Archive | February, 2012

A New Way to Sidestep Currency Conversion Costs

One of my biggest frustrations as an ETF investor is that so few online brokerages allow you to hold US dollars in registered accounts. Last year BMO InvestorLine became just the fourth brokerage to add this feature, following RBC Direct Investing, Questrade and Qtrade.

A few other brokerages offer partial solutions: TD Waterhouse, for example, allows you wash your trade if you’re selling one US security and buying another in an RRSP. But that doesn’t help you if you have new US dollars your want to contribute to your registered accounts.

My own brokerage, Scotia iTrade, offers a so-called US-Friendly RRSP. For a flat fee of $30 per quarter, you can buy US securities in your RRSP with Canadian dollars and avoid the usual spread, which is about 1.5%. I test-drove this service last year, and it’s adequate if you’re making a large transaction once a year. But I’m not going to pay $120 annually for it. Especially now that I’ve discovered a solution for sidestepping currency exchange fees in RRSPs—a solution that should work at any brokerage.

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Scott Burns Interview: Part 2

Here is part two of my interview with Scott Burns, the newspaper columnist and Chief Investment Strategist at AssetBuilder who created the original Couch Potato portfolio more than 20 years ago. You can read part one here.

You’ve said that anyone who can fog a mirror can be an index investor, but as I’m sure you have found, even people who accept the academic arguments often cannot bring themselves to trust the markets.

SB: Absolutely. There are basically two issues here. First, there are the people who say, “I like the Couch Potato approach, but can’t I tweak it a little bit?” The moment they start doing that they are saying that they can forecast the market. They think it’s just tweaking, but they are starting down a road that ends in trying to foretell the future. I think there can be enormous flexibility in an index approach, don’t get me wrong. But when people come with the mindset of liking the Couch Potato but wanting to tweak it, the tweaks get larger and larger and ultimately they become fortune tellers.

The other issue is trust.

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An Interview with the Original Couch Potato

“Allow me to introduce the Couch Potato Portfolio, a surefire formula to invest your money, enjoy a return that will put you in the top half of all professional investors, but expend virtually no effort or thought.”

That’s how Scott Burns began his column in the Dallas Morning News on September 29, 1991, and the Couch Potato strategy was born. Index funds, of course, had existed for some 15 years by that time, but it was Burns who helped popularize them with Joe and Jane Investor in countless articles that followed. In 2006, Burns left the newspaper to found AssetBuilder,  a firm that helps investors build low-cost, passively managed portfolios inspired by the original Couch Potato.

I recently had the opportunity to chat with Scott Burns about the early days of index investing. Here’s an excerpt from our interview.

During the 20 years since you created the Couch Potato portfolio, we’ve seen an enormous evolution in index investing. Can you take us back to 1991 and describe the investing climate back then?

SB: Let’s go back a little further. I have been writing about personal finance since the late 1960s.

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Inside Morningstar’s New Strategy Indexes

On Monday, I wrote a post about a new Canadian dividend fund from XTF Capital. That fund is one of five new products from the newest ETF provider in the country, all of which are based on indexes provided by Morningstar Canada. Two more began trading on Wednesday: the XTF Morningstar Canada Value Index ETF (FXM) and the XTF Morningstar Canada Momentum Index ETF (WXM).

In my original post, I criticized XTF Capital and Morningstar for not making the index methodologies public. It turns out that wasn’t quite fair:  XTF president Barry Gordon contacted me and explained that the index construction rules are indeed fully transparent, and although they were not on the XTF website at the time, they are now.

I ended up speaking with Mr. Gordon about his company’s partnership with Morningstar, and it’s an interesting story. Although XTF Capital is a small firm compared with its competitors, it has partnered with one of the most well-known research firms in the investment industry, and the result is some unique and interesting ETFs. They are all passively managed, but they use rules-based strategies designed to deliver better risk-adjusted returns than the overall market.

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A New Dividend ETF With Secret Sauce?

Last June, a new ETF provider appeared in Canada with little fanfare. I didn’t write anything about the launch of XTF Capital at the time, because their first lineup of products was a series of covered call ETFs and a convertible bond ETF that have little or no relevance to Couch Potato investors. However, last week XTF launched the first three ETFs in a new family that will track indexes provided by Morningstar. One of these, the XTF Morningstar Canada Dividend Target 30 (DXM), may be of interest to passive investors who use a dividend-focused strategy. So it’s worth a closer look.

Of course, the Canadian dividend ETF space is already a little crowded, with the iShares Dow Jones Canada Select Dividend (XDV) and Claymore S&P/TSX Canadian Dividend ETF (CDZ) currently holding almost $1.7 billion between them. Broken down by sector, this new XTF fund is about 25% financials (that’s half as much as XDV, but about 4% more than CDZ) and almost 30% energy, which is a far greater share than either of its competitors. It also holds 13% in utilities and almost 20% in telecoms.

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Are Active Funds Adding Value?

Just how well are mutual fund investors faring in Canada? That question isn’t as straightforward as it may seem.

The Standard & Poor’s Indices Versus Active (SPIVA) reports are useful for determining the percentage of active funds that beat their benchmarks. The most recent one, for example,  found that just 2.5% of actively managed Canadian equity funds outperformed the S&P/TSX Composite Index during the five years ending in 2010.

But the SPIVA reports have some limitations: most importantly, they don’t tell you the degree of that underperformance. Indeed, as critics have pointed out, virtually all ETFs lag their benchmarks, too, so they would all appear on the SPIVA report’s list of losers. The key point, of course, is that the iShares S&P/TSX Capped Composite (XIC) lagged its benchmark by just 22 basis points last year, while the Investors Canadian Equity Fund—to pick on just one high-priced alternative—trailed it by 4.54%. Clearly that’s a crucial distinction.

Wishing upon a Morningstar

Justin Bender, portfolio manager at PWL Capital in Toronto, recently supplied me with some more useful data about fund performance.

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How Claymore’s Advantaged ETFs Pay Investors

In a previous post, I looked at some strategies for tax-efficient investing with ETFs. Among the innovative products designed for non-registered accounts are Claymore’s Advantaged ETFs, which hold either bonds or foreign equities. Because interest and foreign dividends are taxed at your full marginal rate, these ETFs use forward contracts to recharacterize all distributions as either return of capital (ROC) or as capital gains. Although there are costs and some added risks, these products may deliver higher after-tax returns than plain vanilla ETFs in the same asset classes.

What was never clear to me was why the distributions came in these two different flavours. In 2010, for example, the Claymore Global Monthly Advantaged Dividend (CYH) paid out $0.67 per share in distributions, virtually all of which was capital gains. Last year, however, the fund’s $0.63 per share distributions were all return of capital. I asked Claymore to clarify and Dan Rubin, vice president of marketing, replied as follows:

“The distributions in any given year will depend on the activity of the flows of the fund and the performance of the Canadian equities held by the ETF as part of the structure.

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