Three ETF diversifiers for your portfolio

Key Concepts

• Futures-based ETFs: Funds that gain exposure to commodities through derivative contracts rather than physical ownership.
• Contango: A market condition where the futures price of a commodity is higher than the expected spot price, leading to "roll yield" costs as contracts are replaced.
• AI Infrastructure: The physical and technological support systems (electrification, power grids, critical minerals) required to sustain artificial intelligence.
• Active Management: An investment strategy where a fund manager makes specific security selections to outperform a benchmark, rather than passively tracking an index.
• Basis Points (bps): A unit of measure for interest rates and fees; 100 basis points equals 1%.
• Diversification: The strategy of spreading investments across different asset classes to reduce risk and volatility.

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1. Broad Commodity Exposure: ZCOM

• Overview: A futures-based ETF launched in late 2023. It provides exposure to energy, agriculture, materials, and precious metals.
• Key Mechanism: Because it uses futures, investors must understand the "roll" process. Daniel Straus highlights the risk of contango, where the cost of rolling futures contracts can erode returns over the long term.
• Performance: Since its October launch, it has achieved a total return of approximately 23%, outperforming the TSX Composite (15%).
• Strategic Use: It serves as a diversification tool, particularly for investors looking to move beyond gold-only allocations. Straus notes that commodities often "zig when the market zags," providing a hedge against geopolitical instability.

2. AI Infrastructure: MTRX (Global X AI Infrastructure Index ETF)

• Overview: Launched in February 2023, this ETF focuses on the "picks and shovels" of the AI revolution rather than just software developers.
• Investment Thesis: The fund targets interrelated industries, including electrification, energy grid infrastructure, and critical minerals. Straus emphasizes that electrification has become a matter of "national security," providing a strong tailwind for these subsectors.
• Performance: The fund has seen a 77% total return since inception, significantly outperforming both the TSX (39%) and the Nasdaq 100.
• Risk Warning: Straus cautions that high returns in niche thematic ETFs often come with higher volatility. He notes, "The Lord giveth, the Lord taketh away," suggesting that investors should be prepared for potential drawdowns.

3. International Equity: CADE (Avantis CIBC International Equity ETF)

• Overview: An actively managed ETF launched in March 2024. It follows a strategy similar to the US-based AVDE fund.
• Methodology: Avantis is noted for disrupting the active management space by offering active strategies at low fees (stated at approximately 29 basis points).
• Market Context: There is currently historic demand for international developed equities as investors seek to reduce concentration risk in the US market, driven by trade tensions and geopolitical shifts.
• Benchmark Comparison: While the S&P 500 has been difficult to beat, Straus points out that the Avantis strategy (using the US version as a proxy) has shown incremental outperformance against the MSCI EAFE index over a five-year period (68% vs. 60%).

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Synthesis and Conclusion

The discussion emphasizes that ETFs offer a "one-stop shopping" solution for complex investment themes, but they require careful due diligence.

• Commodities (ZCOM) are for sophisticated investors who understand the costs of futures rolling and seek non-correlated assets.
• AI Infrastructure (MTRX) captures the physical requirements of the tech boom but carries the volatility inherent in thematic investing.
• International Equities (CADE) provide a cost-effective, active alternative for investors looking to diversify away from US-centric portfolios.

The overarching takeaway is that while passive index tracking remains popular, there is a growing role for specialized, active, and futures-based ETFs to navigate modern market complexities and geopolitical risks.