SPEAKER: Welcome to TDAM Talks, a TD Asset Management podcast. Join us for insights and analysis on current themes and capital markets from our thought leaders. From market insights to investment strategies, we'll help you navigate the complex landscape of investing.
CHIARA CAROZZI: Hello, and welcome to TDAM Talks ETFs, a podcast where we dive deep into the world of Exchange-Traded Fund market in Canada. We'll share the latest trends insightful analysis, and uncover strategies that will help you navigate the complex landscape of ETF investing. My name is Chiara Carozzi. I am the ETF business development manager here at TD Asset Management.
I'm really excited today as we have an interesting topic of conversation. We're going to talk to you about asset allocation ETFs. What are they? Why do they matter? And how to use them. On the podcast today, we are pleased to have Dave Roode, Vice President and Director of ETF Product and Strategy, here at TD Asset Management. Jonathan Needham, Vice President and Director of ETF Distribution, will also be joining us today. Welcome to the studio.
DAVE ROODE: Thank you.
JONATHAN NEEDHAM: Thank you. Happy to be here.
CHIARA CAROZZI: So, the ETF landscape in Canada is constantly evolving, with several new launches on a weekly basis and year-over-year growth in total AUM-- assets under management. Before we begin unraveling the intricacies of asset allocation ETFs entail, Dave, what can you tell me about the ETF industry in Canada?
DAVE ROODE: Well, Thanks, Chiara. It's great to be here and have the opportunity to discuss ETFs with you, John, and our listeners. And I always appreciate the opportunity to talk about ETFs because they are one of the few areas in the investment funds industry that's attracting attention and seeing lots of innovation. But to answer your question and provide a little bit of background to our discussion, there's currently about 1,400 ETFs listed in Canada, and that's across 40 different issuers. Although the assets are still fairly concentrated among the top three issuers.
So in Canada, those 1,400 ETFs have a market value of approximately $345 billion, and that's across many different asset classes, including your traditional equity fixed income but also some new areas such as Bitcoin or carbon credits, and more recently, liquid alternatives. So it's really an evolving space. And while that number of ETFs has proliferated quite significantly over the last number of years, so too have the number of users and the uses that they're using within their portfolios.
Initially, ETF users use them as core building blocks within their portfolios. But now, given the vast array of strategies that we're seeing, they're being used in much more different ways, certainly still as core building blocks, but investors can use them tactically too to add different sectors or strategies to their portfolio. So things like adding a technology sector or a health sector to their portfolio. And those are things that they just didn't have access to previously.
And the breadth of users has really expanded as well. You've got your traditional DIY investor, that Do It Yourself investor who uses a discount brokerage. You've also got the traditional investment advisors. But we're also seeing lots of institutions, such as pension plans or family offices, really dip into the ETF market to a much greater extent. And so, given the breadth of ETF offerings and the innovation that we've seen in the industry, it's really no wonder that investors are willing to dive into ETFs and use them to a much greater extent.
CHIARA CAROZZI: Great. Thank you for that. So Dave told us a little bit about the ETF market in Canada. Why do ETFs continue to be such a popular investment vehicles for Canadians? Can we maybe touch upon some of the benefits and the risks of investing in ETFs?
JONATHAN NEEDHAM: Yeah, sure. Thanks, Chiara. I mean, I'm a little biased. I'm wearing my "I love ETFs" pin, as I tend to do on most days. So from a Canadian investor perspective, there's a lot of benefits to Exchange-Traded Funds. I mean, first and foremost, instant diversification. In a single ticket, you're getting a basket of securities or a basket of bonds, and so instant diversification. You're getting it extremely cost-effectively.
You have ample flexibility because you can trade these intraday. And of course, more importantly, you have full transparency, so you know exactly what you own and why you own it because ETFs published their basket of holdings on a daily basis. And so ETFs continue to grow in popularity for a number of those reasons, diversification, costs, liquidity, so on and so forth.
But they also continue to gather the wallets and the hearts of Canadian investors because they provide them a ton of flexibility. And I think Dave mentioned a little bit about how they can be the core building blocks of a portfolio, and they are certainly the anchor of a portfolio. But today, you also have the ability to express your views very quickly through the exchange-traded fund vehicle. And I think that's going to continue to evolve and give Canadians more choice in developing better outcomes for their investment portfolios.
CHIARA CAROZZI: Great. So we've seen a fast growth in asset allocation ETFs as an asset class in the Canadian ETF landscape with year-to-date inflows of 2.4 billion, which makes up 8.7% of the total year-to-date inflows of all Canadian ETFs and currently holds 18.9 billion total assets under management. Despite market conditions and recession fears, these ETFs have outgrown average Canadian ETFs and have attracted significant traction from the do-it-yourself investors. So what is asset allocation, and why is it important?
JONATHAN NEEDHAM: Yeah, happy to talk about that. I think I've written and talked quite a bit in the past about the importance of a balanced diet otherwise, you know you're going to suffer from indigestion along the way. So we all grew up being told you need to eat your meat and have your vegetables and make sure you're having fruit and not too much dessert. And so the same holds true in investing. You want to make sure you have the right portion of cash, bonds, and equities in your portfolio. Otherwise, you might suffer from indigestion along the way.
And so, the power of asset allocation is key. About 90% of the variability of returns is driven by one's asset mix. And so getting that asset mix right, what's the right proportion of cash, bonds, and equities based on your risk tolerance time horizon and objective is extremely important and really the most important aspect of determining how you're going to build your portfolio and grow your wealth. And so asset allocation ETFs give you access to a balanced diet at an extremely low cost in a single ticket, and it's one of the main reasons why these have grown in popularity. And I think will continue to do so.
CHIARA CAROZZI: Can you tell me a bit about multi-asset strategies in ETFs?
JONATHAN NEEDHAM: Yeah, certainly. I mean, as I mentioned, whether it's the right amount of-- right proportion of food within your diet, it's the right proportion of cash, bonds, and equities in your portfolio. And so at TD Asset Management, we offer three highly competitive, from a price perspective, ETFs in the asset allocation category, TGRO, TBAL, and TCON, which essentially give an investor in one ticket that balanced diet at an exceptionally low cost. And so that's really important to help clients stay on track, to build their wealth, and not deviate when markets do what markets can tend to do from time to time, and that's misbehave.
CHIARA CAROZZI: So I know we recently made some changes to our asset allocation ETFs here at TDAM. Can you describe what those changes were and why we made those changes in the first place?
DAVE ROODE: Yeah, certainly. We actually launched our ETF portfolios and asset allocation funds back in August of 2020. So it's been about three years since we launched those funds initially under the moniker of the one-click funds, which was really a reference to how easy it was to get that instant diversification that Jon was talking about. So initially, we created three different funds with different risk profiles. The first one being a conservative profile that used mostly fixed income, small amount, 30% of equity.
We also had a moderate risk profile that incorporated a more balanced approach, so a 60/40 split between equity and fixed income. And then lastly, an aggressive portfolio, which was about 90% equity and about 10% fixed income. So each of these ETFs and funds used TD ETFs to construct a very well-diversified portfolio that provided access to many different markets using a variety of different strategies.
At the time, we included a mix of both passive and active ETFs within the portfolios, with about a 25% allocation to active ETFs. But over the years and getting some feedback from clients and from an investment advisors, we determined that the structure really wasn't resonating with our target market. So we made the decision to simplify the portfolios, focus on a much smaller number of core building blocks in terms of ETFs, and really decided to eliminate those active components. So we reduced the number of ETFs in the portfolios down to four.
And because we used our low-cost ETF, our passive index ETFs, as the building blocks for the portfolios, we were able to reduce the management fees down to 15 basis points from 25 basis points. So that really positioned us as being, if not the lowest cost provider in the market, certainly one of the lowest cost providers in the market. So certainly a big step in our mind in terms of repositioning the funds.
We kept the investment objectives, and the investment strategies, and the benchmarks the same for all three funds. So clients can achieve the same risk exposure that they had before but just in a simpler and cheaper package. And really, to make sure that we informed our clients and let them know about all these changes and reflect the new nature of these funds, we renamed the funds, and at the same time, change the ticker symbol for the funds.
So our one-click conservative portfolio became the TD conservative ETF portfolio with an asset mix of 30% equity, 70% fixed income. So that's our conservative approach, and the ticker symbol is TCON, so T-C-O-N. Our one-click moderate portfolio became the TD balanced, and that was the portfolio with the 60/40 equity fixed income split, so a ticker symbol of TBAL to reflect that balanced approach.
And then lastly, the one-click aggressive ETF portfolio became TD Growth ETF portfolio, so TGRO, again, to reflect that growth aspect of in the name with 90% equity and a 10% fixed income allocation. Again, instead of referring to them as the one-click funds, which was our original way of referring to them, we just simply call them the ETF portfolios.
Now, from a management perspective, we did switch that a little bit. Previously, we had our asset allocation team who would make the investment decisions on which ETFs to put in the portfolios, which ones to add, which ones to delete, and what allocation within the boundaries. And by eliminating the asset, the active funds-- excuse me-- and the funds, we also eliminated that decision-making and just try and follow the benchmarks that we set up initially.
So technically, there's still a portfolio manager involved in the process, but what they do is they adjust the portfolios on a quarterly basis to adjust for drifts. So as the market values change and, say, it goes from a 90/10 split to, say, a 92/8 in terms of market value changes, they'll bring it back to that 90/10 split on a quarterly basis. And that really helps reduce the costs of managing the overall portfolios.
And you know, what's great about using those low-cost index passive funds in the composition is that we still get incredibly well-diversified exposure within the portfolios. We've got exposure of about 2,500 different names in those portfolios, and you still get exposure to broad equity markets in terms of Canada, the US, international markets, and a Canadian Bond allocation, so really well-diversified exposure.
And the response has been very positive so far. We've had very good feedback, many clients commenting that the new structure that we've implemented really helps them get their broad market exposure that they're looking for, all in one package, and at a low cost. And we think we've of hit the sweet spot in terms of trying to match what the client's expectations are.
CHIARA CAROZZI: It's great to see that we have one of the lowest fees in asset allocation space, really listening to our investors. Jon, can you explain how someone might use these funds in their own portfolios?
JONATHAN NEEDHAM: Yeah, certainly. I mean, before I do that, I think I want to thank Dave for making these changes to these products because I think we're serving our Canadian investors extremely well. And I'll start by saying, I mean, first, simplicity is powerful, and that's what these products offer. Costs matter. The less we charge, the more you get to keep in your pocket as an investor, and we actually are now the lowest cost provider in this space in the Canadian marketplace.
And I think we mentioned that capturing market returns is extremely hard to do, and this is what you do with these solutions. You're capturing index returns, market returns. And the average investor does not get market returns because of bad behaviors. They tend to underperform the broad market. And so, capturing market returns is actually powerful and great outcome for most Canadian investors.
And when I say investors, even the smartest minds in the world have a difficult time outperforming the market. And so these products allow you to capture the market. Like Dave mentioned, 2,500 names in a single ticket and extremely low cost, so that's extremely powerful. And so that leads me to kind of where do they work within a client's portfolio. I mean, they work everywhere.
First and foremost, if you're an ultra-high-net-worth investor, this is a core component of your portfolio. This could be 80% of your portfolio. And then you might add some real assets and some alternatives and some liquid alts, some private debt, private equity, so on and so forth if you have guidance to do so and you have the risk tolerance to do so.
And, of course, I see my clients all the time, and I work with advisors and have done so for 25-plus years. They use these solutions, and they're smaller accounts, tax-free savings accounts, RRSPs, smaller RRSPs until they get built to size and complexity, where they can then add on the margin to either reduce risk or add potential for outperformance. And so the power of these solutions for any client at any stage in life, from our perspective, is certainly why Canadians continue to use these and why they've amassed a significant amount of assets.
And I think that's a good thing. And I'm hopeful that more and more Canadians will add these to their portfolios because I know whether it's my investment advisor or whether it's my mom and dad or my kids RRSP where they hold TGRO TBAL and TCON in certain proportions, depending on where we are in the market cycle-- yes, I do make calls from time to time-- I know that I'll never have to apologize to those clients for Investing in these solutions because they're going to give them market returns. They're going to rebalance to their set mix.
And so they take a lot of the complexity around investing away. And that allows the client, whether it's the advisor or the institution or an investor, to focus on what really matters. Are they reaching their goals? Are they getting the rate of return that they need and require to reach those goals? Which could be saving for a home, can be saving for retirement, can be saving for education, can be saving for a nice car or a trip down the road, so on and so forth.
And so the power of these asset allocation ETFs, whether it's TCON, TBAL, or TGRO, is that they can fit into any type of account as a core solution for Canadian investors.
CHIARA CAROZZI: For all of you listening, we thank you for tuning in and considering TD ETFs for your hard-earned savings and investment accounts. We at TDAM are fiduciaries and have the best interest of Canadians in mind. We manage money for Canadians, by Canadians, with the lens of a Canadian investor. Not all ETFs are created equal, and we put a lot of thought and diligence into bringing market solutions for all investor types.
Thank you, Dave, and Thank you, Jon, for taking the time today to talk about asset allocation ETFs.
DAVE ROODE: Thank you.
JONATHAN NEEDHAM: Thanks so much.
CHIARA CAROZZI: For more information on TD ETFs, please visit td.com/etfs and follow us on X @TDAM_Canada or on LinkedIn at TD Asset Management to stay up to date on all ETFs related to podcasts and more. Lastly, your feedback is incredibly important to us. If you have any questions about the content shared today or would like to share your thoughts, please reach out to us at td.tdamtalks@td.com. Thank you for joining, and have a great day.
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