Why we decided to add ETF to our portfolio: Hedging ourselves

We added one ETF to our portfolio that had only stocks and this has become of the largest positions already. In this post, we will get to the reasoning behind this ETF inclusion in the portfolio.

Until now we had only stocks in our portfolio, all the holdings were individual stocks that we picked for the long term (the only term). We did not have any ETF or mutual fund. But that’s changed.

Why we decided to add ETF to our portfolio?

A few reasons were taken into consideration when deciding to add the ETF to our portfolio.

Protection against myself

I am an individual investor that invests as a hobby and as a way to save for the future. But I don’t spend my whole day studying the market. My time is dedicated more to my work (as a Software Engineer).

And if even the professionals that spend the whole day on the market most of them will lose to index, I certainly can do so.

So having an ETF will be a hedge against my decision, a way to protect my portfolio from myself. Protect me from my mistakes that can cause bad results in the future.

Simplify my portfolio a little bit

One other reason is that I am looking to simplify my portfolio a little bit. I have a lot of stocks and that made the management a bit complex.

In the past, I dedicated a bit more time to it, but now I changed a bit my goals and want to spend less time and energy studying companies and investments. So adding an index helps me simply my portfolio and there is less need to follow and study as the index does its job in filtering and recycling companies from its portfolio.

Enjoy the tax-free account

Not that it was required to have an ETF in the tax-free account, but I wanted to have very few transactions and less complexity on my tax-free account. So I decided to only have the ETF on the tax-free account. This way I just buy and never sell (until I retire or the plans change).

I plan to max out our tax-free account with the ETF which will probably make it one of the largest holdings.

What ETF did I choose?

After deciding to add an ETF, the next step was to choose the ETF that I wanted to add. This step took a long time and a lot of thought to it. I tried to select the best for me according to my views and what I believe.

The index had to be according to Our Investing Philosophy, which has a great focus on quality companies. So this excluded very risky and also sector ETFs.

Another requirement was that it should be as global as possible. We know that most ETFs have a huge concentration in U.S stocks, but we wanted at least some exposition to other countries. So this ruled out country-specific ETFs.

We analyzed a few options and end up choosing one ETF that follows the MSCI All Country World High Quality Index. And as our tax-free account is in Canada (it is a TFSA account), the ETF is BMO MSCI All Country World High Quality Index ETF (ZGQ).

This is the definition from the ETF website.

“MSCI All Country World High Quality Index (“Index”) is based on the MSCI All Country World Index, its parent index, which includes large and mid-cap stocks from global markets including 23 Developed Market (DM) and 24 Emerging Markets (EM) countries. The Index aims to capture the performance of quality growth stocks by identifying stocks with high-quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth, and low financial leverage. All securities eligible for inclusion in the Index are weighted by the product of their market cap weight in the parent index and their quality score. Issuer weights are capped at 5%. The Index is rebalanced semi-annually.”

So, it has the quality focus that we look for and also has global exposure. The index has high exposure (around 70%) from U.S companies, but that is because the U.S market is the biggest in market cap.

This is the current holding breakdown on the day of this writing.

And these are the top 10 current positions of the ZGQ ETF.

One important thing here is that we have some overlap with the individual stocks that I have in my portfolio. Of the top 10 holdings, I have 7 in my portfolio. These overlap does not concern me.

One thing that I did not like about the ZGQ ETF is the costs. It is very expensive for an ETF, 0.51%. What made me buy is that this cost seems to be worth comparing to ACWI ETF.

Of course, this is not a recommendation, it is just my reasoning behind my choice.

Happy investing!