generate regular income, or a mix of both.
Certainly, the need to generate growth is felt acutely by many; according to a recent survey commissioned by the iShares business, 89% of investors with more than $50,000 in the stock market, bonds or mutual funds felt it was important to maximize the potential for increases in the value of their holdings. A further 73% stressed the importance of income generation in their overall investment plan. Yet 95% of those same investors believe preserving their initial investment and minimizing the risk of loss in their portfolio is a priority.
Against this backdrop, the need for the guidance, education and sound portfolio construction that advisors provide is obvious.
Start the conversation
How can ETFs help with this? How should they be incorporated into existing portfolios?
Many advisors are curious about the details. Fortunately, there are some very straightforward strategies. One of the best things about ETFs is that they work well as tools to complement an existing portfolio. For example, ETFs can be combined with active investments such as mutual funds to implement tactical calls efficiently where manager or security selection is difficult.
As an advisor, you can help guide investors on how best to use these instruments to meet their specific objectives. In most cases, the portfolio need is identified first, and then a suitable ETF is chosen to fill the gap.
For example, an investor who has been saving for retirement for many years may have an existing portfolio comprised primarily of equities. But, as he or she gets closer to retirement, it makes sense to gradually shift towards more conservative investments.
Corporate bonds might be a great choice in this case — they’re generally less risky than equities, but not risk-free, and thus offer higher returns than government bonds. Yet buying corporate bonds directly is challenging, especially when dealing in small amounts.
A great strategy here is to add a well-diversified corporate-bond ETF. As ETFs represent a broad portfolio and are highly liquid, this approach allows the asset mix to adjust gradually, while ensuring diversified credit exposure and minimizing trading costs.
When changes in a client’s asset allocation are needed, it often makes sense to implement these over time, both to control the tax consequences of selling holdings, and because clients can be reluctant to sell long-standing positions. ETFs are the perfect tool for handling these kinds of portfolio adjustments. ETFs are also an ideal tool for clients who are just starting to build their portfolio.
With an asset allocation that’s likely to be focused on equities, ETFs enable investors of any size to build low-cost portfolios that are finely balanced by sector, region, or country. The cost efficiency of ETFs, which is always an important benefit, is especially valuable in the early phases of wealth accumulation. A typical portfolio would hold a broad-based ETF at the core and add international exposure, such as emerging markets.
This approach also yields benefits for the advisor, since ETFs can introduce significant economies of scale with respect to portfolio design and trading.
Assess the risk profile
As always, the risk tolerance of the client is high on the list of factors to be weighed. Once that’s determined, you can then establish a strong plan based on an asset-allocation strategy.
ETFs exist at just about every point along the risk spectrum, so model portfolios can easily be built for the most common of client profiles.
The modularity of many products also makes it easy to adjust to specific needs or express a tactical view. Overweights in small caps versus large caps (for growth), or in government bonds versus corporate bonds (for safety) are both simple ways to offer clients customization.
Overall, ETFs make sense as part of an overall retirement strategy. They allow investors to control the costs of investing, build risk-controlled portfolios with precision, and help advisors scale their business.
All in all, it’s a good time to have an ETF discussion.