As fees are becoming more evident to investors, expect those investors to want to pay less, said Scott Boniferro, product manager for Invesco Canada Ltd. in Toronto.
Boniferro was speaking at an event in the TMX Broadcast Centre in Toronto, regarding shifts in the asset management industry.
Greater fee transparency has been a major theme in the industry thanks to the second phase of the client relationship model (CRM2), which mandates how fees are communicated to clients. Another contributor is the growing number of fee-based advisors.
“Both of these regulatory and structural changes lead to an enhanced spotlight on how much fees are being charged so you’re seeing fees dropping across the industry,” said Boniferro.
These changes are having a major impact to the growth of lower-fee exchange-traded fund (ETF) options, he said.
The quest for positive returns may also change the way investors view their investment product choices. It must be understood that certain lower-risk investment products will not produce the returns they once did. Even if central banks start raising their interest rates, it is unlikely that investors will see the same financial benefits from those products, said Boniferro.
“It’s possible that the days of earning 5% on a money market security or 4% of a [guaranteed investment certificate] are behind us,” he added.
And while equity markets have had a good run, Boniferro wonders how long that will continue.
“It could continue and you never know what the equity market is going to do,” he says. “We would expect at some point that volatility will come back to the market. It’s not likely to be Goldilocks forever.”
This is where smart beta ETFs may have a role to play.
“It’s really the idea of taking the best of both worlds – active management as well as passive indexing,” said Boniferro.
Boniferro spoke to the crowd about two particular types of smart beta ETFs.
Fundamental index ETFs provide an alternative to traditional market cap index ETFs by focusing on a security’s fundamental factors, such as balance sheets and income statements.
It gives you an idea of how large the company is in relation to the whole economy and then weights it appropriately, said Boniferro.
Low volatility ETFs are another option and they contradict common industry wisdom.
“I’m sure you’ve heard of the capital asset pricing model, which basically says, if you want to earn a higher return, you must take on more risk,” said Boniferro. “That might make sense between asset classes but when you look inside the equity asset class, it’s actually completely false if you look back on history.”
Boniferro acknowledged that the management expense ratios for both types of ETFs are typically higher, but in exchange they offer the possibility of better investment performance.