A candid look at an advisor’s ETF portfolio
A serious portfolio manager should put most — if not all — of their own money in the portfolios they recommend to their clients.
When my investment style changed to an ETF-based strategy 10 years ago, I moved most of my investments into one of my practice’s model portfolios. In fact, each of my discretionary model portfolios — conservative, balanced, growth and dynamic growth — was inspired by either me or a member of my family. I would often share this with clients so that they knew that my interests were aligned with theirs and that I had deep conviction in my investment strategy.
My personal investment profile has been either growth or dynamic growth since inception. I plan on working for several more years (after all, Warren Buffett just turned 91), so I don’t need income on my investments. I have managed money through several bear markets and I believe in the power of capital markets to generate gains over time, regardless of their inherent volatility.
When I started using ETFs and subsequently created my portfolio models, I have maintained an overweight in the technology sector. I chose Boston-based State Street Corp.’s Technology Select Sector SPDR fund (NYSE Arca:XLK) for my technology position. In my most aggressive portfolio, this position has represented as much as 10% of my equities allocation.
As I’ve written before, I only maintain overweight positions if they perform better than the broad market index. In the past decade, XLK has returned 23.27% annually compared to 16.95% for SPY, State Street’s S&P 500 ETF.
In my personal non-registered account, I regularly add to my XLK position, so my investment has racked up an impressive capital gain over the years. Even with rebalancing and changes to the underlying holdings by the issuer, there is rarely a capital gain issued to the ETF-holder.
Technology isn’t the only sector to have made substantial gains over the past decade, but I’m focusing on XLK since I have donated this investment in kind to charity.
In Canada, if you own publicly traded securities outside of a registered account that have increased in value since you purchased them, and you donate them in-kind to charity, you’ll realize even more tax savings than you would with a cash gift.
That’s because when selling the securities, 50% of the capital gain is taxable. However, if you donate the securities in-kind, the taxable capital gain is avoided, and you receive a charitable receipt for the market value of the securities on the day they are transferred to the charitable organization.
(The CRA website contains all tax details on donating publicly traded securities.)
The pandemic was a turning point in my charitable giving strategy. I saw omnipresent human and economic distress against a backdrop of relentless climate change. I am fortunate enough to be able to work comfortably from either my home or my cottage, while my investments — especially my technology holdings — increase.
After some discussion with my husband, we decided to create a charitable foundation using some of my XLK shares.
Creating a foundation is not onerous, and can be done with an initial gift of $10,000. There are differences in the rules governing the different types of foundations available to investors (you can read this article for more detail). I worked with the foundation division of my dealer to set up my family’s foundation.
By establishing a charitable foundation, the owner can either remain anonymous or have donations be publicly recognized. In my case, my husband and I decided to use a family designation for our foundation.
Once securities are donated to a foundation, they are required to be invested with due diligence. I sign off on all the foundation’s investments, and I plan to invest the funds in my model portfolios once the foundation’s funds meet the required threshold of $100,000.
Our giving strategy focuses on health care, women’s and children’s causes, and the environment; however, we have the flexibility to give to any recognized charity.
My personal experience tells me that using ETFs to create a charitable trust can allow you to give in a tax-efficient, strategic manner on a regular basis.
As I say in my book, The Black Belt Investor, the ultimate sign of a healthy relationship with money is to be able to give for the satisfaction of doing good.