Archive | June, 2010

More ETFs Now Paying Monthly

Both iShares and Claymore have announced that several of the their ETFs will start paying distributions monthly instead of quarterly. The announcements came within five days of each other earlier this month. It’s good to see the two biggest players in the ETF market pushing each other into improving their products.

Here are the ETFs that will begin paying monthly distributions starting in July:

Claymore Equal Weight Banc & Lifeco (CEW)
Claymore 1-5 Yr Laddered Government Bond (CLF)
Claymore 1-5 Yr Laddered Corporate Bond (CBO)
Claymore Advantaged Canadian Bond (CAB)
Claymore S&P/TSX CDN Preferred Share (CPD)
Claymore Balanced Income CorePortfolio (CBD)
Claymore Balanced Growth CorePortfolio (CBN)

iShares DEX All Corporate Bond (XCB)
iShares DEX Short Term Bond (XSB)
iShares DEX Universe Bond (XBB)
iShares DEX All Government Bond (XGB)
iShares DEX Long Term Bond (XLB)
iShares U.S. IG Corporate Bond (CAD-Hedged) (XIG)
iShares U.S. High Yield Bond (CAD-Hedged) (XHY)
iShares Dow Jones Canada Select Dividend (XDV)
iShares S&P/TSX Capped REIT (XRE)
iShares S&P/TSX Capped Financials (XFN)
iShares S&P/TSX Income Trust (XTR)

The press releases from both Claymore and iShares say they made this change because investment income is becoming more important to Canadians.

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Should You Use Index Funds or ETFs?

[Note: A more up-to-date discussion of this idea, including a spreadsheet to help you with the math, can be found here.]

This week I got an email from a reader who is in the process of firing her advisor and becoming a Couch Potato. “I have decided it’s time to take matters into my own hands,” wrote Sarah. “I have $25,000 in mutual funds in my RRSP with my current adviser. I want to create a Couch Potato portfolio with ETFs, but I’m a little intimidated. I don’t even know how to set up a brokerage account.”

I surprised Sarah with my response: I suggested that she not open a discount brokerage account, and that she forget about ETFs for now. That’s because $25,000 is not enough to make ETFs efficient—index mutual funds are a much better option. The trading commissions Sarah would pay to buy and sell ETFs would outweigh the benefit of the lower annual fees. In fact, index mutual funds beat ETFs for most small portfolios.

I recently wrote an article in MoneySense about this issue, but I wasn’t able to go into detail about the math.

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Not All Indexes Are Created Equal

In yesterday’s post I looked at the recently launched BMO Equal Weight REITs (ZRE), which invests in Canadian real estate investment trusts. The new ETF is going head-to-head with the  iShares S&P/TSX Capped REIT (XRE), which until now had no competition in this space. The big difference between the two funds is that ZRE is equal-weighted, while XRE uses traditional cap-weighting. So, which strategy is superior?

There’s no question that cap-weighted indexes have a flaw: because they are heavily influenced by each stock’s current share price, they give greater weight to overvalued companies and less to undervalued ones. That makes them prone to bubbles: for example, when the price of Internet stocks rose to absurd heights in the 1990s, technology companies dominated the S&P 500, even though some of these had never actually made any money. Meanwhile, fundamentally sound but undervalued companies made up a smaller and smaller portion of the index. We all know what happened next.

In recent years, a number of index providers have looked for ways to avoid this Achilles heel of cap-weighting. Perhaps the best-known “price-neutral” strategy is fundamental weighting, which is based on a company’s dividends,

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New Kid on the Real Estate Block

It looks like BMO has finally made a splash in the ETF market. Most of the bank’s family of exchange-traded funds, launched about a year ago, either duplicated existing products from iShares or focused on exotic asset classes. But they’ve changed that with the launch of the BMO Equal Weight REITs Index ETF (ZRE) last month. This new fund tracks an important asset class — real estate — and does so with a strategy that may be superior to its competition.

Until the launch of BMO’s fund last month, the iShares S&P/TSX Capped REIT Index Fund (XRE) was the only exchange-traded fund tracking the Canadian real estate sector. With almost a billion dollars in assets, it’s a category killer. But perhaps not for long.

Let’s compare the two funds to get a better understanding of how they differ. First we’ll take a closer look at the index that XRE tracks. The S&P/TSX Capped REIT Index is a subset of the S&P/TSX Composite. That means that if a REIT is not part of the S&P/TSX Composite, it can’t be included in XRE. That explains why there are only 11 REITs in the iShares ETF,

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Build Your Own Pension-Fund Portfolio

It’s always interesting to know what the smart money is doing. And I’m not talking about the investment managers who appear on BNN to “talk their book” — like the guy who runs the precious metals fund and suggests you by precious metals. The smart money are the managers of pension and endowment funds worth billions. They earn their salaries by  producing excellent investment results, not by charging high fees while delivering mediocre returns.

Steve from the Think Dividends blog recently suggested I look at creating a portfolio aligned with the asset allocation used by the Ontario Teacher’s Pension Plan, the biggest and one of the most successful pension funds in the country. However, the OTTP’s portfolio is impossible to shadow with ETFs: much of it is private equity and hedge funds. Besides, anyone who invests in the Toronto Maple Leafs can’t be taken seriously. Instead, I looked to the Pension Investment Association of Canada, which compiles data on 130 pension funds.

Before considering how you can use this information to help you design your own portfolio, remember that pension funds are not like individual investors in some important ways.

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9 Secrets of the Empowered Investor, Part 3

This post is the third of three that outline nine critical factors in investment success, as identified by Keith Matthews, a portfolio manager with Tulett, Matthews & Associates in Montreal.

7. Most investment strategies don’t survive for long.

Every year sees an explosion of new investment offerings, innovative strategies and brilliant managers promising big returns. During your investment lifetime, however, the vast majority of them will not survive. Most funds will be merged or liquidated, leaving unitholders to look for the next winning strategy. Often investors will find themselves jumping from one loser to the next.

Even if specific index funds and ETFs occasionally shut down, the asset classes they track will always survive. Using a passive investing strategy benchmarked to the major indices can significantly reduce “survivorship risk” in your portfolio and produce a more consistent long-term investment experience.

8. The industry has conflicts of interest.

Successful investors face many roadblocks on the road to financial freedom. One of the biggest is the conflict of interest that exists in the financial services industry.

Advisors who are paid commissions based on the products they sell may have a disincentive to act in the best interest of their clients.

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9 Secrets of the Empowered Investor, Part 2

This post is the second of three that outline nine critical factors in investment success, as identified by Keith Matthews, a portfolio manager with Tulett, Matthews & Associates in Montreal.

4. Value and small stocks outperform over time.

Many investors look for opportunities in growth companies. But long-term data show that investments in value companies (which have low price-to-book ratios, and are often out of favor) have produced higher returns than growth companies. Small companies have also produced higher returns than larger, more well-known companies.  These premiums appear to exist in all parts of the world.

These observations were reported by finance professors Eugene Fama and Kenneth French in the early 1990s. They explained that investors perceive higher risk in value and small companies and, accordingly, their stocks should provide higher expected returns. This is consistent with the notion that markets are efficient.

Portfolios that are “tilted” toward value and small-cap stocks add more risk, and therefore should have higher expected returns than the broad-market indices over the long term.

5. Markets move randomly and unpredictably.

The chart below ranks the best and worst performing asset classes each year from 2000 through 2008.

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9 Secrets of the Empowered Investor, Part 1

I recently interviewed Keith Matthews for a forthcoming column in MoneySense. Keith is a partner and portfolio manager at Tulett, Matthews & Associates (TMA), an investment counsel firm in Montreal. Index investing is at the heart of TMA’s philosophy: the firm builds widely diversified, passively managed portfolios for its clients using mutual funds from Dimensional Fund Advisors and iShares ETFs.

During our discussion, Keith explained that he recently boiled down his 15 years of investment management experience into a concise framework that he shares with his clients. He’s identified nine factors that contribute to an investor’s long-term success, and he’s agreed to share them with readers of Canadian Couch Potato. I’ll present them this week in a series of three posts. (The material was originally written for TMA clients only, so I have made a few modifications to give them broader appeal.)

What’s more, Keith provided me with a copy of his excellent book, The Empowered Investor, which explores these ideas in greater detail and eloquently makes the case for index investing.

“A structured portfolio is not just about diversification,” Keith explains.

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