More Money Podcast - 289 What You Should Know About Investing in ETFs with Alfred Lee, Director, Portfolio Manager, and Investment Strategist at BMO ETFs

Episode Date: July 1, 2021

Like I mentioned in my last More Money episode (ep. 288), today I’m sharing another bonus episode and we’re talking all about ETFs. I’m joined by Alfred Lee, who is the Director, Portfolio Manager, and Investment Strategist at BMO ETFs. I love any chance I can get to talk about investing and was super excited to go in-depth about ETFs (one of my personal favourite investment products). Alfred is a senior portfolio manager with BMO ETFs and has been a part of their ETF business since its inception over 10 years ago. He currently manages their index-based equities ETFs but also previously managed their fixed income ETF lineup. He also serves as the investment strategist for BMO ETFs and is involved with product design. There is so much to cover with ETFs, including all the different types of index funds, taxation, and the major differences between them and mutual funds. Alfred helps answer all these questions and more in today’s episode. If you want to go even more in-depth when it comes to ETFs, then be sure to check out BMO ETFs' Views for the Desk podcast, which releases new episodes weekly. For full episode show notes visit https://jessicamoorhouse.com/289 Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello, hello, hello, and welcome back to the More Money Podcast. This is episode 289, and I'm your host, Jessica Morehouse. Welcome back to the show. I just want to mention something because my sister is listening to this because, as I mentioned, she now works for me, and one of the roles she does is to kind of do quality control of these episodes and listening to it before it goes live, and she just mentioned to me, do you know that you always say hello, hello, hello, right at the beginning of your episodes? I'm like, yeah, that is like my shtick. Like I've been literally doing that for years. And she thought I was just being weird and like just saying hello three times. But if you're a longtime listener, you

know, I've literally been doing that opening for gosh, I don't know, almost as long as this podcast. And it just happened naturally. It wasn't something that I planned. I just started doing it and I have no idea. And now it's a thing. Now it's a thing. So Sarah, yeah. Hello, hello, hello. Okay. Anyways, so excited to have this bonus episode for you because who doesn't love a bonus episode, especially when it's on one of my favorite topics, investing, but specifically, we're going to dive deep into the world of ETFs, exchange traded funds. And of course, I have the perfect guest for this episode. I have Alfred Lee, he's the director, portfolio manager and investment strategist at BMO ETF. So he is, you know, coming from the inside world of ETFs. So he really does know really everything there is to know. So he is, you know, coming from the inside world of ETFs. So he really does know really

everything there is to know. And he also comes from background of mutual funds, which we talked about in this episode. So he has a very interesting perspective of both, you know, very popular investment products. So you're gonna love this episode. Like I mentioned, kind of closer to the end of this episode. There's so many great resources specifically on exchange traded funds at BMO ETFs website. You can go to bmo.com slash ETFs or go to bmoetfs.com. Also, I recently wrote a blog post about some of BMO's latest ESG ETFs. So if you're interested in more in sustainable, responsible investing, they have a lineup of ESG ETFs. I also did a YouTube video on some of their innovation ETFs and what the heck those are and I explained all the things. So I'm going to link

those in the show notes for this episode, jessicamorehouse.com slash 289. But just letting you know, there's a lot to know about ETFs. I'm talking a lot about it on my channels, and we're going to talk more about it in this episode. So before I get to that interview with Alfred, let's share a little bit about who Alfred is. So like I mentioned, Alfred is a senior portfolio manager with BMO ETFs. He's been there for over 10 years, and he joined near the inception of their ETF business. He currently manages their index based equity ETFs, but also previously managed their fixed income ETF lineup. He also serves as the investment strategist for BMO ETFs and is involved with product design. And to the part of

Alfred's job that he really enjoys is speaking with various client types on the benefits of ETFs and how they can be used in their investment portfolios. And prior to joining BMO ETFs, he led the ETF research desk at a major Canadian brokerage. And not only that, sometimes you can also hear him on a very specific ETF podcast that you may not know about, but you should definitely check out. It is BMO ETFs podcast called Views from the Desk. It is on, you know, wherever you listen to this podcast, you can find it. But some very specific topics that they take on. Wow, they have a lot of episodes, just like another website. Oh my gosh, they really go. They go in there. So you know,

there's an episode on factor investing in volatile equity markets, becoming the smart money and ETF flows. Wow, this is if you're into this episode, you're going to want to dive into this podcast after because they get, they really get into some very specific things when it comes to ETFs. So very cool. Anyways, with that said, let's get to that interview with Alfred because we've got a lot of ground to cover. Welcome to the More Money Podcast. Alfred, I'm so excited to have you on the show to talk about all things ETFs. Welcome. Thanks, Jessica. I'm really looking forward to this. Me too, because I love ETFs. They are just a magical investment product that I talk about all the time on the podcast. So if people who've been listening to the show for a while, they are

fully aware of my love of ETFs. And people who are just joining the show are probably asking me, and I get this question all the time, what the hell is an ETF? Or lots of people are like, what's an EFT? Mixing up the letters, which is totally fine. So we're going to dive deep into the world of exchange traded funds in this episode. So excited. And you are such an expert when it comes to ETFs because you are the director at BMO ETFs. I would love to kind of know how did that happen? How did you, you know, you know, how was what was your kind of career path to get to this point? Were you always interested in investing? Sure. So, you know, I could start at the very beginning, I've been involved in the investment

industry for 20 years. And it's hard to believe it's really been that long. But I guess, you know, time flies when you're having fun. But I graduated university. When I was in university, I felt at least from my own point of view that I was good at statistics. I was good at finite math and calculating probabilities. So I always figured that finance would be a good landing spot for me. I majored in economics as well. So I was always just interested in terms of, you know, how the broader economy affected the stock markets and other asset classes in general. So after graduating university, I spent, you know, two years in very entry level roles where I spent time in the back office, a lot of operational roles, you know, spending time

in the custody side of the business for about two years of my career. And where I really got a break in the investment or moving into the investment side of the business for about two years of my career. And where I really got a break in the investment or moving into the investment side of the industry is a large custody part of a major bank was they were hiring an individual to work with their investment consulting team. So with this team, they serviced a lot of the custodies, a lot of the larger accounts that they had in custody. So it happened to be pensions, foundations and endowments. They serviced a lot of the custodies, a lot of the larger accounts that they had in custody. So it happened to be, you know, pensions, foundations and endowments. So this was a huge advantage for me because it really gave me an idea of how institutional investors put together their portfolios.

So we spent about three to four years there, moved on to another bank, a bank brokerage. So I was tasked with heading up their mutual fund research initiatives. This was in 2005, 2006. And this was really at the peak of the mutual fund industry. After spending about a year, maybe two years in that role,

I kind of thought to myself, it didn't really make sense that the entire industry was built around these star managers. And when you read up about financial literature, they always say that, you know, it's very hard to outperform the index or the market. So it really didn't make sense to me that, you know, they're, you know, the entire industry was built up around these individuals. At this time, ETFs or the ETF industry really started taking off. So at the time, there was about two to three different

ETF providers in Canada. The entire industry at that time was about 20 million. So just to give you an idea, I mean, the ETF industry in Canada right now is about 275 billion. That just is reflective of, you know, all the people just kind of moving towards ETFs, you know, over the last 10 to 15 years. So I spent about three to four years in that role. And then at the time, I heard that, you know, BMO was getting into the ETF business. I never thought that I'd move to another bank. But you know, here we are. But it's been a fantastic move. I mean, when I moved over, it was essentially a startup backed by a bank. So I remember my first day on the job, you know, typically you have your computer set up for you. I asked my boss, I was like, you know, where's my computer? He pointed at a box and he goes,

go ahead and set it up. Oh my God. But it was very unique. I mean, you know, there's five or six of us in one little room. It was like, you know, a little bit bigger than a broom closet. What I noticed was that, you know, the five or six of us were very passionate about ETFs and we had to do everything, everything from portfolio management to the marketing, What I noticed was that the five or six of us were very passionate about ETFs. And we had to do everything, everything from portfolio management to marketing, business development, training up our sales staff. Eleven years later, here we are. We're the fastest growing ETF provider in Canada for the last 11 years. Now we have about 12 investment professionals, I think 20 people in distribution, five people in product.

So it's been quite the ride. But the crazy part is, I started this discussion by saying that I thought it was good at statistics, but I don't think that's really necessary to be good at investing and to take charge of your own financial plan. I think there's a lot of resources out there. I think it's very good that there's people like you out there that are, you know, looking out for individual investors and just educating them and giving them a good background to do their financial planning. Yeah, one of the things I think that individual investors, especially when you're just getting started is, number one, there's just so much information. Number two, how you get that information is either, you know, online, so you're doing all this self research, which is really, you know, time consuming. And also you're like, which information should I

actually is credible and not credible, or you're talking to someone who is selling products, so they have a specific bias. So there's just a lot going on right at the get go. And I think that can be really intimidating and scary. But also, I think there's also this idea that in order to actually build your wealth to make some good money, you need to buy individual stocks and do all this crazy research. Because we always hear of the people, oh, I bought this stock when it just IPO'd and now I'm a millionaire. And you're like, oh my gosh, do I have to do all this research every day?

And one of the things that I love when I discovered, you know, specifically passive investing using index ETS was, oh, I don't have to be, you know, just consumed with, you know, reading all these reports and looking at financial news every single day in order to to build my wealth so I can retire one day because I don't want to do that. That is not something that excites me. I love personal finance. I don't like doing research on stocks. Like I don't care. Quite honestly, I'd much rather just invest in something that gives me, you know, great diversification, broad exposure, and then I can go on with my life, which is kind of why I like talking about, you know, this type of investing. So I'm so fascinated, though, that you came from the kind of mutual fund side of things and into the ets and

what you kind of shared was like that's exactly what i think a lot of people that learn more about etfs or the you know different way of investing is why are we always pushed towards mutual funds when there's actually in my view etfs are just a better product there's more flexibility um you know there's more variety and there's more transparency i think a lot of people that invest mutual funds are like i don't actually know what I'm investing. I just know what the top 10 holdings are. And so it's so fascinating that you have that kind of perspective have as I guess, you know, since you've been in the ETF industry specifically for over a decade, what are some things that you've kind of learned along the way about ETFs and just like what they could provide

for individual investors? I think, you know, you've mentioned a lot of the key points with ETFs. I think, you know, they're very similar to mutual funds in many ways. I mean, when you look at it in Canada, they're actually registered as mutual funds as well. But there's many differences.

I mean, you know, aside from, you know, similar to mutual fund, it's pooling capital from individual investors and going out, you know, the manager behind the ETF for the mutual fund will go out and buy securities on behalf of the investors. But I think some of the advantages that the ETFs is that, you know, you kind of mentioned it before where it's really the cost, right? So when you look at mutual funds, a lot of them, you know, offer a management fee of 2% or higher in many cases. But when you look at an ETF, the main advantage is that, you know, it's really inexpensive. I mean, you could find ETFs that have the management fee of five basis points, for example. So for those that don't know what a basis point is, it's one one hundredth of a percent. So five basis points is 0.05 percent. So it doesn't sound like a lot, but over the over a long haul, I think that could compound to quite the difference over time. And, you know, I think, you know, we you kind of mentioned it as well. I mean, when you look at active managers,

when you look at the studies only, you know, on a year by year basis, only a handful of active managers, less than half could beat the market over the long haul. And when you look at it over five to 10 years, it's a very small amount, right? So, you know, the thesis behind ETFs is that if you can't beat the market, you may as well just match the market and just minimize your cost. So I think those are some of the advantages. One thing I will bring up as well is you mentioned transparency. Transparency is, I think, something that's very overlooked. I think, you know, 2008, I remember when I was a mutual fund analyst at the time, all these mutual fund companies were just really scrambling and trying to figure out how much exposure did they have to, you know, U.S. banks?

How much exposure did they have to the U.S. autos, which were the companies being bailed out at the time. With an ETF, you know, you know, exactly every single holding in the in the portfolio on a daily basis. So that transparency is a key to a lot of investors, I think. Absolutely. I mean, that is just like, such a common thing I hear is like, I don't actually know what I'm investing. Like, that's like the first thing when I, you know, talk to someone new. I'm like, what are you investing in? They're like, I don't know, mutual funds. I'm like, well, what's in there? They're like, I still don't know. It's so refreshing that you can look up any ETF, go on the provider's website, and look at every single company that is in there. That's quite nice. Because then also, too, you know, since we're now in this time where people are being more aware of like my values with my investments and like ESG

investments, you also want to know what are some of the companies in there. And I don't want to invest in this particular ETF if it's going to be in, you know, certain sectors or certain companies. Whereas again, with a mutual fund, not as easy to find all that information. For sure. So since you again, came from that mutual fund background, now an ETF, I think something that is never really discussed, but I think would be of interest to listeners is what, you know, you kind of mentioned the mutual funds and ETFs are very similar in that they, you know, pool money by investors.

What kind of structurally is the big difference between a mutual fund and an exchange traded fund? You know, as I mentioned, structurally, they're the same. So they're regulated in the same way. But, you know, the main difference is, is that, you know, traditionally, I would say ETFs are viewed as passive investment vehicles, meaning that, you know, when we manage an ETF, what we're trying to do is match the index that we're tracking. So we're not going out there and making individual stock picks to kind of outperform the market. Whereas, you know, most mutual funds are actively managed. So it's built around, you know, as I mentioned before, a star manager and their ability to beat the market. But as we know, you know, over time and as studies suggest, only market. But as we know, over time, and as studies suggest,

only a handful of active managers could beat the market. And it's very tough. I mean, even as professionals looking at the market every day, it's very, very tough to beat the market consistently. I think there's active managers out there that can add value, especially not necessarily beating the market, but, you know, on a risk adjusted perspective, maybe adding value in some way. But by and large, I think it's, you know, it's passive that usually outperforms. Studies have shown that. So that's

the main structural difference. And, you know, I'd say the other difference is that mutual funds really rely on, you know, individual stock picking in order to beat the index where ETFs kind of look at investing more holistically, where I view them as more of like access vehicles. So you can use an ETF to access, you know, gold, you could access, you know, all these different areas in the market, Bitcoin now even. So it's kind of more just taking different asset classes, combining them together, rather than just relying on one market and, you know, relying on stock picking to beat the market. So, you know, from my early days in institutional investing, the way they put together portfolios

was kind of more holistically like this. So I think ETFs have really leveled the playing field between, you know, individual investors and institutions. Yeah, absolutely. Now, I'm sure people are going to think, well, you know, there's index ETFs, but there's also so many other types of ETFs that have popped up since they first were born. And also, fun fact, everybody, the first ETF was born in Canada, which I'm always very proud of. But, you know, so we've got, you know, some different types of ETFs that exist now. There's like you kind of mentioned that you can get a Bitcoin ETF now, which is pretty cool in Canada. But there's like there's active ETFs,

there's covered call, there's synthetic. Do you want to kind of talk specifically about what are some other ETFs out there? Because I think some people don't realize that they're not all created equally. If you go out and buy an ETF, that doesn don't realize that they're not all created equally. If you go out and buy an ETF, that doesn't necessarily mean that you're going to be investing in like a broad market index. Not all of them are the same. Yeah. So, you know, I think there's been a lot of innovation in the ETF industry, especially over the last 10 to 15 years. I think, you know, when I started in the industry, it was always, you know, ETF, that term was always synonymous with, you know, passive investing. And mutual funds was more

kind of always synonymous with active investing. Those lines, I would say, have kind of blurred over the last 10 years where, you know, ETFs and mutual funds is really just a difference in the delivery mechanism. You can have ETFs that are, you know, plain vanilla passive products now, actively managed ETFs, which we have seen more and more being launched over the last five years. But then you have everything in between as well. You have, you know, my favorite innovation in the ETF industry has been factor-based investing. So that's taking the equity market and looking at stocks that have a certain attribute or a certain characteristic. So just tilting your portfolio or that ETF towards stocks that exhibit those characteristics. So for example, you can have an ETF that is tilted

towards dividends. You can have an ETF that's tilted towards low vol, which has been very popular over the last 10 years. So that's less risky than the market. There's quality investing, which focuses on blue chips. There's value, which focuses on stocks that trade cheaper than the market. So I think that the overall kind of view here is that I think a lot of people realize that even though passive investing worked for a lot of people, when you look at investing, it may not be a one size fits all strategy. Some people want more income, some people want to be less risky. So these factor based investing allowed investors to really gear, you know, their their ETF towards their investment style. No, absolutely. It's and that's the thing, although I talk a lot about, you know, index investing, it's like, when it comes to investing,

just like personal finances, personal investing is there's no such thing as one size fits all, you really got to take a look at what your particular needs are. I mean, that really even goes into if you want to be a passive investor, your portfolio still may look very different than someone else's portfolio. And that is totally fine. I get so many questions about taxes. So I hope you're ready for this. But I don't know why there's so much interest or just maybe confusion really about taxation. But I just get this question all the time. And this is, you know, quite similar to I'd say a mutual fund. But again, I think there's just not a lot of information about this or it's just not talked about enough. But obviously, taxes happen. If you're investing,

you're going to have some growth with your portfolio. You're going to earn interest or dividends or capital gains. They all have tax unless we're talking about putting those into a tax-efficient account or a registered account. That being said, inside an ETF, how does taxation work? How is that growth taxed within that fund? Because I think a lot of people are like, I didn't get a tax bill for that, you know, portfolio I'm holding. So, you know, what's going on? You know, the easiest way to look at this is, you know, the way I see it is that an ETF is essentially, you know, it's a flow through vehicle, right? So if you look at an ETF that holds bonds, for example, you know, we all know bonds, they pay a coupon interest.

So that coupon interest is taxed as income, which is, from a tax perspective, the least favorable characteristic. So the ETF itself, you know, unfortunately, for the most part, it can't magically convert that into, you know, cap gains or dividends. There are ETFs out there that use swaps, not to get into the nitty gritty that convert this, but they do expose you to a different type of risk as well. But for the most part, when you look at plain vanilla ETFs that actually hold the securities, it's just a flow through mechanism. So when you invest in an ETF, for example, that invest in international stocks, you're going to be subject to withholding tax and stamp duties as well.

One benefit of the ETF is that behind our ETFs and every other ETFs out there, there's a fund accounting team that will do a lot of the withholding tax claims. So that's going to be done for you within the portfolio. But at the end of the year, in terms of your tax characteristics, all the ETF providers will provide you with a tax lift that breaks down the various, you know, tax characteristics for your tax reporting. So that's another advantage with ETFs as well, that just makes your tax planning a whole lot easier. Absolutely. But now I'm sure people are wondering, okay, you know, lots of people talk about the different account types that you can put your investments in.

Some are more efficient than others when it comes to ETFs. Are there certain accounts we should put our ETFs in and certain ones we shouldn't? And we can also look at Canadian ETFs versus foreign ETFs like a U.S. ETF. Yeah. So, you know, for those asset classes or those ETFs that hold asset classes that are less tax efficient, so bonds being a good example, those are generally held within

registered accounts. So the idea there is to shelter them or to make your overall portfolio more tax efficient. So, you know, income, as we all know, is less tax efficient, as I mentioned, than capital gains and dividends in Canada. So for the most part, you know, when you look at the portfolios of, you know, most investment advisors, they typically put their

bonds for their clients in registered accounts. That's how, you know, we see a lot of our financial advisor clients, you know, when I worked in the research division of that Canadian brokerage, that's how a lot of the financial advisors in that firm were doing it as well. And those, you know, those asset classes that tend to be more tax efficient comparatively, so things like equities, those tend to be held in non registered accounts. Yeah, just to take advantage of the different kind of tax rules, which I think is a super important. But now just to make things a little bit more complicated. Now there's a new product or it's not so new, but it's it's relatively new in the

past couple years, asset allocation ETFs, which is essentially an ETF portfolio of other ETFs, which kind of adds another layer of I'd say complexity, just to kind of understand how it works. But also for me, I think it's such a great thing. I wish it existed when I was in my 20s, because I really did want to be a DIY investor. But the idea of picking my own ETFs and rebalancing scared the crap out of me. So I just did not do that. And now there's kind of this new vehicle where you can, you know, pretty easily invest in a whole portfolio and you don't have to rebalance. You want to kind of talk a little bit about that. I'm curious because, you know, BMO obviously has asset allocation ETFs. So what was, you know, the development? What was, I think they're, you know, from my opinion, they're a great solution for, you know, a lot of investors out there. I mean, you know, when you look at most individuals, they tend to be very overwhelmed with investing. So this is a good, you know, kind of starter product.

But even for those, you know, a lot of investors, they don't have the time to, you know, spend all that time in terms of researching. Right. I hear, you know, there's probably a lot more fun stuff to do out there, you know, on a Saturday night, other than reading up on investments. You say you don't like to do it, but I find that hard to believe. I think you do. I do like doing it now, but back in my 20s, I did not. But, you know, I think for the everyday person, I think, you know, they don't want to be bogged down with a lot of this, right? So this is a good kind of one-stop solution for them. And, you know, when you look at investment literature and a lot of studies, they've always concluded that asset allocation is the primary driver, right? So a lot of people, you know, it's the sexy thing to talk about, you know, picking individual stocks, but what really

drives returns is really asset allocation. So there's been a lot of different studies that have come out that say, you know, asset allocation determines between 50 to 90% of the, you know, the returns or risk in your portfolio or the variance between one portfolio to another. They've all always concluded that stock selection is actually a very small part of, you know, what determines your overall returns. Climbing of your stock, so when you make those purchases, is even less critical. So by focusing on asset allocation, that is, again, your primary driver. So a lot of these asset allocation ETFs typically hold five to seven broad-based ETFs. So on the equity side, you typically have an ETF that gets you exposure to Canadian equities, one to US, one to international equities, one to emerging markets,

then several that get you exposure to bonds. And then the asset mixes are predetermined and set on various different risk levels. So there's conservative, there's balance, there's growth. And obviously, those that are more conservative are geared less towards equities and those that are, you know, more growth oriented have more equities in them. But I, you know, as I mentioned, I think it's a, these are great products. They're professionally managed. So all you have to do is just buy them and, you know, basically buy it and forget about it. Very low cost, 18 basis points, the ones that we offer at least. And the good thing about in Canada is there's no double dipping on fees. I mean, just because we hold underlying ETFs, the only thing you pay is that 18 basis points.

So, you know, the fee on the underlying ETFs is not charged. Yeah, that's, I think, a big thing when, you know, people are looking like, how much does this cost? It's like, this is the cost is incredibly low. It is much lower than using a robo advisor. So again, when we're talking about, you know, I, you know, I talk about fees a lot on this podcast. And the reason is because we cannot predict really what's going to happen with the markets. But one thing that we do have control of when it comes to our investments is the fees that we're paying, that is something that we can actually, you know, have a big impact on our

kind of future wealth. And so, you know, the lower the fees, the more money potentially in your pocket. And, you know, especially when we're thinking, I think sometimes to a lot of people, like, but I only have like $1,000. I'm starting with my Yeah, I know, it may not mean that much to you now. But, you know, cut to when you're 40, 50, 60 plus and your portfolio is in the six or seven figures, you're going to want to know the math behind those fees and see how much it's really eating into the money that could be, you know, used for something better. So always looking out for those fees. But yeah, I think it's a great product to set up. And also, too, if you want to just get the hang of, you know, opening up a discount brokerage account and buying a security

on your own and like placing that trade. It is kind of like those baby steps of like, just, you know, sometimes there's just a lot of anxiety about like, I don't want to mess up or press the wrong button. But you know, but something like that, it's like, it's so straightforward and easy. And then that may open you up to maybe down the road, I do want to just build my own ETF portfolio and do it on my own, because we can take the training wheels off or to be fair, honestly, I know a lot of people who are, you know, pretty savvy investors, and they just use an asset allocation ETF, just because again, they're busy people, they're doing other things, they don't want to rebalance their portfolio anymore. So it's nice to have that kind of option nowadays. So another question I, you know, I don't know if you'll have the answer,

but I got this recently. And it was basically, you was basically more to do with if you are a DIY investor and you do want to build your own ETF portfolio, how do you know which ETFs to choose and how many ETFs is too many? In my investing course, one of the things I did was I have a bunch of comparison spreadsheets. I actually broke down all of the different asset allocation ETFs from all the different providers. So you can see all the individual ETFs in them. And some of them, like you mentioned, are like four or five ETFs. And some of them have like 10 to 15 ETFs. And so that could be kind of confusing to be like, why did they put so many more? Does more mean better or does less mean better? When you are

kind of looking at building your own ETF portfolio, what are some things that you should consider when choosing, you know, picking out your ETFs to create your kind of own portfolio? Well, there's a couple things that I would look at. I mean, you know, if you are looking at asset allocation ETFs specifically, one thing I would look at is, you know, if you are the underlying ETFs that it's holding, is it, you know, those ETFs, are they tracking, you know, well-known indices? And why I think that matters is because, you know, typically with, you know, well-known indices, you want, you know, rigid rules in place. A lot of these newer index providers,

they could just simply just change the rules on the fly, right? So you basically, you know, you want rigid rules, because you don't want it to be, you know, you don't want subjectivity to get in the way of your investment portfolio. Typically, when you have index that are more widely tracked, the underlying ETF or that ETF that tracks that index tends to be more liquid as well, just because a lot of especially institutions, they tend to be benchmarked against these indices. Also, I would say, you know, the total cost of investing as well. So a lot of people look at, you know, the management fee only, right? So they'll say, well, you know, this is only, this cost me 20 basis points. The other one is 25 basis points. So I'm going to go with the one that's cheaper,

but they also have to consider the bid offer spread as well. So that's also another cost. So like a stock, an ETF has a bid offer spread. So that's the cost in which you buy and sell it. So the more liquid ETFs are going to have a tighter bid offer spread. So that's going to be part of your cost as well. FX cost, this may not be applicable to Canadian listed asset allocation ETFs. But if you're looking beyond Canada, foreign exchange is one thing you have to consider as well, because I think a lot of people look towards the US ETF industry and say, well, you know, this seems a whole lot more liquid or the fees may be lower, but, you know, when it costs you a percent or 2% to convert Canadian dollars into US dollars, in order to buy that ETF, that's going to be, you know, far more overwhelming than the management fee alone, right? So that's, you know, one thing to consider. And then, you know, the structure of the, you know, asset allocation ETF as well is very important as well. So, you know, is that asset allocation holding ETFs that physically, you know, hold the underlying securities or is it going through a

swap? There's some cases where a swap is better. But for the most part, I think, you know, for your everyday investor, I think, you know, holding the physical stocks is probably the cleaner approach. It's more plain vanilla. It's easier to understand. So those are kind of the key criteria that I would look for when evaluating an ETF. Well, another question I get often is, you know, say you're just building kind of just a plain vanilla index ETF portfolio. A lot of these providers have very similar ETFs. So, you know, you kind of answered some of the, you know, questions or things that you should look out for. But is there really a huge difference between some of our broad market index ETFs per provider?

Or like, are some just way better than others? Or are they all pretty similar? You shouldn't lose sleep over it. Yeah, I mean, you know, just expanding on some of the answers I gave before. I mean, you know, cost is important, but it's not just cost. I mean, tracking error is another thing that investors have to look out for as well, because if you look at, you know, let's say two ETFs that track the S&P 500, you know, both of them are the same cost.

So let's say they're both available for five basis points, but one consistently, you know, underperforms its index by 10 basis points. So that's another 10 basis points that is, you know, factored into the cost as well. So that's, that's something else that investors have to look out for as well. So I wouldn't say the hidden costs. But, you know, that's another, you know, another fee that investors have to look out for. Yeah, it's like the whole idea behind investing in an index ETF is to invest in that index as closely as you can. And so if it keeps on underperforming, you need to consider why and what does it cost to me, ultimately, if that's the case. But yeah, those are all some really, really good points for people that want to really do a deep dive, which there are a lot actually. Once you kind of learn the basics, then you kind of want to get into like the real details of it all. So I appreciate you kind of sharing all of that stuff. Before I let you go, is there anything else specific to ETFs that you want to address or you want to answer? I'm sure you also get questions

all the time from since you are kind of like the go to ETF expert, I'm sure in your family, your friend group, what are some questions that you often get that you want to make clear? So to clear up some kind of confusion, maybe, you know, I would say, you know, maybe not so specifically on ETFs, but maybe just investing in general. You know, I think as we mentioned before, I think a lot of people, when they think about investing, they get overwhelmed. It's not something we're taught in school. So it's something that is, you know, people become adults and they haven't had a real background in investing. So, you know, I think first and foremost, I think, you know, don't get overwhelmed by investing. I think it's good that there's a lot of people, there's people like you out there educating

individuals. And, you know, it's never too late to start investing. And, you know, I know I'm a bit biased in this, but, you know, I personally view that, you know, ETFs are a very efficient way to build a portfolio. As I mentioned, you know, ETFs really have transformed the way that not just even, you know, individual investors like at investing, but also institutions, the way that not just even, you know, individual investors like at investing, but also institutions, the way they put together portfolios has changed through ETFs as well. So I think, you know, ETFs have really made it really made it efficient for a lot of investors

to, you know, put together these holistic portfolios. So again, you know, a lot of information out there. Absolutely. And for me, it's And for me, ETFs are just such a great way to invest in, in my opinion, low cost. There's a variety of different kinds now. They keep on popping up, new ones. And they're just easy to get into. So if you're looking at how to invest or what are your options, definitely check out, you know, ETFs. But also, I will kind of point people to towards, you know, BMO has a lot of amazing, great free resources on their website, BMO ETFs.com. So make sure to check that out. Because honestly, if you really want to do a

deep dive, usually I find like the best information on like the actual provider websites, because I think a lot of people don't know about them, but they have really good research and really good information. So I would highly recommend you check out BMO ETFs dot com. Lots of great stuff on there. So before I let you go, even though I kind of already plugged the website just because it is a good resource, where can people find more information about ETFs and investing in general? Any good pages on the website? Yeah, on our website, we have, you know, as you mentioned, www.bmoetfs.ca. We also have a podcast that's available wherever you get your podcast. So that's done on a weekly basis.

It's called the BMO ETF Views from the Desk. So on Spotify, Apple or wherever you get your podcast. Amazing. Amazing. Well, thank you so much, Alfred, for taking the time to be on the show. It was a pleasure chatting about ETFs. Hopefully I can have you back again and we can go even deeper into the world of ETFs. Thanks so much, Jessica. Have fun. Okay. And that was episode 289 with Alfred Lee. Again, he is the Director, Portfolio Manager and investment strategist at BMO ETFs. Like we mentioned, make sure to check out the website for BMO ETFs at bmoetfs.com,

or you can go to bmo.com slash ETFs. I will link to all the things that we mentioned in the show notes for this episode, jessicamorehouse.com slash 289. And like I also mentioned in the beginning of this episode, and also Alfred mentioned in the episode, BMO ETFs has their own podcast called Views from the Desk. So if you like this episode and want to do a deep dive on ETFs, this is, I mean, you're going to want to check out their podcast because they really go into the specifics. For example, let's see, what are some of the interesting episodes

they have? Portfolio rebalancing between US, Canada, and emerging markets. Ooh, that would be a good one. Let's see, protecting yield in times of volatility, hedging against US political uncertainty, and on and on. Honestly, they have a ton of episodes. And wow, they really do cover it all. So I will link to it in the show notes for this episode. Once again, that is jessicamorehouse.com slash 289. So like I mentioned in yesterday's episode, we only next week is the last week of the show. And then I'm taking a little summer break. And then I'll be back in September, most likely mid September. But yeah, I just need a little break, right? Just for everyone's sanity and for you to miss me a little bit. Some of you have written into me and DM to me that you're like, Oh, I've

listened to all of your episodes. And you deserve a medal if that is the truth, because that is a lot of me. That is a lot. So I guess that means you like me. And like my voice, I suppose. So thank you so much for supporting this podcast. Just a few kind of housekeeping things just to mention before I let you go. Like I always kind of remind you, but again, you only have one more week to enter my big book giveaway. I'm giving away, it's currently like 12. I'm going to add a third or the 13th rather book for the giveaway next week. But if you go to jessicamorehouse.com slash contest or the show notes for this episode, you can enter to win all of the books. You'll only win one, of course. But you know, there's lots of chances to win. So take advantage. And what a great, okay, this is me showing how much of a

nerd I am. I'm like, what a great thing to do get a book about personal finance to read over the summer. No one else wants to do that besides me, I'm sure. But I'm honestly I have a stack of books that I have not had the chance to really crack open and I'm so excited to read them over the summer. I'm such a nerd, but hey, that's why you love me. Right. Right. Right. Right. Um, so yeah, we got the contests. Um, also like I mentioned me and my sister, uh, have, uh, kind of been working on a very exciting project, uh, adding some merch to my shop page. If you go to Jessica Morehouse.com slash shop, that is where you can find some exciting new merch. Also budget spreadsheets. And also reminder, if you want to learn more about ETFs

and investing in general, I've got a course called Wealth Building Blueprint for Canadians. You can apply and see if it's a good fit for you. And yeah, just go to jessicamorehouse.com slash WBB. Or again, I've linked to it in the show notes for this episode. So that is it for me. A big shout out to my podcast editor, Matt Rideout. Thanks again for making this podcast super shiny and clean and pretty. And to you, podcast listener, thank you so much for supporting this show over all of these years. Or if you're new, thanks for dropping by. I hope you like it. I will see you back here next Wednesday with a fresh new episode of the show. So, you know, stay safe, enjoy the good weather, and I'll see you soon.

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