Archive | August, 2012

More ETFs Close Their Doors

This month, two ETF providers in the US announced they were closing shop. First up was FocusShares (associated with the online brokerage Scottrade), who will shutter its entire roster of 15 ETFs. Then on August 17—the same day the FocusShares ETFs ceased trading—Russell ETFs declared it will close all of its passively managed funds in October.

ETF closures are not particularly newsworthy in the US: some 48 other funds have called it quits since the beginning of 2011, and there will no doubt be many more as the market evolves. But I think these latest closures are much more significant, and here’s why: these were genuinely good products.

As the ETF market has exploded in the last six or seven years, all manner of exotic, narrowly focused products have sprouted up like weeds. Not only is it unsurprising that many failed to attract investor interest, it’s heartening. It was hard to shed a tear over the demise of the HealthShares family of funds that included ETFs specializing in Dermatology & Wound Care, Metabolic-Endocrine Disorders and Autoimmune-Inflammation. Is it any wonder they pulled the plug on these terminally bad ideas?

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BMO Takes on the Big Boys

BMO has announced some interesting new changes to some of the ETFs—and one of them may lead to the first genuine price war in the Canadian marketplace.

The company recently announced that the BMO Dow Jones Canada Titans 60 Index ETF (ZCN) will soon be pegged to the S&P/TSX Capped Composite Index, the most widely tracked Canadian equity benchmark. That will increase the number of holdings in the fund from 60 to almost 250, since the broader index includes mid-cap and small stocks as well as large caps. In addition, the BMO US Equity Index ETF (ZUE) will begin tracking the S&P 500. It will grow its holdings from 282 to 500 stocks, though it remains confined to large caps.

BMO says the changes were prompted by requests from advisors who wanted funds that tracked the better-known indexes from S&P. The Dow Jones benchmarks the funds currently use were created specifically for the BMO funds when they were launched in 2009.

Head-to-head with the giants

This is an interesting development in the Canadian ETF market. As most Couch Potatoes will recognize, the revamped ZCN and ZUE will track the same indexes as the iShares S&P/TSX Capped Composite (XIC) and the iShares S&P 500 (XSP),

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Another Weak Criticism of Indexing

The investment industry has never been kind to index investing, but the criticisms are getting weaker and more desperate.

An article in yesterday’s Globe and Mail gets off to a bad start by suggesting the recent growth in indexing is the result of a marketing campaign: “The financial firms want you to buy the index because they’ve figured out that they can make a good buck selling index-linked products—funds and especially ETFs.”

I suppose it’s true that investment firms like BlackRock and Vanguard want you to buy their products. But the growing popularity of index funds and ETFs has largely been the result of the appalling record of active management, and it has come despite the best efforts of the financial industry, not because of it.

No doubt a small number of firms are “making a good buck” from index funds, but ETF assets in Canada are still about $50 billion, compared with about $800 billion in mutual funds, the vast majority of which are actively managed. That’s about a 6% market share. To suggest the fund industry stands to profit from more passive investing is like arguing the fast food industry is organizing a conspiracy to promote salad.

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Under the Hood: First Asset Morningstar US Dividend Target 50 (UXM)

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: First Asset Morningstar US Dividend Target 50 Index ETF (UXM)

The index: The fund tracks the Morningstar US Dividend Target 50 Index, which was created specifically for this ETF. The methodology screens US companies based on five criteria: expected dividend yield, cash flow/debt ratio, five-year normal EPS growth, return on equity (latest quarter), and three-month EPS estimate revision. To ensure liquidity, all stocks in the index must also be among the top third in average daily trading volume. The top 50 stocks in this screen are then equally weighted in the portfolio (2% each) and rebalanced quarterly.

The cost: The fund’s management fee is 0.60%. Because the fund is less than a year old it has not published its full MER, but expect it to be at least 0.68% after factoring in the Ontario Harmonized Sales Tax.

The details: UXM is designed to give dividend-focused Canadians a one-stop solution for diversifying into the US market. The index is based on the US Income model portfolio that is part of Morningstar’s Computerized Portfolio Management Services (CPMS),

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ETF Webinar Today

This afternoon (Tuesday, August 14) I will be participating in a webinar called “ETFs in Portfolio Management and Construction,” moderated by Yves Rebetez of ETF Insight. I’ll be joined by two industry professionals who are much smarter and better dressed than I am: Alfred Lee, Vice President and Investment Strategist for BMO ETFs, and Tyler Mordy, Director of Research, HAHN Investment Stewards.

We’ll be discussing the various ways that ETFs can be used to build diversified portfolios. I’m going to cover the basics using the Complete Couch Potato as an example. This  portfolio provides extremely broad diversification with just six ETFs, all for an annual fee of 0.29%. The other panelists will consider some more advanced strategies, including adding alternative asset classes to traditional stock-bond portfolios.

I welcome you to join us at 4:15 pm EST. For login information and links, visit ETF Insight.

Book giveaway winners

Thanks to everyone who entered the draw for one of three copies of my new book, The MoneySense Guide to the Perfect Portfolio. There were more than 250 entries,

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The Second Coming of the Perfect Portfolio

The anticipation has been palpable, I know, but the waiting is over. The second edition of The MoneySense Guide to the Perfect Portfolio is now available.

The first edition of my handbook for do-it-yourself index investors, published last October, sold out quickly as Couch Potatoes stampeded to their local newsstands to demand a copy. The revised second edition should now be available across Canada on magazine newsstands at Chapters, Shoppers Drug Mart, Walmart and Loblaws. It’s also available online, and if you order 51 copies or more, you get a hefty discount. Order 99 and you save even more. [Update: Perfect Portfolio is now available in Kobo. and Kindle editions.]

While the second edition is very similar to the first, there have been a surprising number of developments since last fall. Vanguard arrived in Canada, Claymore was bought by BlackRock, and three brokerages now offer commission-free ETFs. The guide has been updated accordingly.

Now with improved performance!

I have long wanted to compile more complete historical performance data for my model portfolios,

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