Archive | New products

Drilling Down into the iShares Core ETFs

When iShares launched its Core ETF series back in March it made some waves in the industry. The company cut the fees on nine ETFs it considers building blocks of a long-term portfolio. Its boldest move was to slash the cost of one of its flagship products, the iShares S&P/TSX Capped Composite (XIC). At the time XIC was weighed down by a management fee of 0.25%, much higher than its competitors from Vanguard and BMO. After that fee was reduced to a stingy 0.05%—making it the cheapest ETF in the country—it prompted BMO to follow suit less than a month later.

Now more moves are afoot. On July 21, iShares rebranded these nine ETFs to include “Core” in their names. They also launched a new addition to the family: the iShares Core Short Term High Quality Canadian Bond (XSQ).

The new ETF is extremely similar to the iShares Canadian Short Term Bond (XSB) in most respects: both are about 60% government bonds and 40% corporates, and the holdings are all investment-grade (rated A or higher). Their fundamentals are almost identical:

XSB
XSQ

Yield to maturity
1.58%
1.55%

Average coupon
2.98%
2.81%

Duration
2.83
2.77

Average term
2.83
2.92

Source: BlackRock Canada

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Under the Hood: Vanguard FTSE All-World ex Canada (VXC)

This post is part of a series that takes a detailed look at specific Canadian ETFs or index funds.

The fund: Vanguard FTSE All-World ex Canada Index ETF (VXC)

The index: The fund tracks the FTSE All-World ex Canada Index, which includes “primarily large- and mid-capitalization stocks of companies located in developed and emerging markets, excluding Canada.” The index includes approximately 2,900 stocks in 46 countries.

The cost: The management fee is 0.25%. Since the fund is brand new we don’t know the full MER, but it should be less than 0.30% after adding taxes and incidentals.

The details: VXC started trading on July 7 and was one of five new Vanguard ETFs launched that day. The fund is a one-stop solution for those looking to diversify outside of Canada. Not so long ago, investors needed two or three ETFs to get exposure to the US, international developed markets and emerging countries (unless they were willing to buy US-listed ETFs). Now they can get it with a single fund.

VXC weights each country according to the size of its capital markets,

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ShareOwner: Canada’s First ETF Robo-Advisor

Back in February I wrote about the rise of robo-advisors, the online services that allow you to build an ETF portfolio that’s maintained by a computer. These services are already operating in the US, and several are in the works in Canada, including the start-ups Nest Wealth and Wealthsimple. But the first to market has turned out to be ShareOwner, a well-established firm better known to dividend stock investors.

I wrote about ShareOwner more than four years ago, and my review at the time was quite negative. They charged a $79 annual fee for RRSPs, their trading commissions were on the high side, and their menu of ETFs was mostly confined to niche products. But the firm has a new owner in Bruce Seago (a veteran of the online brokerage business) and a revamped offering. Their newly announced Model Portfolio Service has a lot of promise for ETF investors seeking a low-cost, low-maintenance solution.

Here’s an overview of how it works. When you open an account, you can select one of ShareOwner’s five model portfolios,

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Vanguard Goes Global With New ETFs

[Note: This blog post was updated several hours after it was published, as new information became available.]

The Vanguard Total International Stock ETF (VXUS) has long been part of my Complete Couch Potato portfolio, since it gives instant access to virtually all the world’s markets outside the United States. I’m frequently asked whether Vanguard is planning to launch a Canadian-listed version of VXUS, so investors could avoid the expense and hassle of converting their loonies to US dollars. The answer is probably no—but the solution might be even better.

Vanguard Canada announced today that it will launch five new ETFs later this year, the most interesting of which is the Vanguard FTSE All-World ex Canada. While full details have not been published yet, the preliminary prospectus explains the fund will track “the performance of a broad global equity index that focuses on developed and emerging markets, excluding Canada.” The management fee has been set at 0.25%.

This new ETF is not a Canadian wrapper for VXUS: it will include US stocks and exclude Canada, whereas VXUS does the opposite.

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A Tax-Friendly Bond ETF on the Horizon

Bonds should be part of just about every portfolio, but if you have to hold them in a non-registered account the tax consequences can be onerous. Fortunately, Canada’s ETF providers are taking steps to ease that burden with some innovative new products, including an ETF of strip bonds and another that holds only low-coupon discount bonds. The latest entry is the Horizons Canadian Select Universe Bond (HBB), which is set to begin trading this week. HBB is unique: it’s the only bond ETF in North America—and maybe anywhere—that uses a total return swap, which should dramatically improve its tax-efficiency.

The swap structure is the same one used by the Horizons S&P/TSX 60 (HXT) and the Horizons S&P 500 (HXS), which are now more than three years old. Here’s the basic idea: the ETF provider has an agreement with National Bank (called the counterparty) to “swap” the returns of two different portfolios. When you buy units in HBB, Horizons places your money in a cash account and pays the interest to the counterparty. In return, National Bank agrees to pay Horizons an amount equal to the total return of the fund’s index—that means any price change,

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Inside the RBC Quant Dividend Leaders ETFs

In January, RBC launched the Quant Dividend Leaders ETFs, a family of dividend-focused funds covering the Canadian, U.S. and international markets. I recently had a chance to speak with Bill Tilford, Head of Quantitative Investments at RBC Global Asset Management, to learn more about the new ETFs:

RBC Quant Canadian Dividend Leaders (RCD)
RBC Quant U.S. Dividend Leaders (RUD/RID.U)
RBC Quant EAFE Dividend Leaders (RID/RID.U)

The funds do not track a third-party index: rather, the portfolios are built using a rules-based methodology. Unlike the popular S&P Dividend Aristocrats indexes, which focus on past dividend growth, Tilford says the RBC ETFs try to be forward-looking. So in addition to screening for stocks with above-average dividend yield, the strategy also looks at three measures of financial strength to determine the sustainability of the dividends.

The first is called the Altman Z-score, which has been used since the 1960s to estimate the probability of a bankruptcy. “It also does a great job of forecasting dividend growth,” says Tilford. The other factors are the volatility of the firm’s return on equity (ROE) and the amount of short interest.

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How Low Can ETF Fees Go?

Less than a month ago, BlackRock aggressively cut the management fees on several of its core ETFs. The boldest move was to slash the fee to just 0.05% on its broad-market Canadian equity fund, the iShares S&P/TSX Capped Composite (XIC). That seemed to get the attention of the competition, because BMO has hit back with similar fee reductions on several of its own ETFs. (Good thing I didn’t update my model portfolios.)

On April 30, BMO will reduce the fees on the following ETFs:

Fund name
Old fee
New fee

BMO S&P/TSX Capped Composite (ZCN)
0.15%
0.05%

BMO S&P 500 (ZSP)
0.15%
0.10%

BMO S&P 500 Hedged to CAD (ZUE)
0.15%
0.10%

BMO MSCI EAFE (ZEA)
0.30%
0.20%

BMO MSCI EAFE Hedged to CAD (ZDM)
0.35%
0.20%

BMO MSCI Emerging Markets (ZEM)
0.45%
0.25%

BMO Short Corporate Bond (ZCS)
0.30%
0.12%

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In the major equity asset classes, the management fees are now identical on comparable BMO and iShares products. Surprisingly, the Vanguard counterparts are now the most expensive in the group. I’m pretty sure no one saw that coming,

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The Couch Potato Mutual Fund is Here At Last

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

One of the perennial problems with ETFs is they require you to open a discount brokerage account and learn to trade individual securities. That can be intimidating, especially for those who are accustomed to buying mutual funds.

For several years now, I’ve been investigating ways to bring the Couch Potato portfolios to more investors, including the millions of Canadians who aren’t comfortable with ETFs. So I’m excited to unveil the Complete Couch Potato Balanced Fund, a traditional mutual fund that will launch later this month.

Creating a new mutual fund is far more difficult than many people realize, and I could never have done it on my own. That’s why I decided to partner with a large, well-known investment firm based in Winnipeg. (I’m not yet at liberty to disclose its name because the final prospectus is being translated into French.) This firm’s capable sales force will make sure advisors across Canada sell the funds to clients even if they don’t understand the strategy.

An enhanced strategy

The new fund is based on the Complete Couch Potato in my model portfolios,

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iShares Cuts Its Fees to the Core

That sound you just heard was the latest shot fired in Canada’s ETF price war. iShares has just slashed the management fees on several popular equity and bond ETFs—and just like that the country’s oldest ETF provider has become the cheapest in many categories.

BlackRock has rebranded nine ETFs as the iShares Core Series, “a suite of funds covering key asset classes.” A balanced portfolio of these ETFs now has a weighted management fee of just 0.12% or so, less than half the former cost. (As a rule of thumb, expect the full MERs to be 8% to 10% higher due to taxes.) Here’s what a traditional Couch Potato portfolio might look like when assembled from the Core Series ETFs:

ETF name
Allocation
Old fee
New fee

iShares S&P/TSX Capped Composite (XIC)
20%
0.25%
0.05%

iShares S&P 500 (XUS)
20%
0.14%
0.10%

iShares MSCI EAFE IMI (XEF)
15%
0.30%
0.20%

iShares MSCI Emerging Markets IMI (XEC)
5%
0.35%
0.25%

iShares High Quality Canadian Bond (CAB)
40%
0.30%
0.12%

Total
100%
0.26%
0.12%

The cost of competition

BlackRock launched a family of Core iShares ETFs in the US back in October 2012.

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