ETF providers have pushed out new products at a fast pace over the last few years, with over 1300 tickers in Canada alone (Source: Morningstar Mar 2023), as new providers look to enter the market and as existing providers look to add new options. Sometimes we need to remind ourselves, at the core of this success lies the broad market equity exposures that represent easy to trade, low cost to hold, and known tickers that investors are comfortable with holding for the long term. Core equity ETFs cover Canada, U.S., International, and Emerging Markets exposures.
When ETFs first gained acceptance in the marketplace, it was on the back of these broad market ETFs, giving investors an easy-to-use product with instant diversification in a single ticket, offered at a very effective price. This hasn’t gone away, there’s just a lot of other stories out there waiting to be told. We need to revisit the core from time to time. The benefits are well understood, but what about performance?
Broad market ETFs are positioned as passive exposures and building blocks, with active managers entering the space, and factor-based alternatives also deserving of attention, performance is a valid question. While core equity ETFs provide the benefit of delivering the return of markets, fully participating in market appreciation, have they kept up with the competition?
With BMO ETFs first entering the market in 2009, we have several ETFs with over ten years of performance history, demonstrating that these ETFs deliver returns for investors.
|As of Feb 28 2023||Ticker||1 Year Annualized Performance||3 Year Annualized Performance||5 Year Annualized Performance||10 Year Annualized Performance|
|BMO S&P/TSX Capped Composite Index ETF||ZCN||-1.24%||10.82%||8.82%||7.83%|
|BMO S&P 500 ETF (CAD)||ZSP||-0.95%||12.40%||10.79%||14.96%|
|BMO MSCI EAFE ETF||ZEA||4.02%||6.86%||3.93%|
|BMO MSCI Emerging Markets ETF||ZEM||-8.99%||1.41%||-0.55%||4.01%|
Source: Morningstar, February 28, 2023
We can then look at peer group percentiles to show that these ETFs also show well against competitors.
|As of Feb 28 2023||Ticker||1 Year Percentile||3 Year Percentile||5 Year Percentile||10 Year Percentile|
|BMO S&P/TSX Capped Composite Index ETF||ZCN||61%||37%||18%||34%|
|BMO S&P 500 ETF (CAD)||ZSP||34%||15%||12%||13%|
|BMO MSCI EAFE ETF||ZEA||29%||41%||39%|
|BMO MSCI Emerging Markets ETF||ZEM||52%||48%||41%||27%|
Source: Morningstar, February 28, 2023
An interesting observation to make is that in the U.S., known as the most efficient market, ZSP ranks within the first quartile on time periods of three years or longer, showing how difficult it is to beat the market consistently over time. In other markets that are less efficient than the U.S., these core ETFs all still rank within the first two quartiles on periods of three years or longer.
Overall, the easy-to-use low cost core ETFs make sense to use as diversifying portfolio building blocks, and as we look at longer term performance, they have the track record to support performance comparisons as well. Sometimes the most obvious choice is the right one.
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