Below, we've collected questions and answers about the portfolio migration in March 2022.
- What changes did you make to the portfolio?
- Why did you change the factor equities ETF?
- What is different about the fixed income exposure?
- Why did you sell ZFL when it was down?
- Was the old mix of ZFL and ZCS better or worse than ZAG?
- Does this have to do with the Fed and BoC hiking rates?
- How will this impact the fees on my portfolio?
- Why did you change geographic weights? Does it have to do with the Russian invasion of Ukraine?
- Why did you remove hedged US equities?
- Why didn’t my portfolio make one of the changes described above?
What changes did you make to the portfolio?
We made several changes to the Wealthsimple core portfolio, which can be summarized as follows:
- Improved our factor-based world equity allocation: we swapped world min-vol equities for a new ETF that incorporates other factors, like quality and momentum
- Modified fixed income exposure: we reverted back to our fixed income allocations from mid-2020, which use an aggregate bond ETF instead of mixing long-duration riskier bonds with short-duration less risky bonds
- Reduced emerging markets exposure: we made the strategic choice to reduce emerging markets exposure and bring the geographic weights in the portfolio closer to world market-cap weighting
Why did you change the factor equities ETF?
Fundamentally, not much has changed; the new ETF is still a defensive exposure to world equities, we just think it’s an improved version of the old one. It incorporates different factors and is less different from regular world equities while maintaining defensive characteristics. We think it will improve average outcomes and make it easier for our clients to stay invested as a result.
What is different about the fixed income exposure?
Instead of approximating mid-duration bonds by blending longer and shorter bonds, we are now just holding mid-duration bonds. In September 2020, we made the opposite switch because bond yields were very low and we didn’t think mid-duration bonds could offer diversification potential, so we held a mix of bonds we thought could offer diversification against equities and would perform similarly.
So, at the portfolio level, very little will change. There will still be about as much fixed income risk in the portfolio as before, it will just be sourced from different bond ETFs.
Why did you sell ZFL when it was down?
We didn’t sell it because it’s down, we sold it because we think the asset it had replaced, aggregate bonds, offers diversification potential again. Yields have increased enough that we don’t think we need to hold long bonds to offset equity risk.
Was the old mix of ZFL and ZCS better or worse than ZAG?
The mix of long-duration bonds and short-term credit performed very similarly to an aggregate bond ETF from September 2020 until we switched back.
Does this have to do with the Fed and BoC hiking rates?
Not directly; we aren’t selling bonds because we think the Fed or BoC are going to hike, or because we have a view on whether or not that would be good.
How will this impact the fees on my portfolio?
Your fees should stay the same or decrease slightly; we are providing a rebate on the new factor ETF so the cost remains the same to our clients. Your total cost of ownership will actually decrease slightly, since we reduced the yield of your portfolio by reducing exposure to emerging markets and changing the bond mix.
Why did you change geographic weights? Does it have to do with the Russian invasion of Ukraine?
We changed the geographic weights because our new global minimum volatility ETF tilts to higher quality and value stocks, which we believe will provide a meaningful mix of returns and diversification. We still wanted to be geographically diversified, so we allocated stocks based on their sources of revenue instead of where the company is listed as we had previously. Outside of a slight home bias to Canadian equities, we believe the portfolio remains globally diversified.
Why did you remove hedged US equities?
We determined that the cost of the hedge was not worth it for most clients. Although it’s fine to hold hedged US equities, we think there is a slight benefit to USD exposure and it was not worth our clients paying higher fees to remove it.
Why didn’t my portfolio make one of the changes described above?
Some clients may not have traded out of hedged US equities or factor equities if they have a short time horizon or significant capital gains. Our order generation system only makes trades that it expects will benefit our clients in the long run; instead of realizing capital gains or trading costs, some clients are better off just sticking with their current portfolio.