Archive | 2017

Podcast 9: Finding Common Ground

Does the whole “active versus passive” debate miss a key point about what leads to successful investing? Why do investors focus on “mutual funds versus ETFs” when neither structure is inherently superior? These are some of the topics I discuss with Tom Bradley in my latest podcast:

Tom is the co-founder and president of Steadyhand Investment Funds, based in Vancouver. Steadyhand believes strongly in active management: they even call themselves “undex funds,” because their goal is to look like nothing like the benchmarks. But if you spend any time reading Tom’s articles in the Globe and Mail, MoneySense, and on the Steadyhand blog, you’ll notice there a surprising amount of overlap in our messages. I noted this some six years ago when Tom released the first edition of his book, It’s Not Rocket Science.

Tom and I both understand that, whatever your specific strategy happens to be, the fundamental ingredients of a successful plan are low cost, broad diversification and a disciplined strategy you will adhere to over the long term.

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Ask the Spud: Should I Switch All at Once?

In Episode 8 of the Canadian Couch Potato podcast, I answered the following question from a listener named Remy:

I want to move away from my stocks and mutual funds in order to build a Couch Potato portfolio with ETFs. What is the best way to do this? Should I sell everything at once and pay all of the taxes this year, or should I sell my assets over a longer period, like two to three years?

Many investors in Remy’s situation have made that all important first-step: committing to an indexed strategy. But now they’re unsure about how to liquidate their existing portfolio and build the new one. Should you clean house and do it all at once, or take a more gradual approach?

This is an easy decision if all of your investments are in RRSPs and TFSAs. Since there are no tax consequences to selling your existing holdings, you should just liquidate all the holdings right away. But Remy is investing in a non-registered account, and if he’s held his stocks and mutual funds for several years, he’s probably sitting on large unrealized capital gains,

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Podcast 8: Couch Potato With a Conscience

Are you interested in indexing but uneasy about the idea of investing in certain “sin stocks”? In my latest podcast, I look at whether you can be a Couch Potato investor and still stay true to your values.

The episode features a detailed interview with Tim Nash, a financial planner, creator of the Sustainable Economist blog and a specialist in socially responsible investing (SRI), with a particular expertise in green ETFs. I first interviewed Tim here on the blog back in 2013, and since then he has been my go-to guy on sustainable investing.

During the interview we discuss several ETFs. Here are links to the ones Tim mentions:

iShares Jantzi Social Index ETF (XEN) offers exposure to 50 large-cap Canadian companies weighted according to environmental, social, and governance (ESG) criteria.

iShares MSCI KLD 400 Social ETF (DSI) is one option for large-cap US stocks. According to Tim: “Really what they’re trying to do is to replicate the S&P 500, but getting rid of the worst of the worst companies.” The fund drops the lowest-ranking 20% of stocks based on their ESG scores.

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Bond Basics 3: Should You Wait for Higher Yields?

In my last podcast, I set out to answer a series of common questions about bonds. Here’s one I’ve been hearing on and off since 2009: “With yields so low now, is it even worth it to invest in bonds? Wouldn’t I be better off waiting until interest rates go up?”

It’s true that interest rates are near historical lows: as of early May, 10-year Government of Canada bonds are yielding just over 1.5%, and a broad-based bond index fund like the ones I recommend in my model portfolios yield a little less than 2%. It’s hard to get excited about that, especially when equity returns have been so strong in recent years.

It’s also hard to tune out the financial media, which is still populated by gurus who warn interest rates have “nowhere to go but up.” Since rising rates will cause the value of bonds to fall, why not just stay out of bonds until yields are higher?

The first thing to discuss is this idea that interest rates are highly likely to go up in the near future. I don’t think we can take people seriously anymore if they continue to beat this drum.

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Bond Basics 2: Why Your ETF Isn’t Losing Money

In my latest podcast, I answer a series of frequently asked questions about bonds. The second of these came from a reader named Andrew: “I have been investing using your Couch Potato strategy for just over three years now,” he wrote. “However, does it still make sense to invest in bonds when they are continually losing money?”

As it happens, bond ETFs have not been “continually losing money” at all. Indeed, over the three years ending March 31, broad-based funds such as the BMO Aggregate Bond Index ETF (ZAG) and the Vanguard Canadian Aggregate Bond Index ETF (VAB) returned close to 4% annually, with positive returns in each calendar year. A $1,000 investment in either ETF would have grown to about $1,120 over that period. So why would an investor think he had lost money?

I don’t blame Andrew for being confused, as this one trips up a lot of investors. The problem lies in the way brokerages display the holdings in your account. Rather than calculating the total return on your investments—which would include both price changes and all interest payments and dividends—your list of holdings reflects only the change in market price.

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Podcast 7: Making Sense of Bonds

I’ve always felt that being a defenseman is the toughest job on a hockey team. Forwards score most of the goals, and goalies can steal the show with a few timely saves, but fans rarely notice a defenseman until he makes a mistake. Bonds get that same lack of respect from investors: everyone seems to forget the times they provided a safety net when stocks plummeted, but if they lose a few percentage points they get kicked to the curb.

Part of the problem is that bonds can be difficult to understand. So in my latest podcast, I devote the full episode to answering common questions about the asset class investors love to hate.

I previewed this episode in my last post about why bond prices fall when rates rise, and I’ll continue with a series of blog posts that expand on some of the other issues discussed in the podcast:

If you started investing in bond ETFs about three years ago, chances are good that your holding is showing a loss on your brokerage statement. So you might be surprised to learn that broad-based bond index funds returned close to 4% annually over the three years ending March 31.

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Bond Basics 1: Why Bond Prices Fall When Rates Rise

Bonds have a reputation for being conservative, even boring. But no one ever accused them of being easy to understand. I get a steady stream of emails and blog comments about bonds, and they reveal that many investors are very confused by how bond ETFs work, how they’re affected by changes in interest rates, whether investors can use alternatives to bonds, and even whether it’s OK to abandon them altogether. So my next podcast (which goes live on April 19) is devoted to answering common questions about bonds, with the hope of clearing up some of this confusion. As a companion to the podcast, I’ve also created a short series of blog posts addressing the same questions.

In this first installment, let’s dig into one of the most fundamental concepts for bond investors to understand: the inverse relationship between bond prices and interest rates: when one goes up, the other goes down. This is confusing for many people—after all, investors regularly complain that bond yields are low, so shouldn’t higher interest rates be a good thing? And why are we told to stay away from bonds because yields might rise? You never hear people say you should avoid stocks because their dividends might get higher.

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Can ETFs Make the Market Go Up in Smoke?

[Note: This was an April Fool’s joke!]

Does the growing popularity of indexing and ETFs pose a real danger to the markets? As I discussed on a recent podcast, some market experts are concerned that the swelling ranks of index investors is creating a bubble. I used to brush off these concerns as the paranoid ramblings of money managers who are losing billions in assets as investors discover they add no value. But I’m starting to wonder if it might be true. After all, there are lots of articles on the Internet that say so.

A recent piece in the Globe and Mail, for example, featured billionaire hedge fund manager Seth Klarman, who worries that the growth of indexing is making markets less efficient: “The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.”

I appreciate that index investors want to get broad diversification at the lowest possible cost, and that they’re attracted to a strategy that has the weight of academic evidence behind it.

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How TD Put the “Managed” in ETF Portfolios

What Canadian bank was first to launch a line of ETFs? You might think it was BMO, which is by far the biggest bank in the industry today, with more than 70 ETFs and some $37 billion in assets. But in fact it was TD, who were ahead of the curve when they created a small family of ETFs way back in 2001. Five years later, with truly terrible timing, they shuttered those ETFs because of lack of interest. Of course, the industry exploded in popularity almost immediately afterwards.

TD re-entered the ETF marketplace in 2016 with six funds covering the core asset classes: Canadian, US and international stocks (the latter two available with or without currency hedging) and Canadian bonds. The ETFs were copycats of what’s long been available from iShares, BMO and Vanguard, and the launch had almost no fanfare: one suspects TD just wanted to provide another option for their advisors who had been fielding questions about ETFs from clients.

But this week TD launched something innovative: a lineup of five mutual funds that use the bank’s ETFs as their underlying holdings. Each has a different target asset allocation:

Fund name
Bonds
Stocks

TD Managed Income ETF Portfolio
70%
30%

TD Managed Income &

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