Archive | ETFs

The Trouble With Leveraged ETFs

Being a Couch Potato is about buying, holding and rebalancing over the long term. Exchange-traded funds are great tools for index investors, but not all ETFs are designed for Couch Potatoes. In fact, some are nothing more than gambling instruments.

Readers may have noticed that my list of Canadian ETFs does not include most of the offerings from Horizons BetaPro. That’s because many of the ETFs from this provider are radically different from those of iShares, Claymore and BMO.

Horizons’ so-called leveraged ETFs promise to deliver double the return of the index they track: if the Canadian stock market goes up 2% in a given day, the Horizons BetaPro S&P/TSX 60 Bull Plus should go up 4%. If the index declines, the ETF will lose twice as much. The Bear Plus ETF works the other way around, delivering twice the inverse of the day’s returns: if the market drops 2%, the fund goes up 4%. Canadian investors love these things: they are among the most frequently traded securities on the TSX.

In the hands of a professional, leveraged ETFs may be useful for managing short-term risk.

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Should You Buy US-listed ETFs?

Jason, a reader of this blog, recently wrote to ask why an investor would want to invest in Canadian-listed  ETFs that hold US stocks when there are US versions with much lower fees.

For example, the iShares Canadian S&P 500 Index Fund (XSP) charges 0.24%, while the Vanguard Total Stock Market ETF (VTI) has an MER of just 0.09%. Jason had several specific questions—all very good ones—which I’ll attempt to answer.

Q: When one holds a US-based ETF, are the dividends paid out in US dollars and then converted to Canadian dollars by the brokerage, costing the investor conversion fees?

Yes, dividends earned from US-listed ETFs are paid in US dollars. If you hold the ETF in a taxable account, the dividends simply go onto the US-dollar side of the account. But if you hold the ETF in RRSP or other account that does not allow US dollar holdings, your broker automatically converts them before depositing them in your account. This usually incurs a fee of about 1% or more: check your broker’s website or call and ask.

While this conversion fee does cause a small drag on your dividend return,

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