Archive | May, 2010

Under the Hood: BMO Real Return Bond

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The fund: BMO Real Return Bond Index ETF (ZRR)

The index: The fund tracks the DEX RRB Non Agency Bond Index, which consists of inflation-linked bonds issued by the Government of Canada. It seems to have been created specifically for this ETF.

The cost: The ETF’s management fee is 0.25%. As with other BMO funds, the actual MER will be higher because it includes GST/HST and some other expenses.

The details: This brand-new ETF (it started trading on Wednesday, May 26) holds five real-return bonds issued by the federal government, each making up about 16% to 23% of the fund’s assets.

Real-return bonds — or Treasury Inflation-Protected Securities (TIPS), as they’re called in the US — are an important asset class, and some financial experts recommend them as a core holding.

Both the principal and the interest payments of real-return bonds are tied to the Consumer Price Index, so they go up with inflation.

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ShareOwner: A Better Way to Buy ETFs? Part 2

Last week’s post was an overview of Canadian ShareOwner Investments, a service that allows clients to buy stocks and ETFs using an innovative trading platform. Investors can place an order to purchase multiple securities for a single $40 commission, and the trades are implemented according to a fixed monthly schedule. Uniquely, ShareOwner also allows investors to hold fractional shares and automatically reinvests all distributions.

Now let’s consider whether ShareOwner offers good value for Couch Potato investors with all-ETF portfolios. My thanks to reader Steve, who recently opened account with ShareOwner and gave me his impressions of its strengths and weaknesses, and to those who shared their own experiences in the comments section of the previous post.

The advantages

ShareOwner lets investors assemble and maintain a diversified ETF portfolio with much lower trading costs than big-bank discount brokers that charge $29 per trade. First, the service allows you to make individual ETF purchases for $9.95, the same as low-cost brokerages like Questrade and QTrade. Where you can potentially save much more is by buying multiple ETFs for a single $40 commission. (As one commenter pointed out, however, you still need to pay attention to your overall trading costs.

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ShareOwner: A Better Way to Buy ETFs? Part 1

Several weeks ago, a reader named Steve wrote to me about using Canadian ShareOwner Investments to build a Couch Potato portfolio with exchange-traded funds. I had no experience with this service, so I asked Steve to report back after he did his research, and he kindly followed up. In today’s post I’ll describe how ShareOwner works, and early next week I’ll pass along Steve’s assessment of its pros and cons.

ShareOwner Investments (formerly the Canadian Shareowner’s Association) is a dealer that allows investors to trade stocks and ETFs in both registered and taxable accounts. But unlike a discount brokerage, ShareOwner uses a dollar-based trading platform that enables you to buy and sell small amounts, and to own fractional shares. For example, you can place an order for $500 worth of a stock or an ETF, and if it’s trading at $27.36, you’d receive 18.2749 shares. ShareOwner also reinvests all dividends including partial shares, something traditional DRIPs don’t allow.

The other important feature of ShareOwner’s platform is that you can place a single order covering as many securities as you want. If you have $1,000 to invest, you can order $50 worth of 20 different stocks or ETFs,

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Tips for Trading ETFs

I happened to have Google Finance open on my computer last week when the “flash crash” happened. While the market’s whipsaw on May 6 affected almost all stocks, it seems that ETFs were particularly hard hit: I watched my position in the iShares S&P/TSX Capped REIT Index Fund (XRE) fall 15% in a matter of minutes. The ETF, which opened the day at $12, eventually fell to $6.89. I missed that low point, as I was standing on the ledge of my home office window, poised to hurl myself onto the dandelions below.

I’m not sure we’ll ever know the full story behind the madness of May 6, and for long-term investors it’s probably not worth fretting about. But the day was a reminder that ETFs, unlike mutual funds, are potentially vulnerable to the insanity that occasionally plagues stock exchanges in this era of automated trades. If you’re building a portfolio of ETFs in a discount brokerage account, here are a few suggestions to make sure your trades go smoothly:

Choose frequently traded ETFs. In theory, ETFs are supposed to be infinitely liquid: that is, you should be able to buy or sell units at market prices very close to the net asset value (NAV).

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Indexing’s Dirty Little Secret

“Most actively managed mutual funds underperform the market.” Couch Potato investors sing this refrain all the time in defense of ETFs and index funds. I’ve done it many times myself — a bit smugly, I confess. My FAQ page points out triumphantly that 92.6% of actively managed Canadian equity funds have trailed the S&P/TSX Composite over the last five years, according to Standard & Poor’s, which issues a quarterly report on active funds versus the indexes.

But here’s the part that S&P and most indexing advocates usually leave out: the vast majority of ETFs and index fund underperform their benchmarks, too. So it’s not fair for index investors to imply that they earn market returns, because they almost never do. Call it indexing’s dirty little secret.

This inconvenient truth is discussed in an excellent article by Scott Ronalds, published in this month’s Canadian Money Saver. Ronalds is manager of research and communications with Steadyhand Investment Funds. His article doesn’t disparage indexing, nor does he pull out the red herrings that Mackenzie Financial and others use to criticize ETFs. He simply points out that a true apples-to-apples comparison would pit actively managed funds against ETFs and index funds in the real world,

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International Tracking Error: Part 3

In this final post in the series on why international index funds performed so poorly in 2009, it’s time to look at currency hedging.

Currency hedging is a strategy designed to smooth out the fluctuations in the value of the Canadian dollar relative to other world currencies. For example, in a fund that tracks the EAFE index (which covers Europe, Japan and Australia), the stocks are denominated in pounds, euros, yen and Australian dollars. If the UK holdings go up 10%, but the loonie rises in value by 4% relative to the British pound, an investor’s return in Canadian dollars is only 6%. To protect against this potential loss, a fund can buy forward contracts designed to offset the currency swings. Ideally, Canadian investors in a hedged EAFE fund should receive the full 10% return of their UK stocks. (If you’d like to learn more, RBC offers a nice explanation of currency hedging.)

It’s a reasonable strategy: if all of your liabilities are in Canadian dollars, it makes sense to hold your assets in Canadian dollars, too. Yesterday’s guest post on Canadian Capitalist also makes a compelling argument that currency hedging reduces volatility for investors with foreign holdings.

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