The most passive approach to investing in core ETFs with a fixed asset mix is to invest in core ETFs with a fixed asset mix. It doesn't involve stock-picking or special asset classes like real estate, private equity or infrastructure.
To make it even more plain vanilla, let's abolish the ability to shift money between asset classes to avoid a crisis or to take advantage of an opportunity in the market. One would not expect the returns from such a simple approach to compete favourably with the nation's largest pension funds that can afford to pay literally hundreds of millions of dollars a year for active investment management.
To test this, assumptions can be made that I invest $100 in an ETF portfolio starting Jan. 1, 2014, and hold it until Dec. 31, 2022. This portfolio includes 25 percent in the iShares S&P/TSX Capped Composite Index ETF, 25 percent in the iShares S&P 500 Index ETF, 20 percent in the iShares MSCI International Index ETF and 30 percent in the iShares Core Canadian Universe Bond Fund ETF. The fund is rebalanced regularly to maintain a consistent asset mix.
If you invest the same $100 in an Ontario Teachers' Pension Plan fund, you will be able to invest in the same $800, resulting in a net income of $600,000. With a team of 350 investment professionals who manage assets in more than 50 countries, the OTPP fund has about $250-billion in assets. In addition to stocks and bonds, the fund also invests in alternate asset classes like real estate, private equity, commodities, and infrastructure to enhance returns or at least diversify away from risk.
The comparison is an eye-opener. The ETF's portfolio remained consistent with the OTPP-invested fund until 2021, according to the chart. While the OTPP has a good chance of outperforming ETFs by a large margin in 2022, this needs to be taken with a grain of salt. Of the OTPP assets, about half are privately invested and therefore are not'marked-to-market'. At any given moment, the value of their book may not accurately reflect fair market value.
In bad investment years like 2022, such assets will appear to outperform simply because prices have not been marked down to reflect what the investments would actually fetch in the market. In 2018, the ETF portfolio caught up with the OTPP a year later.
This exercise is not meant to pick on the OTPP, which I suspect performed no worse than other jumbo funds since 2014. The OTPP fund was selected solely for its size and that calendar-year data was easily available. Nor is it intended to highlight RBC iShares ETFs to the exclusion of other products, as competing ETF products would almost certainly have achieved similar returns.
The result is that investors can do a lot without paying high investment fees and without having access to sophisticated management techniques. To maintain that mix in good markets and bad may be necessary to choose a suitable asset mix using ETFs.
Frederick Vettese is the former chief actuary of Morneau Shepell and creator of the PERC retirement calculator.