First Asset formally introduced its Core ETF portfolio solutions last Thursday in a webinar led by Barry Gordon, President and CEO, and David Barber, Vice President of National Accounts. Topics covered included the motivation for creating the Core ETF product suite, the methodologies underlying the products, and where First Asset hopes the ETFs will fit not only in their own product lineup, but also more broadly in the industry overall .
The conference call replay is available by clicking HERE and filling in the required information.
Some of the key takeaways from the webinar:
- These are one-ticket ETF solutions, providing exposure to the four smart beta factors of value, momentum, dividend, and low risk, in one product, with additional goals of capital appreciation, risk mitigation, and income generation. There are three ETF offerings: a 100% Canadian equity solution (CED), a 100% U.S. equity solution (CES), and a balanced equity and fixed income solution of primarily Canadian holdings (CBB). The fixed income component of CBB will be a combination of government and corporate barbells.
- These products were largely created in response to increased demand from advisors for a comprehensive solution combining all four factors in one product. In addition, the Core Balanced ETF (CBB) offers a mix of both debt and equity, offering further comprehensiveness.
- Barry and David highlighted a few shortcomings of market cap weighted investing, including a tilt toward growth stocks, which don’t tend to reward people with long term outperformance, and a resulting lack of diversification. These are two of the fundamental reasons First Asset’s factor based ETFs have tended to perform well in times when market cap investing hasn’t, including in recent months, and played a part in the decision to introduce the Core ETF series of products.
- To this last point, the presentation showed a number of tables and charts highlighting factor outperformance versus a broad benchmark over extended time periods. Barry and David made the point that although in a given year not all four factors will outperform a broad benchmark, combining them in one ETF provides for not only better returns than for individual factors on their own, but also smoothes out the volatility significantly. In addition, they presented charts showing the hypothetical out-performance from 2002 to 2014 of both Core Canadian equity and Core U.S. equity ETFs against broad benchmarks.
- The management fee of these ETFs will be 15 basis points in addition to the weighted average fees for the underlying ETFs in each product. As an example, the management fee for CED and CES is about 75 bps, with CBB at about 60 bps. All the ETFs also come in an Advisor series variety, and The U.S. equity solution CES is available additionally in un-hedged and U.S. dollar unit varieties.
- The balanced solution CBB can vary in allocation to equity and fixed income from 40% to 60%, on either side. Currently the allocation is 60% to equity and 40% to fixed income. This balance can change but the process will never be dramatic and instead gradual over time. As far as the equity component balance of CBB, the weighting of the four factors will reflect the weights in the Core Canadian ETF CED. As well, the duration of the fixed income component will be pinned to the ETF benchmark.
Bottom line: Similar solutions have been introduced to the Canadian market before, with generally mixed results certainly from a market penetration standpoint. That said, the presence of the strong First Asset factor-based ETFs likely gives the products a competitive edge and separates them from previous iterations of such ETFs. The combination of the factor-based strategies in one product may resonate with investors from the outset – gauging from the strong response to the Value and Momentum strategies individually as well as performance since creation.