Determined To Begin Investing In 2025? Read On!
For those beginning their investing journey in 2025 in order to reach long-term financial goals, the endless list of investment choices can be overwhelming. It’s impossible to evaluate every investment option, and many young investors find it challenging to even get started. Add in the fear of losing money, and the default often involves giving up for now. This is costly, since what is lost is "time invested", which is one of the key elements that impacts wealth accumulation over the long term.
Given the explosive growth of exchange-traded funds (ETFs) in recent years, highlighting these products is timely and valuable for young investors. What follows is a “Q&A” with Erin Allen, CIM®, Vice-President, On-line Distribution, BMO ETFs. Ms. Allen is the host of the ETF Market Insights broadcast on YouTube which focuses on providing ETF education for investors. This conversation has been edited given space constraints.
Q1. When it comes to reaching long-term financial goals such as adequately funding retirement, what makes asset allocation ETFs such powerful products for new investors to understand and consider?
Ms. Allen: Asset allocation ETFs take the heavy lifting out of investing and remove the barriers many new investors face when starting to put their money to work. With these all-in-one solutions, new investors do not need to think about which ETFs they should buy and how much (or what “weight”) to allocate to each ETF. Instead, they can purchase a well-diversified portfolio of ETFs, gaining exposure to different geographies, sectors and asset classes (fixed income and equity) in one, simple-to-use ETF. Diversification is the “only free lunch” in investing, because it helps reduce volatility over time in your portfolio. This can help new investors stay committed to their plan by creating a smoother ride, with the theory that when some assets in the portfolio zig, others will zag.
There are multiple asset allocation ETFs available, across a range of different risk levels, from conservative, balanced, growth, and even an all-equity ETF for those with a longer time horizon. This means investors can select the ETF that matches their goals, and, they have the flexibility to change their plan over time to become more conservative, for example.
These solutions are professionally managed and rebalanced. As markets move, an investment portfolio needs to be rebalanced to avoid getting off track when it comes to the mix of ETFs in the portfolio. This is often an emotional task for investors, but it is a key to long-term investment success.
Finally, these ETFs don’t break the bank when it comes to fees. The management expense ratio (MER) for BMO’s Asset Allocation ETFs is 0.20%, which includes the cost of the underlying ETFs. We know new investors are fee-sensitive; these solutions are accessible and competitively priced.
Q2. Typically, providers of asset allocation ETFs offer a family of these products with equity weightings falling along a continuum from 40% to 100%. Research shows that “asset allocation” is a prime driver of investment returns. Given this, what should young investors—who have decades and decades of time to accumulate wealth—understand about the investment options that are typically available in a family of asset allocation ETFs?
Ms. Allen: Having a variety of all-in-one ETFs available means that you can pick the portfolio that best suits your unique time horizon and risk tolerance. For young investors saving for a long-term goal like retirement, for example, they can own higher-risk investments in their portfolio by allocating a greater portion of the portfolio to equities. Equities, which can carry a higher risk and tend to be more volatile, are more likely to provide higher returns for investors over the long term. This provides a benefit for younger investors who have a longer runway; if they get started early, they can compound their returns over a longer period. They have the benefit of being able to ride out any shorter-term market volatility, reinvest any distributions, and take advantage of the overall upward trend in the stock market over the long term.
These portfolios are built with a variety of different asset mixes, giving investors flexibility to choose the right portfolio for their unique circumstances.
Q3. Seasoned investors know that the vast majority of actively managed mutual funds don’t beat their respective index benchmarks over the long term. Yet, these actively managed mutual funds attract billions of investor dollars across Canada. Unfortunately, investors pay mightily for this choice, since these actively managed funds routinely charge fees that are far higher than index products such as ETFs. How do asset allocation ETFs compare to typical actively managed mutual funds when considering fees?
Ms. Allen: In a September 2024 Conference Board of Canada “Impact Paper” entitled “Funding the Future: The Economic Impact of Canada’s Investment Funds Industry” , it was noted that mutual fund fees have come down over the past decade. The research quoted was by Investor Economics, which found that the MER for the average asset-weighted mutual fund declined to 1.47% from 2.06% between 2013 and 2023.1
Comparing this with a 0.20% MER on BMO’s Asset Allocation ETFs shows the fee gap is still significant. While there are active managers that do outperform their benchmark indices, it’s important to note that S&P Indices vs. Active (SPIVA®) data consistently shows that this is not the norm. It’s always a good idea for investors to do their due diligence on a portfolio manager and the fund before investing.
Q4. For many young investors, aligning their investments with their values is of great importance. For those with this kind of an investing mindset, can you discuss how “responsible investing ETFs” might be a good fit?
Ms. Allen: Responsible investing is an approach to investing that aims to incorporate environmental, social and governance (ESG) considerations into investment decisions, to help manage risk and generate sustainable long-term returns. Taking ESG considerations into account when building a portfolio can resonate with investors who are looking to align their sustainability preferences with their investments. It can also help build a higher-quality portfolio with the potential to improve risk-adjusted returns. We know that younger generations are putting a higher value on sustainable investments, as they educate themselves on the benefits, become less tolerant of corporate “ESG incidents” and gain a better understanding of the potential financial benefits of the approach.
The BMO MSCI ESG Leaders ETF suite of products targets companies that have the highest ESG rating relative to peers in each sector of the parent index. They also exclude specific companies involved in more controversial business activities such as nuclear weapons, tobacco, and thermal coal mining.
Conclusion
It’s wise to act sooner rather than later in order to increase the chances of reaching long-term financial goals to put time on your side. Remember too, that using asset allocation ETFs is well worth considering given the array of advantages that they offer to investors over the long term.
Fred J. Masters, BBA, BEd, PQP, is the author of Lessons on Mastering Money: The Personal Finance Guide for Canadians in their 20s & 30s. He is the President of Masters Money Management Inc. and has given financial wellness presentations to all demographics in Canada, including university students and alumni. He is a retired professional educator, having taught senior financial accounting for decades. He is also a licensed mortgage agent with Mortgage InGenuity Inc. and can be reached at F.Masters@mastersmoneymanagement.ca. To find out more, visit www.mastersmoneymanagement.ca.
1 https://www.conferenceboard.ca/product/funding-the-future_sep2024/