What are we looking for?
Canadian-listed ETFs that historically have exhibited less risk than their peers yet have outperformed them.
The screen
It is nearly impossible to ignore the news around tariffs and a quickly falling equity market. Seasoned investors know, however, that staying the course (as painful as it may be), will result in better long-term outcomes than trying to time the market. That said, if the recent typhoon of news and market movements is proving to be a touch too much for you to comfortably navigate, it may be worth revisiting your investments.
Most portfolios have some mix of stocks and bonds, with the former being a key source of both risk and returns and the latter offering stability and income. However, even within the stock sleeve of a portfolio, investors can “tilt” their choices toward less volatile investment strategies to better align with investor attitudes toward risk.
Today we use Morningstar Direct to screen for stock ETFs that might help an investor achieve lower degrees of risk in the equity sleeve of their portfolio. The screen looks for Canadian-listed ETFS (of which there are now a whopping 1,630, according to Morningstar data), that have
- a Morningstar risk rating of “low,” noting that this rating is calculated using a unique application of utility theory, based on the idea that retail investors would prefer a stable investment returning 8 per cent over a volatile investment returning 12 per cent. In other words, it places emphasis on “downside” volatility. The rating is relative, comparing ETFs and mutual funds’ historic risk characteristics against category peers, and is granted against a fixed distribution, resulting in 10 per cent of funds within a category receiving a “low” risk rating.
- a Morningstar rating for funds, or star rating, of four stars or better. This measures a risk-adjusted return (ensuring that funds that take on a lot of risk are not overly rewarded) against category peers. Though the star ratings are backward-looking, our data show that on aggregate, five-star funds end up outperforming four-star funds, which outperform three-star funds and so on in periods after receiving the rating. Investors should not pick investments solely on this measure, but it does serve as an excellent starting point for further research.
What we found
The 14 ETFs that met the above requirements are listed in the table accompanying this article, inclusive of tickers, ratings, trailing returns, fees and inception dates. It is abundantly important that readers first consider the category to which each fund belongs (purposefully listed first), given that both ratings used are relative to these peer groups. I’ve also indicated whether each fund is actively managed (where a human manager is making investment decisions), passive (where the ETF follows an index) or strategic beta (where the ETF follows a rules-based index but the index has an active style tilt).
This article does not constitute financial advice. Readers are encouraged to conduct their own independent analysis before buying or selling any of the ETFs listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.