Archive | 2016

Podcast 2: Planning vs. Investing

The second episode of the Canadian Couch Potato podcast is now available:

Many thanks to the thousands of people who downloaded and listened to the debut episode, and for sending your feedback and suggestions for future topics. After an initial delay, the podcast is now available through iTunes as well as all major podcasting apps, so please subscribe if you haven’t done so already. If you enjoy what you hear, I invite you review the podcast on iTunes, which helps more listeners hear about it.

Our new episode features financial planner Sandi Martin, who will be well-known to readers of Canadian financial blogs: she has her own blog at Spring Personal Finance, and has been a contributor to Boomer & Echo. Sandi is also one of the creators of the Because Money video and podcast series.

In our interview, Sandi and I discuss the important (and frequently misunderstood) differences between financial planning and investment management. The media often lump these two services together, but they are fundamentally different: in all provinces except Quebec, financial planning is not even regulated.

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Making Sense of Capital Gains Distributions

Imagine you’re part of a group of 10 friends at a restaurant to celebrate the holidays. Everyone else arrives on time and enjoys cocktails, appetizers and a main course, while you get stuck in traffic and barely make it in time for dessert. At the end of the meal, the server brings 10 separate bills, each for the same amount. “But I only had a slice of pie!” you complain. “Why am I paying for a full meal?”

If you’re an ETF or mutual fund investor who makes a large purchase in December, you may end up feeling the same way. That’s because some funds distribute capital gains at the end of the year, and you’re on the hook for the taxes whether you’ve held the fund for a couple of weeks or the full 12 months. (Note this only applies to non-registered accounts: you don’t need to worry if you’re using only RRSPs and TFSAs.)

Giving them the slip

Let’s back up and review why this happens. Mutual funds and ETFs occasionally sell investments that have increased in value, resulting in capital gains. Over the course of the year, a fund may also do some tax-loss harvesting to realize losses that can offset some or all of those gains.

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Podcast 1: Are You Ready for DIY?

Welcome to the debut episode of the Canadian Couch Potato podcast.

Every two weeks I’ll be releasing a new episode of the podcast and announcing it here on the blog. You can stream the most recent episode using the player below, or you can subscribe via iTunes or Google Play, or using your favorite podcast software, such as Stitcher, Pocketcasts or Overcast.

This inaugural episode features my friend and colleague Justin Bender. In our interview we reflect on our experiences developing our unique DIY Investor Service, where we helped clients build ETF portfolios they could manage on their own. Here are some links related to that interview:

Renovate Your Portfolio appeared in MoneySense in 2012. Written before I joined PWL Capital, this article featured three of the original clients of the DIY service.
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In his continuing efforts to support investors, Justin has just launched a YouTube channel called DIY Investing with Justin Bender. The first series of videos includes tutorials on how to place ETF trades at Canada’s largest online brokerages.

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The Canadian Couch Potato Podcast is Here

I’m excited to announce that on Wednesday, November 30, we’ll be launching the Canadian Couch Potato podcast.

Each episode will feature an interview with a guest expert who will chat about a specific investing topic, and then I’ll review some takeaway messages from the discussion. I’ve also created a segment called “Bad Investment Advice,” where I poke fun at a specific bit of unhelpful commentary in the financial media. Finally, I wrap up with an Ask the Spud segment where, with the help of my PWL colleague Amanda Dalziel, I answer investing questions from listeners and blog readers.

(By the way, I’m always looking for new ideas for these segments, so if you’ve read or heard some crappy investment advice, or if you have a question related to index investing, please let me know.)

Our first episode will feature my friend and colleague Justin Bender. We reflect on our experiences developing our unique DIY Investor Service, where we helped clients build ETF portfolios they could manage on their own. That service (since discontinued) helped well over a hundred families and we received consistently great feedback. We learned a lot about what it takes to be a successful DIYer—but also what can go wrong.

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Ask the Spud: Reverse Share Splits in ETFs

Q: I noticed the unit price of some iShares ETFs changed radically last week. For example, the iShares MSCI Singapore ETF (EWS) shot up from around $10 to $20 overnight on November 7. Another fund went from $14 to over $28. What’s going on here, and how would it affect investors? — Chris

If you wake up to find the unit price of your ETF doubled overnight, you might be tempted to think you just scored a 100% return while you slept. But unless you’re an eternal optimist, you’ll probably realize that isn’t the case. What’s happened here is called a reverse share split, or consolidation. Although the price per share of these iShares ETFs doubled (or in some cases quadrupled), the total value of each investor’s holding hasn’t changed, because they now own correspondingly fewer units.

If you’ve ever traded stocks, you’re probably more familiar with a regular stock split, whereby a company increases its number of outstanding shares by some multiple, reducing the price of each share by a proportional amount. A company with one billion shares trading at $100 might undergo a 4-for-1 split, creating four billion shares trading at $25.

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Tangerine Expands Its Lineup

The Tangerine Investment Funds have long been part of my model portfolios, as they’re a simple way to build a broadly diversified index portfolio with a single product. With a management expense ratio (MER) of 1.07% they are not the cheapest option, but they offer a lot of convenience for investors who aren’t ready to manage a portfolio of individual index funds or ETFs.

This month the Tangerine family grew for the first time in five years with the launch of the Tangerine Dividend Portfolio.

As with the existing members of the Tangerine lineup, the Dividend Portfolio includes a mix of Canadian, US and international equities. But whereas the older funds track traditional indexes of large and mid-cap stocks, the new one is focused on yield. It tracks three MSCI indexes that screen for companies with dividend payouts at least 30% higher than average, as well as “quality characteristics” that suggest these yields will be sustainable.

The MSCI Canada High Dividend Yield Index currently holds 22 stocks, including the usual suspects such as Fortis, TransCanada, Telus, and the big banks.

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Smart Beta ETFs: Summing it All Up

This is Part 10 in a series about smart beta ETFs. See below for links to other posts in the series. In this final installment, we review what we’ve learned and consider the pitfalls of embracing smart beta strategies.

 

At last we arrive at the final post in this series on smart beta ETFs. From the comments, tweets and few cancelled subscriptions, I know some readers didn’t make it this far. Even if you stuck it out, you’re probably asking why I’ve devoted so much space to this technical subject. After all, I’ve spent years arguing that investors should keep things simple with traditional index funds and ETFs, and let go of the dream there’s something better out there. Have I changed my tune and embraced a strategy that strives to beat the market by tilting toward value stocks, small caps, momentum, low volatility and high-quality companies?

Let’s be clear: I haven’t changed my position. I still recommend plain old cap-weighted ETFs for DIY investors, and our full-service clients. I still use them in my own portfolio.

So why devote so much space to smart beta?

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Is Your Smart Beta Strategy Doing Its Job?

This is Part 9 in a series about smart beta ETFs. See below for links to other posts in the series. In this installment, we look at how you can tell whether smart beta indexes will really perform as expected.

 

As we’ve worked through each of the factors targeted by smart beta ETFs—value, size, momentum, low volatility and quality—we’ve been careful to point out that no one really knows whether these premiums will persist in the future, especially once they’re on the radar of millions of investors.

However, we can look backward to see whether smart beta indexes have actually behaved as you would expect. Say you’re considering an ETF that targets value and small-cap stocks. If the index did well when value and small stocks outperformed, and did poorly when they lagged, that’s reassuring. But if you find the index’s performance had no correlation with value and size—or if it delivered outsized returns during periods when these stocks were dogs—that’s a red flag. It would be difficult to put a lot of faith in that ETF.

Think of a gardener who buys a system of rain barrels to capture the precipitation that falls on her roof.

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Exploring Multi-Factor Models

This is Part 8 in a series about smart beta ETFs. See below for links to other posts in the series. So far we’ve looked at ETFs that target specific factors. In this installment, we look at funds that offer exposure to more than one.

 

Over the last few weeks I’ve looked at the five factors most commonly associated with smart beta ETFs: value, size, momentum, low volatility and quality. The specific funds I’ve mentioned so far are designed to zero in on one of those factors. But what if you wanted to target more than one? Should you just use several funds, or are their ETFs that use “multi-factor” strategies?

Let’s first consider the reason for building a portfolio with exposure to more than one factor: better diversification. As we’ve seen, each factor is virtually guaranteed to see periods of underperformance, even if they deliver higher returns over the long haul. This can lead to tracking error regret, which is the frustration investors feel when they lag the broad market. Unless you believe strongly in your smart beta strategy,

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