ADMS 4501 S3-20 - ETF Assignment

Client profile: Assume you have just received a year-end bonus of $50,000 from your first year of full-time employment since graduating with your York B.Comm (hons) degree. You are Canadian, single and do not need any of the portfolio for income. You plan to invest the $50,000 for the next 5 years, perhaps for a future house downpayment.

Part 1: 14 marks

Build a balanced portfolio based on the Client Profile below, using at least 5 different ETFs.

At least one ETF must be active, and two ETFs must be Alternative Investment ETFs.

• You must give a brief description of each ETF including whether it is active or passive, hedged or unhedged and the MER. The description must be in your own words; do NOT cut and paste or major marks will be deducted)
• Risk profile of the portfolio (low, medium, high)
• Where the ETF is traded (which exchange)
• Any other important facts
• Expected return of each ETF (Using past 5 year average annual return, if available)
• Expected risk level and return of your portfolio
• Explain why you have chosen the asset weights that you are using and each ETF (i.e. justify why your portfolio is balanced and fits with the client profile)

Part 2: 4 marks

Compare your balanced portfolio (Part 1) with the iShares XBAL (60/40) or XGRO (80/20) (you need to decide which one is a more appropriate benchmark/comparison for your portfolio)

Compare on an (i) expected return, (ii) risk and (iii) MER basis

Part 3: 2 marks

Conclusion: Which is a better portfolio for you (your customized ETF portfolio or XBAL/XGRO) and why?

Other:

• Can be done individually, or in pairs (note: some of the assignment may be tested on the final, so dont just add your name to another persons work)
• Maximum 2-3 pages (for content) but charts can be used.
• Page 3 needs to contain a bibliography (not MLA but include specific URL links you used. E.g. not ishares.com)

Resources for ETF issuers:

• www.ishares.com; www.bmoetfs.ca www.vanguardcanada.ca
• www.horizonsetfs.com
• Other ETFs are acceptable
• Extra ETF Resources are also posted on eCLass
• A Sample Part 1 is posted on Moodle. Please review. You can not use any of the ETFs listed in that sample.

Please find the sample below:

ADMS 4501 Sample Part 1 (only) - ETF assignment

Client: Recent graduate with $50,000 savings that does not have to be touched for at least 5 years.

Step 1: Portfolio Allocation: (50 Equities/10% Bonds /40 AI); Specifically:

• 30% Canadian Equities
• 20% Emerging Markets ETF (Equities)
• 10% Investment Grade Bonds (Cdn and USA)
• 40% Alternative Investments (2 ETFs)

Reason for portfolio weights: I chose this weighting because ________________________________

Step 2: ETF Selection

ETF Name	Active/Passive	MER	Weight	5 Year Ave Annual Return	Risk Level	Currency Hedged to C$?	Where traded
1. XIC	Passive	0.06	30%	8%	Medium	Yes (automatic)	TSX
2. AAA	Passive	0.05	20%	3%	Low	Yes	TSX
3. HAB	Active	0.50	10%	3.22%	Medium	Yes (see below)	TSX
4. BBB	Active	0.20	20%	4.2%	Low	No	NASDAQ
5. CCC	Active	1.25	20%	11%	High	No	NYSE

ETF 1: XIC iShares Core S&P/TSX Composite Index ETF

This ETF holds all stock in the TSX composite index. It is low cost (MER = 0.06%) and designed to be a long-term core holding. This ETF is well-diversified as it contains 249 holdings, has high liquidity (net assets > $3 billion) Since the underlying stocks in this ETF are Canadian, it is hedged to the C$. I chose this ETF because I believe that Canadas economy will do well post-pandemic as it is a resource-rich country and equity valuations in Canada are still reasonable. (currently at 21X next years EPS)

ETF 2: AAA: Emerging Markets Equities ETF - explain

ETF 3: HAB Horizons Active Corporate Bond Index ETF

This ETF gives broad exposure to Canadian and U.S. investment grade corporate bonds (ratings BBB and higher) with an average duration of 6.09 years. li. I chose this ETF because I am concerned about slowing global growth and want protection in the event that equities continue to underperform during the fall. It has a Morningstar rating of 4 stars, which is good. Liquidity is high with over $500,000,000 of assets inside the ETF

The ETF manger using derivatives to hedge any US$ exposure so it is hedged to the C$.

ETF 4: BBB: Alternative Investments ETF - explain

ETF 5: CCC: Alternative Investments ETF - explain

Overall Portfolio

Expected return = (20% x 8%) + (20% x 3.22%) + (30% x 5.2%) + (10% x 6.5%) + (20% x 11%) = 7.2%

Risk level = (20% Medium) + (20% Medium) + (30% Low) + (10% High) + (20% High) = Medium

Note: The above sample is for Part 1 only. You also need to complete Parts 2 and 3 as outlined in the ETF Assignment Information file.