How ETFs opened global markets for Canadian investors
“Wilfred Hahn, who founded the firm, always said that as ETFs evolved, he could build a better portfolio with $250,000 today than he could with $25 million in a pension plan back in the 1990s,” Mordy says. “It’s a cliché, but ETFs really have democratized global asset allocation. The irony is that we now have more ETFs than individual securities on the TSX and US stock exchanges. And I would argue that the more ETFs there are, the more important active asset allocation becomes.”
How Forstrong uses ETFs
As ETFs evolved from pure beta plays into the sophisticated set of products now available, Mordy says their value for global investors has grown all the more. The further an investor looks away from developed markets, he says, the more valuable an ETF becomes. The institutional infrastructure and trading efficiency offered by an ETF can be far more advantageous for a Canadian investor than buying those securities directly. Mordy gives the example of a global bond strategy, noting the huge transaction costs as well as issues of custody, settlement, market access, liquidity, currency, and tax that are all wrapped up within the ETF and managed with scale through the MER.
Because even globally-listed ETFs are constantly underpinned by market makers, Mordy notes that trading hours become less of an obstacle. While bid-ask spreads can widen when the underlying market is closed, ETFs can give Canadian-based managers a way to access foreign strategies without having to keep foreign hours. Those market makers, can provide liquidity beyond what is visible in the ETF’s daily trading volume, allowing managers to execute institutional-sized trades efficiently.
Because of those advantages, Forstrong’s own ETFs which trade on the TSX, are largely comprised of foreign-listed ETFs. Across the three strategies they offer, global income, global balanced, and global growth, the firm can find extremely specific underlying strategies in ETF format to add a desired exposure. Mordy gives the example of copper miners, which he can get through an ETF for lower cost and with better diversification than going for single securities. Those targeted ETFs, Mordy says, reflect how markets are becoming increasingly ‘micro-efficient’ — very good at pricing individual securities, industries and sectors. Forstrong’s opportunity is therefore less about finding mispriced individual stocks and more about deciding which of those markets investors should own. ETFs allow the firm to aggregate those micro-efficient exposures into an actively allocated global portfolio.
Finding the right ETFs for a global strategy
The trouble with the ease of access that ETFs provide is that it creates a universe of seemingly impossible choice. It’s hard enough to parse through the 1,000-odd Canadian equity ETFs listed on the TSX, let alone deciding how to assemble a global bond portfolio from globally-listed ETFs. Mordy says that his firm has created a set of seven criteria to assess the suitability of an ETF. By applying those criteria as screens for the total investable universe, Mordy says he and his team can quickly sort through the vast majority of the global investable universe to arrive at the funds that serve their goals.
