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How Long Will You Wait for Smart Beta to Work?

In my last post I shared some insights from Ben Carlson’s A Wealth of Common Sense, which argues that investors are generally better off keeping their portfolios simple and straightforward. This idea has little appeal for index investors who hope to improve on plain-vanilla funds by using so-called smart beta strategies.

“Smart beta” refers to any rules-based strategy that attempts to outperform traditional cap-weighted index funds. Now more than a decade old, fundamental indexing is the granddaddy of smart beta, while factor-based strategies are the newer kids on the block. In each case, the goal is to build a diversified fund that gives more weight to stocks with certain characteristics (value, small-cap, momentum, and so on) that have delivered higher returns than the broad market over the long term.

Many proponents of passive investing see huge potential in factor-based strategies because they combine the best features of indexing—low-cost, broad diversification, and a rules-based process—with the potential to overcome the shortcomings of traditional cap-weighting. Indeed, many of our clients at PWL Capital use a combination of traditional ETFs and equity funds from Dimensional Fund Advisors (DFA),

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Couch Potato Portfolio Returns for 2015

With 2015 now in the books, it’s time to look back on the year that was.

It was another year of surprises: after the gurus continued to predict higher interest rates, the Bank of Canada shocked almost everyone by lowering the overnight rate twice in 2015: first in January, and then again in July. That spelled another year for higher-than-expected bond returns. And while it was a disappointing year for equities in almost all regions, the plummeting Canadian dollar caused the value of foreign equities to soar.

All in all, a diversified portfolio did quite well in the “year when nothing worked.” Yet another reminder of why it is so important to hold all of the major asset classes all the time and ignore the noise. Let’s look at the details.

The building blocks

Here are the returns of the individual TD e-Series funds and Vanguard ETFs that are the building blocks for Options 2 and 3 of my model portfolios:

TD Canadian Bond Index – e (TDB909)

TD Canadian Index – e (TDB900)

TD US Index – e (TDB902)

TD International Index – e (TDB911)
Source: TD Canada Trust


Vanguard Canadian Aggregate Bond (VAB)

Vanguard FTSE Canada All Cap (VCN)

Vanguard FTSE Global All Cap ex Canada (VXC)
Source: Vanguard Canada



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Canadian Couch Potato Threatened By Legal Action

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

I regret to announce that this blog is in jeopardy of being shut down due to pending legal action.

On the afternoon of Friday, March 29, I received a letter from the law firm of Zuckercorn & Loblaw, LLP. The attorneys informed me that the name “Canadian Couch Potato” is owned by an Ontario corporation that is threatening to sue for trademark infringement. According to the letter: “You can avoid legal action by immediately ceasing and desisting from any and all infringing activity including use of the domain.”

The letter gives me seven (7) days to decide on a course of action, and I am currently seeking counsel from my own attorney before determining how to proceed. Rest assured I will not give in unless I have no other choice.

You can read the full text of the cease-and-desist letter by clicking the image below.

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Couch Potato Portfolio Returns for 2012

I think we can safely say we are now almost four years into the most disrespected bull market in history, to borrow a phrase from Alexander Green. In a recent roundtable in The Wall Street Journal, the moderator opened the discussion by saying, “It’s been another very difficult year for investors.” Um, really? US stocks were up over 16% in 2012, and international equities did even better. If that’s a difficult year, I can’t wait for an easy one.

Indeed, last year was much kinder to investors than 2011, when the Complete Couch Potato returned just 2.36% and most of my other model portfolios did worse. In 2012, all of the model portfolios delivered remarkably similar performance, with returns between 8% and 9%.

The data below were gathered from fund websites whenever available: otherwise I used Morningstar. Returns for US-listed funds are expressed in Canadian dollars. Consider these unofficial results: when I have all the necessary data I will update the long-term Couch Potato performance report card. [Note: The updated report card is now available.]

Global Couch Potato (Option 1)

iShares S&P/TSX Capped Composite (XIC)

iShares MSCI World (XWD)

iShares DEX Universe Bond (XBB)


Global Couch Potato (Option 2)

TD Canadian Index – e (TDB900)

TD US Index – e (TDB902)

TD International Index – e (TDB911)

TD Canadian Bond Index – e (TDB909)


Global Couch Potato (Option 3)

RBC Canadian Index (RBF556)

RBC US Index (RBF557)

RBC International Index (RBF559)

TD Canadian Bond Index – I (TDB966)


Complete Couch Potato

iShares S&P/TSX Capped Composite (XIC)

Vanguard Total Stock Market (VTI)

Vanguard Total International Stock (VXUS)

BMO Equal Weight REITs (ZRE)

iShares DEX Real Return Bond (XRB)

iShares DEX Universe Bond (XBB)


Yield-Hungry Couch Potato

iShares S&P/TSX Cdn Div Aristocrats (CDZ)

iShares DJ Canada Select Dividend (XDV)

iShares Global Monthly Adv Dividend (CYH)

BMO Equal Weight REITs (ZRE)

iShares S&P/TSX Preferred Stock (XPF)

iShares DEX HYBrid Bond (XHB)

iShares Advantaged US High-Yield Bond (CHB)

iShares Advantaged Canadian Bond (CAB)



iShares Canadian Fundamental (CRQ)

iShares S&P/TSX SmallCap (XCS)

Vanguard Total Stock Market (VTI)

Vanguard Small Cap Value (VBR)

iShares MSCI EAFE Value (EFV)

iShares MSCI EAFE Small Cap (SCZ)

Vanguard Emerging Markets (VWO)

SPDR Dow Jones Global Real Estate (RWO)

BMO Mid Federal Bond (ZFM)

BMO Short Corporate Bond (ZCS)


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What’s Next for iShares — Part 2

Here is part two of my interview with Mary Anne Wiley, Head of iShares, who explains what to expect in the wake of BlackRock’s acquisition of Claymore. You can read the first part of the interview here.

Claymore pioneered some innovative programs, such as preauthorized cash contributions (PACCs) and dividend reinvestment plans (DRIPs), as well as the Scotia iTrade partnership that brought commission-free ETFs to Canada. Will those programs continue?

MAW: Let me take each one of those individually. Claymore did have a program with PACCs, DRIPs and SWPs, and by far the DRIPs were the most popular. There are other ways to do DRIPs with the brokerages directly, but not every brokerage has every ETF set up for it, and we want it to be as easy as possible for all types of investors. So we are going to keep all of the programs on the existing funds, and we are looking to expand the DRIPs, in particular, to a wider set of iShares.

As for the commission-free partnerships, we think these are fabulous programs. Anything that encourages investors to try ETFs and get to know them,

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Why You Should Beware of First Dates

Imagine that you’re the marketing director for MegaAlpha Investments and you want to advertise two of your mutual funds. In the September 2011 issue of Performance Chaser magazine, you place the following ad:

Are stocks still worth the risk? Not anymore. Over the last three years, the S&P/TSX Composite Index delivered an annualized return of just 0.2%. Meanwhile, the MegaAlpha Awesome Income Fund earned 6.4% a year. Rather than relying on a disappearing equity premium, our managers delivered reliable yield and significant growth with a portfolio of the highest quality government and corporate bonds.

Three months later, in the December issue, you run a different ad:

Are stocks still worth the risk? You bet. Over the last three years, the MegaAlpha Awesome Equity Fund  delivered an annualized return of 12.5%, dramatically outperforming the DEX Universe Bond Index, which returned just 7.7%. Rather than relying on the perceived safety of bonds, our managers took advantage of generous dividends and capital growth in a portfolio of leading Canadian companies.

Do you think I made those numbers up? Nope. Both the index returns and the funds’ performance are real—except the “MegaAlpha Awesome Income Fund” is actually the iShares DEX Universe Bond Index Fund (XBB),

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Can the Pros Time the Market?

I never meant to make you cry
And though I know I shouldn’t call
It just reminds us of the cost
Of everything we’ve lost
Bad timing, that’s all
Bad Timing, Blue Rodeo

One of the promises made by active managers is that they can move to cash before the markets tank and then get reinvested before they recover. When markets are as volatile as they have been in recent years, a manager with this skill would be something of a hero.

I recently looked at the record of actively managed mutual funds during bear markets for an article just published in Canadian MoneySaver. I found that there were indeed periods where managers were able to protect investors from losses. The problem was that defensive mangers were usually late to the recovery party. As a result, over an entire market cycle most investors are usually better off staying fully invested all the time.

Shortly after the article appeared, I heard from a member of the investing club I belong to. He told me that one the other club members,

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ETF Risks in Perspective: Securities Lending

This is the final post in a series of three looking at the potential risks that ETFs may pose to the stability of financial markets. The previous two discussed synthetic and leveraged ETFs. Now we’ll take a look at the practice of securities lending.

Many active traders, including hedge funds and prop traders at investment banks, engage in short selling when the they believe a stock is about to fall in price. For example, if a company is trading at $20, a short seller might borrow shares and sell them on the open market for that price. If the stock falls to $18, the trader can then buy it at this lower price, return the shares to the lender, and pocket a profit of $2 per share (before costs).

Firms that borrow shares need to get them from somewhere, and the most common lenders are mutual funds, ETFs and pension funds, who use securities lending agents as intermediaries. When a fund lends shares to a short seller, it collects a fee for doing so.

The problem

The main concern about securities lending is common to all funds,

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Couch Potato Live in Toronto

Looking for something to do on Wednesday, November 9? ING DIRECT is hosting a public event to discuss personal finance with four panelists, including yours truly. The other three are:

Rubina Ahmed-Haq, a financial journalist and blogger who has worked with the CBC, Rogers Media and Moneyville.
Ellen Roseman, the Toronto Star’s intrepid consumer advocate and columnist, whose work also appears on CBC Radio and Moneyville.
Preet Banerjee, an obscure former blogger with no public profile.

The event, hosted by Andrew Zimakas, VP Marketing of ING DIRECT Canada, will give live audience members an opportunity to ask questions of the panel. We’ll also be taking additional questions through social media.

Everything kicks off at 7 pm EST at the ING DIRECT café at 221 Yonge Street in downtown Toronto. It will also be streamed live at the other café locations:

600–6th Avenue SW

466 Howe Street

Toronto (north)
111 Gordon Baker Road

If you prefer to sit at home and participate in your pyjamas, the event will be available through a live webcast: register here.

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