How to choose the best possible ETFs

Kevin Gopaul

President & Chief Commercial Officer of BMO Exchange Traded Funds, BMO Global Asset Management


Rapid growth in the ETF industry has made it challenging for Advisors to easily compare products and issuers, which is only more important with the heightened market volatility cause by the COVID-19 pandemic. To this end, industry pioneer Kevin Gopaul, Global Head of ETFs, BMO Global Asset Management, offers a handy guide on evaluating quality, risk and value in the marketplace.

Look beyond industry buzzwords

As you navigate through volatile markets, it can be challenging to find ETF strategies that are ideally suited to your client’s particular investment needs. The sheer volume of offerings has skyrocketed over the past decade, with issuers adding hundreds of new exposures to help you build customized portfolios. And given that quantity is very different from quality, what steps can you take to identify the best possible solutions for clients?

The first is to make sure both you and your clients have clarity on terms that are often misunderstood – such as smart beta, factor-based investing and responsible investing (RI). The problem with these industry buzzwords is each ETF issuer sells them differently, leading to confusion that not only limits understanding, but sometimes results in strategies being sold on the wrong premise. For example, I routinely meet investors who believe smart beta ETFs will guarantee superior returns, when in reality they are designed to provide a more thoughtful approach to asset allocation.

Education on this front is absolutely critical. As the industry moves toward a “best interests” standard, it will take a tremendous amount of effort, resources and focus to know which ETFs align with your clients’ preferences. Case in point: you may determine that while one investor needs a low volatility ETF to meet their financial goals, another requires an equal-weight tilt in their younger years that transitions into an income-oriented approach as they near retirement. What’s important in either scenario is that you look beyond the ETF industry jargon to find strategies that accomplish your ultimate purpose – which is to fulfill each clients’ specific financial goals.

  • Smart Beta/Factor-Based Investing: Any rules-based methodology that tilts the portfolio weighting towards a specific factor (ie., low volatility, quality)
  • Responsible Investing: Any methodology that tilts the portfolio weighting according to environmental, social and governance considerations

Investors who get conservative too early often miss the broader market returns.

Pay attention to the market cycle

Choosing the right ETF often depends on the macroeconomic environment. For example, historical data suggests that pre-positioning your clients for a recession can often lead to missed opportunities.

Over the last decade, investors who became conservative too early missed up to 8.1% annually of returns compared with those who remained invested in the equity market. Even more pronounced, those who moved to short bonds over full market bonds missed up to an additional 1.9% annually.1 The lesson is simple: You should have the freedom to shift your clients’ allocation when conditions are actually turning, rather than when they’re merely on the horizon.

More important, the trajectory of portfolio returns will depend on how you approach transparency, liquidity and exposure with the investments. A simplified product shelf creates more time for dealing with the families you serve, so that when markets shift you can prevent them from making emotional decisions about the portfolio. You’re also able to use a streamlined approach to enhance your practice – and grow your book.

Given that the coronavirus has caused markets to shift dramatically – and rapidly – we have seen flows to our most flexible strategies. In particular, income-oriented ETFs, such as our BMO Premium Yield ETF (Ticker: ZPAY) and those in the BMO Covered Call Suite, have outperformed by writing out-of-the-money options to manage risks and generate additional yield. The premiums accrued through these derivatives put a ceiling on the ETF’s growth potential in exchange for safety and income, giving investors a way to wait out the crisis while earning a decent return.

As the industry has grown more crowded it has become harder to identify which companies are providing valuable tools, and which ones are not.

Remember fees aren’t the only differentiator

During the past decade, investors had an easy method for spotting competitive funds – they simply looked at the price. Now, however, fees are low enough that a few basis points are not likely to make a significant difference to the value provided. The focus has shifted to the quality of the issuer, because as the industry has grown more crowded it has become harder to identify which companies are providing valuable tools, and which ones are not.

This is very similar to how the institutional world operates. You often see firms dig deeper into an issuer’s reputation, looking at how well financed they are, how long they’ve been in the space and how they manage their resources – and, as more Advisors have adopted a pension-style approach, this robust criteria is moving down the chain to the retail side of the industry.

At the same time, education has become increasingly important. Many ETF investors appreciate the ability to pick up the phone and speak directly to the portfolio management team, or else browse through articles and resources explaining how to trade ETFs. Sound information is key – if issuers can help you better understand how each asset is constructed, then they’re helping improve the quality of your allocation from a risk and return perspective. 

Moreover, as a business owner it’s vital to align yourself with companies that have similar values and the right tools to support your practice. Some take a minimalist approach to providing value-added resources, while others build focus in niche areas such as estate planning and philanthropic giving. In either case, choosing an ideal partner requires looking beyond product considerations in order to map out what you’re trying to achieve in the service model.

Periodic shifts in the investment advisory channel are an opportunity for innovation.

Seek out support and innovation

Looking ahead, we expect a lot of consolidation as Baby Boomers retire and sell their books to younger Advisors. Managing these large rosters will demand greater efficiency on the allocation side of the business, including concierge “white glove” services that not all firms can provide.

In our experience, these periodic shifts in the investment advisory channel are an opportunity for innovation – both in product, and on the distribution side of the business. For example, several years ago we provided Advisors with a LinkedIn practice management tool to help connect them with clients. At the time, client expectations were evolving due to greater choice and awareness in the investment universe, and there was mounting pressure was to communicate the value of professional advice.

We brainstormed more effective ways to help get the message out, and it resulted in an entire training program that we thought would be useful to our Advisor partners. It was wildly successful, in part because we didn’t focus on selling products; our goal was solely to increase the profile of IAs, in the belief that as their business grew, our relationship would feel the positive effects.

More recently, we retooled our ETF Dashboard into a valuable communication hub, publishing non-sop content and weekly podcasts to help Advisors keep up with markets. Once again, we did it as a value-add resource. Because as the industry continues to evolve, we know that investors will come to value support, innovation and expertise as the hallmarks of quality – and we want to be ahead of the curve.

More from Kevin Gopaul, Global Head of ETFs:


1 Bloomberg, based on index returns in Canadian dollars of MSCI World, FTSE Canada Universe Bond, and FTSE Canada Short Term Universe Bond, as of December 31, 2019.

This communication is intended for informational purposes only and is not, and should not be construed as, investment, legal or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Past performance does not guarantee future results.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

The BMO ETFs or securities referred to herein are not sponsored, endorsed or promoted by MSCI Inc. (“MSCI”), and MSCI bears no liability with respect to any such BMO ETFs or securities or any index on which such BMO ETFs or securities are based. The prospectus of the BMO ETFs contains a more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related BMO ETFs.

Commissions, management fees and expenses (if any) all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated. For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the prospectus.  BMO ETFs and ETF series trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

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