Archive | New products

Claymore’s Bond ETF Comes Up Short

You knew it was coming, and now it’s finally arrived: the first Canadian ETF that shorts the bond market. On June 29, the Claymore Inverse 10 Year Government Bond ETF (CIB) began trading on the TSX. The fund is designed to deliver the opposite of the daily return of 10-year Government of Canada bonds. In other words, it caters to the Fear of the Month: rising interest rates.

Of course, bond prices fall when interest rates rise, and long-term bonds are the most sensitive to this risk. For more than a year, since the overnight rate bottomed out at 0.25% last April, pundits have been warning investors away from long maturities, which seem certain to fall. Meanwhile, amid all the anxiety, the iShares DEX Long Term Bond Index Fund (XLB) has returned more than 14% in the last 14 months, including distributions. The lesson here is that attempts to forecast interest rate movements is rank speculation.

That’s why this new Claymore ETF scares me. I’m concerned that Couch Potato investors, worried their bond holdings are “certain” to fall in the near future will think this product can offer some safety.

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Not All Indexes Are Created Equal

In yesterday’s post I looked at the recently launched BMO Equal Weight REITs (ZRE), which invests in Canadian real estate investment trusts. The new ETF is going head-to-head with the  iShares S&P/TSX Capped REIT (XRE), which until now had no competition in this space. The big difference between the two funds is that ZRE is equal-weighted, while XRE uses traditional cap-weighting. So, which strategy is superior?

There’s no question that cap-weighted indexes have a flaw: because they are heavily influenced by each stock’s current share price, they give greater weight to overvalued companies and less to undervalued ones. That makes them prone to bubbles: for example, when the price of Internet stocks rose to absurd heights in the 1990s, technology companies dominated the S&P 500, even though some of these had never actually made any money. Meanwhile, fundamentally sound but undervalued companies made up a smaller and smaller portion of the index. We all know what happened next.

In recent years, a number of index providers have looked for ways to avoid this Achilles heel of cap-weighting. Perhaps the best-known “price-neutral” strategy is fundamental weighting,

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New Kid on the Real Estate Block

It looks like BMO has finally made a splash in the ETF market. Most of the bank’s family of exchange-traded funds, launched about a year ago, either duplicated existing products from iShares or focused on exotic asset classes. But they’ve changed that with the launch of the BMO Equal Weight REITs Index ETF (ZRE) last month. This new fund tracks an important asset class — real estate — and does so with a strategy that may be superior to its competition.

Until the launch of BMO’s fund last month, the iShares S&P/TSX Capped REIT Index Fund (XRE) was the only exchange-traded fund tracking the Canadian real estate sector. With almost a billion dollars in assets, it’s a category killer. But perhaps not for long.

Let’s compare the two funds to get a better understanding of how they differ. First we’ll take a closer look at the index that XRE tracks. The S&P/TSX Capped REIT Index is a subset of the S&P/TSX Composite. That means that if a REIT is not part of the S&P/TSX Composite, it can’t be included in XRE. That explains why there are only 11 REITs in the iShares ETF,

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Under the Hood: BMO Real Return Bond

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: BMO Real Return Bond Index ETF (ZRR)

The index: The fund tracks the DEX RRB Non Agency Bond Index, which consists of inflation-linked bonds issued by the Government of Canada. It seems to have been created specifically for this ETF.

The cost: The ETF’s management fee is 0.25%. As with other BMO funds, the actual MER will be higher because it includes GST/HST and some other expenses.

The details: This brand-new ETF (it started trading on Wednesday, May 26) holds five real-return bonds issued by the federal government, each making up about 16% to 23% of the fund’s assets.

Real-return bonds — or Treasury Inflation-Protected Securities (TIPS), as they’re called in the US — are an important asset class, and some financial experts recommend them as a core holding.

Both the principal and the interest payments of real-return bonds are tied to the Consumer Price Index, so they go up with inflation.

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Adding Gold to Your Portfolio

Unless you’ve been in a coma, you know that gold has been the hottest commodity of the last decade, quadrupling in value since 2000. That’s in US dollars, but even measured in loonies gold is up more than 164% over the last ten years.  Those are impressive returns during a period when investing in stocks often felt like feeding cash into a paper shredder.

Claymore’s Gold Bullion ETF (CGL) began trading on the TSX on Tuesday, giving even Couch Potatoes an easy way to invest in physical gold. Is it time to add some of the shiny metal to your portfolio?

Let’s consider the main arguments in favour of investing in gold:

It’s a hedge against inflation, and it retains its value even if a nation’s currency becomes devalued.
Unlike stocks and bonds, gold has virtually no risk of becoming worthless. That makes it a safe haven in the event of financial Armageddon.
Gold is not highly correlated with stocks, bonds or real estate, so it plays a diversification role in a portfolio.
Gold’s price tends to move in the opposite direction of the greenback. This can protect Canadian investors who hold securities denominated in US dollars,

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More new ETFs from iShares and BMO

Last Monday, January 25, BMO launched nine new exchange-traded funds, bringing its total number of ETF offerings to 22:

BMO China Equity Hedged to CAD (ZCH)
BMO India Equity Hedged to CAD (ZID)
BMO Nasdaq 100 Equity Hedged to CAD (ZQQ)
BMO Global Infrastructure Index (ZGI)
BMO Equal Weight Utilities Index (ZUT)

BMO Junior Gold Index (ZJG)
BMO Mid Corporate Bond Index (ZCM)
BMO Long Corporate Bond Index (ZLC)
BMO Aggregate Bond Index (ZAG)

Then on Wednesday, January 27, iShares launched six new funds of their own:

iShares China (XCH)
iShares S&P CNX Nifty India (XID)
iShares MSCI Brazil (XBZ)
iShares S&P Latin America 40 (XLA)
iShares U.S. IG Corporate Bond Hedged to CAD (XIG)
iShares U.S. High Yield Bond Hedged to CAD (XHY)

The BMO Aggregate Bond Index (ZAG) is an interesting creation. It tracks a version of the DEX Universe Bond Index (the most widely followed fixed-income benchmark in Canada) that excludes municipal bonds.

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