Archive | July, 2011

Claymore’s CGL: When Buying Gold Isn’t Enough

In Monday’s post, I answered a reader’s question about the iShares Gold Trust, an ETF that is cross-listed on the Toronto and New York Stock Exchanges with the ticker symbols IGT and IAU, respectively. I explained that while it is possible to buy and sell this product in either US or Canadian dollars, neither version gives you any exposure to currency risk. However, that’s not the case with the Claymore Gold Bullion ETF (CGL), which also tracks the price of the yellow metal by holding gold bullion. CGL is unique among gold ETFs in that it uses currency hedging.

It’s worth pausing to think about this concept. As most index investors know, it’s common for funds that hold foreign stocks or bonds to hedge their currency exposure to protect Canadians from the effects of a rising loonie. But gold is not a foreign-denominated asset, like shares in Coca-Cola. Yes, its price is widely quoted in US dollars, but that’s not the same thing. Think about it this way: if you were buying gold bullion from the Royal Canadian Mint,

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Ask the Spud: iShares Gold Trust

Q: The iShares Gold Trust (IGT) trades on the Toronto Stock Exchange, but I can’t find it on the iShares Canada website. Can you tell me why? — Jim O.

The iShares Comex Gold Trust is an exchange-traded product that tracks the price of gold. Like its competitor, SPDR Gold Shares (GLD), the trust is backed by gold bullion held in a vault by a custodian.

But although IGT is listed on the Toronto Stock Exchange, it is not a Canadian product. It’s simply a cross-listing of the iShares Gold Trust (IAU), which is domiciled in the US and traded on the NYSE. That’s why it isn’t included on the iShares Canada site.

If you’re not familiar with cross-listing, it’s a common practice among large corporations that want their shares to trade in more than one currency (and sometimes more than one time zone). For example, while Research in Motion is a Canadian company traded on the TSX, you can also buy its shares in US dollars on the NASDAQ. There are many other examples of companies with dual listings,

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Review: Scotia iTrade’s US-Friendly RRSP

The cost of investing has dropped dramatically since the advent of online discount brokerages, but there are a couple of transactions where Joe Retail stills get clobbered. One of these is currency exchange fees: charging clients 1.5% or more to convert Canadian dollars to US dollars—and the same to change them back—is a disgrace. Investors who use US-listed ETFs need to find ways to avoid foreign exchange fees or they risk giving back everything they save on the lower management fees.

As a client of Scotia iTrade, I had an opportunity to test-drive their US-Friendly RRSP program this month as I made some changes in my portfolio. I used to hold three separate ETFs for my international equities, but when the Vanguard Total International Stock (VXUS) was launched earlier this year, it made sense for me to merge them into a single fund when I next rebalanced. So I was in a position to sell three US-listed ETFs and buy another, and these four trades would have cost me hundreds of dollars in foreign exchange fees at the usual rate.

However, Scotia iTrade’s US-Friendly RRSP offered a solution.

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The Quest for Alpha Comes to Edmonton

Larry Swedroe is continuing his cross-country quest for alpha, making his next stop in Edmonton—and Canadian Couch Potato readers are invited to attend.

I was contacted last week by Marshall McAlister, a principal at Pavilion Investment House in Edmonton, who will be hosting the event this Friday morning, July 22, at 8 a.m. The firm would like to invite readers in Alberta’s capital to hear Swedroe discus the ideas in his latest book, The Quest for Alpha: The Holy Grail of Investing.

Swedroe delivered the same talk earlier this summer in Ottawa and Toronto. His presentation gives an overview of the main idea in his book: namely, that decades of evidence reveal that beating the market on a consistent, risk-adjusted basis is extraordinarily difficult for mutual funds, pension plans, hedge funds and individual investors.

The talk is free, although stock pickers will have to pass through a metal detector and submit to a thorough body cavity search. (Don’t worry, they’re just looking for alpha.) If you’re interested in attending, contact Lana Meyer at (780) 638-2491.

The Canadian connection

There is some interesting Canadian content in Chapter 9 of The Quest for Alpha,

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Why Do Index Funds Use Derivatives?

Earlier this week I described how several US and international equity index funds get their market exposure by using index futures rather than holding the stocks directly. This structure is partly a holdover from the days when Canadians could keep only a small portion of their RRSPs in foreign investments. But the question remains: now that foreign content rules are long gone, why don’t these funds just move to a traditional structure and buy all the stocks in the index?

I put that question to Paul Mayhew, RBC Global Asset Management’s VP of Research and Product Development. He explained that the non-hedged version of the US Index Fund actually does hold all the stocks in the S&P 500. However, RBC decided to continue with the old structure in the US and international index funds that use currency hedging, because futures contracts provide an easy way to manage the foreign exchange risk. More important, however, was the potential tax advantage of keeping the derivative structure intact.

Their loss is your gain

This is actually pretty counterintuitive. Funds that use index futures are not normally tax-efficient, because any gains are treated as interest income,

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What’s in Your Index Fund?

In a series of posts last month, I looked at ETFs from Horizons and Claymore that use derivatives rather than simply holding the stocks or bonds in their underlying indexes. A number of readers responded by saying that they were wary of non-traditional index funds and preferred to use the plain-vanilla variety. What they may not realize is that several Canadian index mutual funds also use derivatives to get exposure to foreign stocks. You may even own one without even being aware of it.

Here’s a list of the funds that fall into this category:

RBC US Index Currency Neutral (RBF558)
RBC International Index Currency Neutral (RBF559)
Altamira US Index (NBC846)
Altamira US Index Currency Neutral (NBC856)
Altamira International Index (NBC839)
Altamira International Index Currency Neutral (NBC877)
Scotia CanAm Index (BNS351)
Scotia NASDAQ Index (BNS397)

The above funds hold well over 90% of their assets in T-Bills and cash equivalents, and they get their market exposure by holding index futures. These are  agreements to purchase the stocks in the index at a contracted price on a specific future date.

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Holding Your Bond Fund for the Duration

Bond index funds have a place in almost all portfolios, even in a low-rate environment. However, it’s important to match the right bond fund to your investment goals. To do that you need to know two important details. You can usually find both of these numbers on the web page or fact card of any bond mutual fund or ETF.

The first is the weighted average term to maturity of the bonds in the fund. For example, the iShares DEX Universe Bond Index Fund (XBB)—which tracks the most popular fixed-income benchmark in Canada—is about half short-term (one to five years to maturity), one quarter intermediate-term (five to 10 years) and one quarter long-term bonds. The weighted average term to maturity of all the bonds in the fund is 9.3 years.

This number is important, because the fund will behave much like an individual bond of about this same maturity. Sure enough, if you look up the current yield on Government of Canada 10-year bonds you’ll find it is 3.07%, almost identical to XBB’s current yield to maturity (3.03%). Now you know that XBB will be sensitive to the prevailing interest rate on 10-year bonds: if this yield goes up,

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Will Rising Rates Really Clobber Bonds?

Investors are worrying about a lot of things these days, but the fear of rising interest rates remains near the top of the list. Not only are savings accounts and GICs yielding peanuts, but bond investors are worried that a spike in rates will send the value of their bond funds and ETFs plummeting.

The concern is certainly warranted. Remember that bond prices and interest rates are on opposite ends of a seesaw: whenever one goes up, the other goes down. But before you make drastic changes to the fixed-income side of your portfolio, make sure you understand the subtleties of interest rates and their effect on bond prices.

Overnight sensation

When people talk about interest rates, they’re usually vague about which ones. The media tend to focus on the overnight rate, which is set by the Bank of Canada in an effort to control inflation.

That rate was 0.25% in April 2009, and in 2010 it ticked upward three times to 1%, where it stands now. If you follow the mortgage markets, you saw that the banks’ prime rates (currently 3%) went up immediately following each of these three hikes in the overnight rate.

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