Archive | February, 2010

The Ethical Couch Potato

Recently a reader wrote to me with an intriguing question: “I’m very interested in the Couch Potato strategy, but I have an added hitch: I’d also like to engage in socially responsible investing. I know there’s the iShares Jantzi Social Index Fund (XEN) for Canadian equities, but I’m not sure if there are other Canadian indexes out there, or what is available in terms of US, international, and emerging markets.”

For those who aren’t familiar with this idea, here’s a definition from the Social Investment Organization, a Canadian non-profit: “Socially responsible investment (SRI) is the inclusion of social, environmental and governance considerations into the management and selection of investments.” Companies commonly excluded from SRI indexes are those in the business of tobacco, weapons, and those with poor environmental performance, human rights violations, or poor employee relations.

Turns out that only one other index fund tracks the Jantzi Social Index, which is the most common SRI benchmark in Canada. The Meritas Jantzi Social Index Fund is one of seven socially responsible mutual funds run by a Winnipeg firm with close ties to the Mennonite community. It’s the only index fund in their lineup and it has a management expense ratio of 1.94% and a hefty front-end load or deferred sales charge.

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Unpacking ETF Fees, Part 4: iShares

In the last of this series of posts on ETF fees, let’s take a closer look at iShares, the largest ETF provider in Canada and the only one that discloses its funds’ entire management expense ratio (MER) on its website.

I spoke with a representative at iShares to ask whether an investor should expect any other operating costs above and beyond the MER. In most cases, the answer is no: the management expense ratio includes GST, and the fees payable to the independent review committee (IRC) are “a fraction of a basis point.”

iShares ETFs will still incur trading costs that are not included in the MER, but with an index fund these are typically very low. Brokerage costs are itemized in the footnotes of the funds’ financial statements and they appear to be negligible: the S&P 500 Index Fund (XSP) and the MSCI EAFE Index Fund (XIN) have the highest brokerage costs at about $25,000 to $35,000 annually, but these funds each hold a billion dollars in assets.

iShares estimates that currency hedging (used by both XSP and XIN) costs about 0.15% annually, and this won’t be included in the MER either.

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Unpacking ETF Fees, Part 3: BMO

BMO is the newest player in the ETF arena in Canada, and it has aggressively tried to undercut the low fees of its competitors: its large-cap Canadian equity fund, the Dow Jones Canada Titans 60 (ZCN), is marketed as the cheapest equity ETF in the country.

However, like Claymore, BMO lists its only the funds’ “Maximum Annual Management Fee” on its website, not its total management expense ratio. To find the MERs, you need to look on pages 51 and 52 of the latest prospectus. In some cases the differences are three or four basis points, while in others you’re looking at an extra 10 or 12:

Mgmt Fee
MER
Difference

Dow Jones Canada Titans 60
ZCN
0.15
0.18
0.03

S&P/TSX Equal Weight Banks
ZEB
0.55
0.60
0.05

S&P/TSX Equal Weight Oil & Gas
ZEO
0.55
0.60
0.05

US Equity
ZUE
0.22
0.33
0.11

Dow Jones Industrial Average
ZDJ
0.23
0.33
0.10

International Equity
ZDM
0.46
0.50
0.04

Emerging Markets Equity
ZEM
0.54
0.58
0.04

Canadian Government Bond
ZGB
0.33
0.45
0.12

Short Corporate Bond
ZCS
0.30
0.35
0.05

Again,

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Unpacking ETF Fees, Part 2: Claymore

As discussed in Monday’s post, the Claymore website does not report the entire management expense ratios (MERs) of their exchange-traded funds. Instead, they report the ETF’s management fee, which does not include GST and some other expenses that are passed along to investors. Today’s post will dig deeper into the costs of Claymore’s funds.

Twice a year, all mutual funds and ETFs are required to file a Management Report of Fund Performance, which discloses the returns, activities and expenses of the past six or 12 months. To learn the full management expense ratio of Claymore ETFs, you need to track down these documents. They are available from SEDAR, a website where fund companies post electronic versions of their regulatory filings. Follow this link, type “Claymore” in the search box, then choose “Management Report of Fund Performance” from the pull-down menu.

The most recent reports available are for the period ending June 30, 2009. Here are the MERs for some popular Claymore ETFs, compared with the management fee reported on their website:

Mgt Fee
MER
Difference

Canadian Fundamental Index
CRQ
0.65
0.60
-0.05

S&P/TSX Canadian Dividend
CDZ
0.60
0.64
0.04

US Fundamental
CLU
0.65
0.62
-0.03

International Fundamental Index
CIE
0.65
0.62
-0.03

Japan Fundamental Index
CJP
0.65
0.68
0.03

Global Monthly Advantaged Dividend
CYH
0.65
0.64
-0.01

Global Real Estate
CGR
0.65
0.72
0.07

BRIC
CBQ
0.60
0.66
0.06

1-5 Year Laddered Government Bond
CLF
0.15
0.17
0.02

1-5 Year Laddered Corporate Bond
CBO
0.25
0.28
0.03

S&P/TSX CDN Preferred Share
CPD
0.45
0.48
0.03

Balanced Income CorePortfolio
CBD
0.25
0.70
0.45

Balanced Growth CorePortfolio
CBN
0.25
0.82
0.57

Note that most of the MERs are just two to four basis points higher than the management fee,

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Unpacking ETF Fees: Part 1

Keeping costs low is one of the pillars of Couch Potato investing. Even if fans of actively managed mutual funds remain oblivious to the corrosive effect of fees and expenses, index investors know better. That’s why the first thing they do when choosing an ETF is look at its cost.

Unfortunately, the costs of Canadian ETFs are not as straightforward as one might think. Most investors don’t realize that iShares, Claymore and BMO disclose their fees in different ways, making apples-to-apples comparisons difficult.

The first point to understand is that Claymore and BMO list their ETFs’ management fee on their websites. iShares, on the hand, lists each ETF’s management expense ratio, or MER. The two terms are not synonymous: the management fee is only part of a fund’s overall MER. It’s usually the largest part, for sure, but it’s not the whole picture.

The management fee covers all of the ETF’s administrative costs, the manager’s compensation, the index licensing fee, and all fees paid to the custodian (the investment firm that holds the securities), registrar and transfer agent (the firm responsible for keeping shareholder records).

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Bad Advice from BMO

Jim, a loyal reader of this blog, recently emailed to ask about the model ETF portfolios that BMO is offering to its InvestorLine clients. The portfolios were designed by Lipper, the mutual fund research firm based in New York. “All the Lipper Leader Model Portfolios,” BMO’s website explains, “are based on a proprietary Lipper rating and built by their independent and unbiased experts.”

I can’t link to these model portfolios, since they’re available only to InvestorLine clients, but Jim sent me some details. Here’s one for long-term investors looking for a balance of income and growth:

Equity

iShares Canadian LargeCap 60 Index (XIU)
19.1%

iShares Canadian Composite Index (XIC)
10.9%

PowerShares QQQ Trust, Series 1 (QQQQ)
9.7%

WisdomTree DEFA Fund (DWM)
8%

Fidelity NASDAQ Composite Index Tracking Stock (ONEQ)
5.3%

Fixed Income

iShares Barclays 7-10 Year Treasury Bond Fund (IEF)
20%

iShares Barclays Aggregate Bond Fund (AGG)
19.1%

iShares Barclays TIPS Bond Fund (TIP)
7.9%

Jim asked whether this portfolio might be appropriate for an RRSP. My answer is that this portfolio isn’t appropriate for anyone in Canada,

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Adding Gold to Your Portfolio

Unless you’ve been in a coma, you know that gold has been the hottest commodity of the last decade, quadrupling in value since 2000. That’s in US dollars, but even measured in loonies gold is up more than 164% over the last ten years.  Those are impressive returns during a period when investing in stocks often felt like feeding cash into a paper shredder.

Claymore’s Gold Bullion ETF (CGL) began trading on the TSX on Tuesday, giving even Couch Potatoes an easy way to invest in physical gold. Is it time to add some of the shiny metal to your portfolio?

Let’s consider the main arguments in favour of investing in gold:

It’s a hedge against inflation, and it retains its value even if a nation’s currency becomes devalued.
Unlike stocks and bonds, gold has virtually no risk of becoming worthless. That makes it a safe haven in the event of financial Armageddon.
Gold is not highly correlated with stocks, bonds or real estate, so it plays a diversification role in a portfolio.
Gold’s price tends to move in the opposite direction of the greenback. This can protect Canadian investors who hold securities denominated in US dollars,

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The S&P 500 Effect

On Tuesday, February 16, Berkshire Hathaway will become part of the S&P 500, the most widely followed stock index in the world.

While the Dow Jones Industrial Average is more famous, the S&P 500 is the benchmark for more invested dollars than any other index. The iShares S&P 500 Index Fund (IVV) and the SPDR S&P 500 ETF (SPY) together hold about $85 billion in assets, while the Vanguard 500 Index Fund holds $93 billion, making it one of the largest mutual funds on the planet. Here in Canada, the iShares Canadian S&P 500 Index Fund (XSP) ranks number three among US equity funds with more than $1.27 billion under management.

It will be interesting to see what happens to the market price of these ETFs and index funds on Friday, the last trading day before Warren Buffett’s company officially becomes part of the privileged 500. Some market watchers wonder whether Berkshire’s stock price will spike: indeed, in the two weeks since Standard & Poor’s announced the company’s inclusion, the B-class shares have already shot up more than 8%.

Being added or dropped from the S&P 500 can have a huge effect on a company’s share price.

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Review: The Elements of Investing

Whenever people ask me where they can learn more about Couch Potato investing, I need to answer carefully. Two classic books are Burton Malkiel’s A Random Walk Down Wall Street and Charles Ellis’s Winning the Loser’s Game, but for someone who just wants the basics, without a lot of graphs and unfamiliar terms, neither title would be my first choice. Fortunately, these two authors have teamed up to write a quick-and-dirty primer on smart investing that any newbie can read in a couple of well-spent hours.

The Elements of Investing (Wiley) packs a lot of wisdom into its 130 little pages. It begins by explaining some cardinal rules of investing (the time value of money, the Rule of 72) and imparting some commonsense advice about reducing debt and saving more money. Then it lays out the case that Malkiel and Ellis have been arguing for decades: “Investors will be much better off bowing to the wisdom of the market and investing in low-cost index funds, which simply buy and hold all the stocks in the market as a whole.”

The book includes a wise chapter on avoiding common blunders,

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