If you have modest investment return goals of 4%-8% annually, consider structured notes and factor based ETFs; tools designed to achieve your return goals with a higher degree of confidence than mutual funds or index funds.
The iShares S&P/TSX Index Fund (XIU) price has increased approximately 1.66%annualized from April 27, 2006 to April 27, 2016. Including dividends, the compound rate of return is about 4.1%i. That is not spectacular for taking the risk of investing in the stock market, nor will it be sufficient to meet your return objectives and financial goals.
Mutual Funds returns are all over the map, and after fees most do not outperform their benchmark consistently. How can you increase the likelihood of returns in the 6%-9% range, and decrease the likelihood of negative returns, over an investment time horizon of 4-6 years? Even if the stock market is flat, structured notes are designed to do just that.Structured notes are issued by Canadian banks, and sold by prospectus and investor information documents through Canadian brokerage firms like iA Securities.
A structured note is an obligation of the note issuer to pay the investor based on the performance of a reference portfolio. The reference portfolio is typically a stock market index, an exchange traded fund(ETF), or a basket of blue chip stocks.
Bank owned brokerage firms often limit the approval of other banks products. At iA Securities we offer structured notes from all the major Canadian banks. This independence enables us to recommend the notes we feel are most suitable to our clients.
The types of notes described in this section below typically have terms of 5-6 years, and will achieve good outcomes even in relatively flat markets. Please keep in mind every note has different terms, and investor documentation is available for every issue. Most notes have a $5,000 minimum investment.
Of course, you would not want your entire portfolio in structured notes. Two other assets to consider are Factor Based ETFs and Absolute Return Funds.
A factor-based investment strategy has the potential to produce better risk-adjusted returns compared to market benchmarks. Low cost Exchange Traded Funds (ETFs) help keep the fees down. Mutual funds and managed accounts are normally more expensive than factor-based ETF strategies.Momentum and Value are two factors that have historically provided good results on a risk-adjusted basis.
First Asset Morning star Canada Momentum Index ETF reported a management expense ratio of 0.7%.
As a comparison, a popular mutual fund in Canada, “Investors Canadian Growth Class” reported a management expense ratio of 2.8%.
Sources: SUMMARY DOCUMENT (October 29, 2015) First Asset Morningstar Canada Momentum Index ETF Investors Canadian Growth Fund -Series A I.G. Investment Management, Ltd. Fund Facts June 30, 2015
Absolute Return Funds typically have investment goals of 5%-7% over a medium term time horizon, even in sideways or negative markets. Absolute return funds typically have investment minimums of $25,000.
Goals: Create clear, appropriate investment goals.Balance: Develop a suitable asset allocation using structured notes, broadly diversified ETFs and perhaps some mutual funds. Avoid the risk of individual stocks selected by yourself or a portfolio manager.
Cost: Markets are unpredictable. Costs like mutual fund fees and taxes are forever. The lower your costs, the greater your share of an investment's return.
Discipline: Discipline and perspective can help you remain committed to along-term investment program through periods of market uncertainty.
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