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As investors around the world continue to allocate more and more money into exchange traded funds (ETFs), we've seen the continuation of a long-term trend: the further afield investors allocate capital, the more likely they are to consider an ETF solution for their portfolio. While we Canadians are investing over $1 billion a week into ETFs of all asset classes¹, ETF adoption is even higher in international and the global equity categories.
Recent data from the Canadian ETF Association and Environics shows that Canadian investment professionals are increasingly likely to use ETFs for several asset classes, namely fixed income and international/global equities. This makes sense - bonds are challenging given low rates and a lack of bond inventory to invest in, and overseas markets are difficult to research and trade with.
At the same time that ETF adoption continues to climb higher, uncertainty has returned to the market. Risks seem to be bubbling to the surface - is inflation permanent or transitory? Will government stimulus withdrawal be orderly and gradual, or chaotic? Are rising bond yields going to wreak havoc on equity returns as they have before? What does one do with their existing portfolio, and with uninvested capital, today? Don’t overlook factor diversification.
In order to prepare portfolios for multiple outcomes, consider a few ideas:
- Diversifying into global equities,
- Gain exposure to factors that might not already be present in your portfolio, such as growth and quality,
- Determine whether an active solution for global equities might make sense, given the rapidly changing market conditions of late.
A global solution for multiple outcomes
The TD Active Global Equity Growth ETF (TGGR) is a global ETF that not only helps diversify geographically and sector-wise, it's also actively managed and has some of the strongest returns in the category since the launch in 2020². TGGR is sub-advised by Epoch Investment Partners, Inc. (Epoch), an affiliate to TD Asset Management Inc. (TDAM). Based in New York, they have a specific investment philosophy that aims to deliver strong growth and quality factors to portfolios.
Epoch champions the concept that companies who can generate a higher Return on Invested Capital (ROIC) compared to their Weighted Average Cost of Capital (WACC) will flourish, provided they allocate free cash flow to five specific goals:
Acquisitions - Active management is important here, in order to ensure that companies being acquired are accretive to the business model. When done well, acquisitions can be a wonderful use of free cash flow (FCF).
Internal Investments - Many high growth companies do not pay dividends simply because the return potential and the compounding opportunity of re-investing into the business is that much greater. While virtually all investors appreciate a dividend from time to time, many of the fastest growing companies pay little to no dividends, since that payment would cost them opportunities to reinvest and grow even faster.
Cash Dividends - If businesses have created dominant positions in their industries, sometimes those businesses will elect to 'share the wealth' via dividend payments. This is always a balancing act however, as a dividend that's too generous might suggest a company has little else to do with their free cash flow.
Share Repurchases - Repurchases, or buy-backs, improve shareholder yield because on a go-forward basis there will be fewer shares to divide earnings into, or future FCF. Again, active management allows investors to consider the merits of a share buy-back, to ensure that the company is buying shares at prices lower than their intrinsic value and hasn't 'run out of ideas' for its FCF.
Debt Reduction - Rather straight forward, paying down debts can be a healthy way to 'prepare for a rainy day' and ensure operational flexibility into the future.
How are the securities selected?
Securities are selected for TGGR via several steps: First, quantitative screens narrow the field, eliminating businesses with low sales growth or declining FCF, for instance. Secondly, this short list is fundamentally evaluated for quality: management structure, financial statements, a macro assessment of the industry the company is part of, and the like. Finally, the portfolio is constructed and balanced to manage overall portfolio risk.
The end result is an ETF with 60-80 holdings of high-conviction, quality businesses from around the world, both developed and emerging markets. The portfolio ends up being diversified, professionally managed, and is offered at a low cost, a 0.65% management fee can offer cost savings versus other investment alternatives in the Global Equity category. Finally, I'd be remiss if I didn't also mention that the performance has exceeded the benchmark meaningfully since inception in June 2020, sitting at 6.15% outperformance as of September 30, 2021³.
While we don't know what the future holds, know that an actively managed ETF like TGGR can help position portfolios for multiple outcomes.
Trevor Cummings
Vice President, ETF Distribution
TD Asset Management
¹ Source CETFA: the figure is represented by year-to-date (YTD) flows into ETFs divided by the number of weeks. YTD flows of $39B as of September 30, 2021.
² TD Active Global Equity Growth ETF Performance: 3 months: 2.4%, 6 months: 10.9%, YTD: 16.1%, 1 year: 27.2%, Since inception: 26.0% Inception date: May 26, 2020.
³ Since inception alpha (value add) to September 30, 2021 is 615bps vs the benchmark index (ACWI).
The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.
Commissions, management fees and expenses all may be associated with investments in exchange- traded funds (ETFs). Please read the prospectus and ETF Facts before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. TD ETFs are managed by TD Asset Management Inc., a wholly-owned subsidiary of The Toronto- Dominion Bank.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
Epoch Investment Partners, Inc. ("Epoch") is a wholly-owned subsidiary of The Toronto-Dominion Bank and an affiliate of TD Asset Management Inc. TD Asset Management operates through TD Asset Management Inc. in Canada and through Epoch Investment Partners, Inc. in the United States. Both are wholly-owned subsidiaries of The Toronto-Dominion Bank.
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