Investing in a core exchange-traded fund (ETF) that combines fixed assets is the most passive investment style you can choose. This does not include stock picking or specialized asset classes such as real estate, private equity, or infrastructure.
For further clarity, let’s eliminate the ability to move money between asset classes to avoid crises or take advantage of market opportunities. You can’t expect the returns from such a simple approach to compete favorably with the nation’s largest pension funds, which can afford to pay literally hundreds of millions of dollars a year for active investment management.
To test this, let’s assume you invest $100 in an ETF portfolio starting January 1, 2014 and hold it until December 31, 2022. (The 9-year period was chosen because this is the period in which all of these ETFs have existed.) This portfolio consists of 25% RBC iShares S&P/TSX Capped Composite Index ETF, 25% RBC i 25 percent Shares S&P 500 Index ETF, 20 percent RBC iShares MSCI International Index ETF, and RBC Core Canadian Universe Bond Fund ETF. The fund is rebalanced periodically to maintain a constant asset composition.
Now imagine investing that same $100 into the Ontario Teachers’ Pension Plan (OTPP) fund. OTPP funds have approximately $250 billion in assets (only the CPP fund has more) and a team of 350 investment professionals manage assets in more than 50 countries. In addition to stocks and bonds, the fund invests in alternative asset classes such as real estate, private equity, commodities and infrastructure to boost returns, or at least diversify risk.
The results of this comparison are striking. As the graph shows, the ETF portfolio remained comparable to the funds in which OTPP invested until the end of 2021. And in 2022, it looks like he has OTPP significantly outperforming his ETF, but this should be taken with a grain of salt. Approximately half of OTPP assets are private investments and are therefore not “marked to market.” This means that the current carrying value may not accurately reflect fair market value.
In bad investment years like 2022, such assets appear to outperform because their prices have not been reduced to reflect the amount the investments are actually fetching in the market. Just because. The same phenomenon occurred in 2018, with ETF portfolios catching up to OTPP a year later. (It will be interesting to see what happens when full-year 2023 results are known.)
This exercise is not intended to criticize OTPP. I think the OTPP fund has not performed poorly compared to other jumbo funds since 2014. The OTPP fund was chosen simply because of its size and the fact that calendar year data is readily available. Nor is it intended to highlight his RBC ETF to the exclusion of other products. Competing ETF products on the market would almost certainly have achieved similar returns.
Importantly, investors can get by without paying high investment fees or accessing sophisticated management techniques. It may be enough to use ETFs to choose the right asset mix (which may require advice first) and then stick to that mix through good and bad markets. .
Frédéric Vettese is a former principal actuary at Morneau Shepell. PERC Retirement allowance calculation tool (perc-pro.ca).
