More New ETFs on the Horizon

The ETF market just keeps on growing. A couple of new products from Horizons focus on US-dollar investments, and while neither is a core holding for index investors, they may have some niche appeal.

The Horizons U.S. Dollar Currency ETF (DLR) is bought and sold on the TSX in Canadian dollars, and it gives investors exposure to fluctuations between the loonie and the greenback. Here’s how it works: if the two currencies are at par, the ETF will trade at an even $10 per share. If the US dollar falls to CAD $0.95, then the ETF’s price will be $9.50, and so on.

The fund charges a 0.45% management fee (the full MER will be higher), and trading commissions and bid-ask spreads will also add to the cost of DLR. But because the ETF is traded in Canadian dollars, there are no forex fees when you buy or sell it. As any Canadian knows, the currency exchange costs levied by banks and online brokerages are obscene — it’s not unusual to lose 1.5% or more when you buy, and the same amount again when you sell.

DLR’s holdings are all US cash equivalents, such as T-bills, with no derivatives used. Because T-bills yield close to zero these days, the ETF does not pay any distributions.

What’s the value of an ETF like this? For a long-term passive investor, not a lot. However, if you happen to believe that the Canadian dollar’s strength can’t last forever and you want to load up on greenbacks while they’re on sale, DLR may be a cost-effective way to do that. For example, if you’re planning a trip to the States later this year, you could park some money in this ETF now (perhaps in a Tax-Free Savings Account) while the loonie is near its all-time high. Then you can convert it to USD before you leave.

As Canadian Capitalist mentioned in his recent post about this ETF, if Horizons were to introduce a USD-denominated version of DLR, retail investors could even use the two ETFs to do their own currency conversion for the cost of two trades.

Horizons has also launched a US-dollar version of its S&P/TSX 60 Index ETF (HXT.U). This fund tracks the 60 largest companies in Canada and is listed on the TSX, but it trades in US dollars. It seems likely that the ETF is aimed primarily at American investors who want exposure to our equity markets, but Canadian individuals and business with significant US cash holdings may find it useful.

Coming soon to a brokerage near you

It looks like a whole slew of new ETFs are set to launch later this year. A look through the new filings on SEDAR turned up these works in progress:

iShares JPMorgan USD Emerging Markets Bond (CAD-Hedged)
iShares NASDAQ 100 (CAD-Hedged)
iShares S&P Global Healthcare (CAD-Hedged)
iShares S&P/TSX Capped Consumer Staples
iShares S&P/TSX Capped Utilities
iShares S&P/TSX Equity Income
iShares S&P/TSX Global Base Metals

Claymore US Dividend Growers
Claymore Small-Mid Cap BRIC
Claymore 1-10 Yr Laddered Government Bond
Claymore 1-10 Yr Laddered Corporate Bond
Claymore Canadian Balanced Income CorePortfolio
Claymore Conservative CorePortfolio

Surprisingly, some of the new iShares ETFs look to be me-too versions of BMO products, including those devoted to emerging market bonds, utilities, base metals and the NASDAQ 100. It’s hard to see how there could be much demand for another NASDAQ 100 fund, especially since it is such a badly designed and poorly diversified index to begin with.

Claymore’s future offerings look more interesting, especially the 10-year bond ladder ETFs. Claymore’s popular CLF and CBO use a laddered strategy, but they cover only short-term bonds of one to five years.  These new ETFs would also include intermediate bonds, which should add to the yield and still protect investors from interest rate hikes by spreading out the maturity risk.

15 Responses to More New ETFs on the Horizon

  1. Sean April 14, 2011 at 12:30 pm #

    At this rate we’ll soon have more ETFs than mutual funds! Most of the new ETFs have such small AUM (Assets Under Management). I guess no one wants to be left off the gravy train. Their fees are based on perceived value (nebulous concept) rather than actual costs.

  2. DRM April 14, 2011 at 12:37 pm #

    Another well written article, Dan. I very much enjoy your blog and I especially enjoyed, a couple of months ago, your series on Dividend Myths immensely. Over the last 25 years or so, I have graduated from GIC’s to mutual funds and subsequently to stocks. I basically “buy and hold”. I am currently considered a “dividend” investor, but not necessarily married to the idea. I think finding a quality stock that pays a decent dividend is smart investing.

    I am intrigued by the idea of index investing. I have read a lot of the articles on your site, amongst others. I understand the concept, however I don’t fully understand the mechanics of ETF’s and therefore I am reluctant to jump in until I do. I would like to do a historical analysis over the last 8-10 years in order to evaluate my existing strategy versus indexing but I am not sure that I have the tools to do it.

    For example, I am uncertain as to what’s included in the annual performance numbers of various ETF’s. Are the annual performance numbers of an ETF that are reported strictly growth or do they include dividends. I’m assuming they include the reported Management Fees.

    Over and above that required to do an analysis, I have several concerns.
    *Are derivatives involved in market index ETF’s?
    *Is there anything other than the price of the individual stocks that impacts the price of an ETF since it’s not supply/demand of the ETF that dictates the price?
    *Are there any risks beyond the rise and fall of the individual stocks held by an ETF?
    *Some ETF’s appear to represent a weighted basket of stocks while others appear not weighted. What’s right and what’s wrong: Is there a significant difference in the results?

    I suspect that there are others like me who might be interested in considering ETF’s but don’t quite fully understand the mechanics behind ETF investing. With the rapid proliferation of ETF’s, I wonder if it would be appropriate to do another series of articles on ETF’s as you did with dividend myths. ETF’s 101!!!

    One final question; is ETF investing recommended for any portfolio size, whether it’s $10,000, $100,000, $500,000 or beyond?

    Keep up the good work, it is greatly appreciated.

    Dan

  3. Canadian Capitalist April 14, 2011 at 12:38 pm #

    Pretty soon, we’ll be needing a full-time job just keeping up with all these new ETFs. One thinks wistfully of the good ol’ days when all we had were a handful of ETFs and it was more than enough for our portfolios.

    Thanks for the mention! I do wish HBP lists a USD version of DLR. It would be of tremendous use for retail investors.

  4. Canadian Couch Potato April 14, 2011 at 1:01 pm #

    @Sean and CC: Funny thins is, there are still a few gaps in the Canadian ETF lineup – like a total-market US equity fund, for example. I’d like to see a DLR.U as well, though Horizons wouldn’t make any money on an ETF that was just used to flip currencies. Guess we’ll have to stick to Norbert’s Gambit for the time being. 🙂

    @DRM: Thanks for the comment, and glad you’re enjoying the blog. You’ve asked a lot of questions that would be hard to answer completely, even in a whole series of posts. I’d suggest having a look at The ETF Book, by Rick Ferri, which will give you a thorough understanding of how ETFs work.

    To answer a couple of your simpler questions, an ETF’s reported return includes all dividends (or interest payments) and is net of fees, just as with all mutual fund reporting. My usual recommendation is that investors with less than $30,000 to $50,000 avoid ETFs in favour of index funds.

  5. gibor April 14, 2011 at 4:19 pm #

    Horizons is launching 2 more ETFs:
    Horizons AlphaPro Enhanced Income Energy ETF (HEE)
    The investment objective of HEE is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of Canadian companies that are involved in the crude oil and natural gas industry; and (b) monthly distributions of dividend and call option income.
    Top Holdings % of NAV
    Arc Resources LTD. 6.67%
    Athabasca 6.67%
    Crescent Point Energy Corp 6.67%
    Canadian Natural Resources 6.67%
    Canadian Oil Sands 6.67%
    Cenovus Energy Inc. 6.67%
    EnCana Corporation 6.67%
    Enerplus Corporation 6.67%
    Husky Energy Inc. 6.67%
    Imperial Oil Limited 6.67%
    Nexen Inc. 6.67%
    Pacific Rubials Energy 6.67%
    Penn West Exploration 6.67%
    Suncor Energy Inc. 6.67%
    Talisman Energy Inc. 6.67%
    TOTAL 100%

    and Horizons AlphaPro Enhanced Income Gold Producers ETF (“HEP”)
    The investment objective of HEP is to provide unitholders with: (a) exposure to the performance of a portfolio of North American based gold mining and exploration companies; and (b) monthly distributions of dividend and call option income. Any foreign currency gains or losses as a result of HEP’s investment in non-Canadian issuers will be hedged back to the Canadian dollar to the best of its ability.
    Top Holdings % of NAV
    Barrick Gold Corporation 6.67%
    Agnico-Eagle Mines Limited 6.67%
    AngloGold Ashanti 6.67%
    Detour Gold Corporation 6.67%
    Eldorado Gold Corporation 6.67%
    Goldcorp Inc. 6.67%
    Gold fields Limited 6.67%
    Rangold Resources Ltd. 6.67%
    Harmony Gold Mining Co. Ltd. 6.67%
    Iamgold Corporation 6.67%
    Ivanhoe Mines Ltd. 6.67%
    Kinross Gold Corporation 6.67%
    Newmont Mining Corporation 6.67%
    Pan American Silver Corp 6.67%
    Silver Wheaton Corp. 6.67%
    TOTAL 100%

  6. Michel April 15, 2011 at 5:33 am #

    Good comment DRM. I think a well diversified portfolio of good dividend paying stocks will do better, over the long term, than any mutual fund or ETF.

  7. Billie 2 Willies April 15, 2011 at 7:41 am #

    ETFs are the flavour of the month. What’s next ? an ETF that invests in maple surup
    futures ?

  8. Boomer from GP April 15, 2011 at 8:27 am #

    I think I will be sticking to my broad based index ETF’s like XIC, VTI, VXUS and the like. This is ridiculous! At least they are not “flavor of the month” ETF’s!

  9. Canadian Couch Potato April 15, 2011 at 8:35 am #

    @Billie: All I can say is that if there is ever a maple syrup ETF, I will be the first to invest. Of course, I would want to diversify with a bacon ETF.

  10. BC_Doc April 16, 2011 at 11:11 am #

    Just give me a few good broad Vanguard ETFs and I’ll be a happy camper!
    I would love to see Vanguard competing with iShares Canada– that would truly be bliss…

  11. Cesar Acosta May 5, 2011 at 12:08 pm #

    Hi everyone,
    Just wanted to get your opinion about Emerging Markets ETF’s. I have been a Couch Potato investor for almost 3 years now and planning to include emerging markets in my portfolio. I am having a hard time deciding which ETF to purchase; the 3 alternatives I am considering are:
    1. Claymore ETF (CWO)
    2. Vanguard ETF (VWO)
    3. iShares ETF (XEM)
    The CWO has a MER of 0.70%, the VWO 0.22% and the XEM 0.83%.
    Based only on this, it would be a no brainer to buy the VWO, however; I am not sure if:
    1. This ETF is RRSP eligible (since it is traded in the NYSE) and,
    2. I ignore if there are other considerations to take into account.

    I would greatly appreciate it if you can share your thoughts on this topic.
    Thanks a lot!!!!

    Cesar Acosta

  12. Canadian Couch Potato May 5, 2011 at 1:04 pm #

    @Cesar: VWO is indeed RRSP-eligible. It is the ETF I recommend in my model portfolios. One advantage of XEM is that it is bought and sold in Canadian dollars, so your trading fees will be lower. For more about CWO, see this recent post:
    http://canadiancouchpotato.com/2011/04/11/living-on-the-hedge/

  13. Cesar Acosta May 10, 2011 at 11:02 am #

    Hi again,
    Just to follow up on my question from last week in regards to Emerging Market ETFs.
    I am planning to follow your advice and go for the VWO ETF from Vanguard. The only thing that came to my mind is the Dividend Reinvestment option. I know that the CWO automatically reinvests the dividends… what about the VWO?
    Do you know how it works or if I can set up automatic dividend reinvestment?
    Thanks again for your valuable advice.

    Cesar Acosta

  14. Canadian Couch Potato May 10, 2011 at 11:25 am #

    @Cesar: In my opinion, dividend reinvestment should not enter into your decision here. The yield on VWO is low to begin with (less than 2%) and the dividends are paid annually, so you will never have any significant amount of idle cash sitting in your account as a result.

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