It seems like ETFs are appearing in Canada every month, but it’s been a while since I got genuinely excited about a new product. It was great to see both Vanguard and BMO create S&P 500 funds with no currency hedging: they certainly filled a gap in the marketplace. A few other recent launches have been interesting (bond barbells, preferred share ladders, low volatility), if a bit esoteric. Some just induce yawning—do we really need another dividend ETF? It makes you wonder: if you could have one ETF wish, what would you ask for?
Turns out a Canadian ETF provider is granting wishes. First Asset has just announced a contest that invites advisors to submit ideas about what’s missing in the ETF marketplace. They’ll reward the best suggestion with $10,000, which will be donated to the advisor’s favourite charity. Two runners-up will also snag $5,000 for their chosen cause.
“Launching this competition seemed like a natural thing to do as part of our search to find what’s missing in the Canadian ETF landscape,” First Asset’s president and CEO, Barry Gordon, told me in an email. “We don’t believe we’re the only people who can come up with good ideas and we hope we’ll get some great ETF concepts.”
My two cents
The contest is only open to licensed securities dealers and mutual fund reps, but I’ll offer a couple of suggestions, in case anyone is listening.
The one gaping hole in the Canadian market is a broad-based, low-cost international equity ETF that does not use currency hedging. The MSCI EAFE is arguably the most widely tracked index for developed markets outside North America: it includes Western Europe, Japan, Australia and Hong Kong. Both iShares and Vanguard have ETFs tracking this index, and BMO has one that tracks a similar Dow Jones benchmark, but all three funds use currency hedging. Since the stocks in these indexes are denominated in more than a half-dozen currencies, hedging them all seems inefficient and of dubious value.
So tops on my wish list would be an ETF equivalent of the TD International Index Fund (TDB911). It would track the MSCI EAFE or something comparable, with no currency hedging, and would hold the stocks directly rather than using an underlying US-listed ETF like the iShares and Vanguard products. That would reduce the impact of foreign withholding taxes in both non-registered accounts and RRSPs.
If the ETF genie granted me a second wish, I’d ask for an international bond ETF. Since interest rates in different countries do not move in tandem, a global fixed income fund can offer some portfolio diversification. In this case, however, the fund should be hedged to Canadian dollars, since currency fluctuations would overwhelm any differences in yield. (For an excellent paper on this topic, see Vanguard’s Global fixed income: Considerations for U.S. investors. The concepts apply equally to Canadians.)
In Canada, the only product like this is the DFA Five-Year Global Fixed Income Fund (DFA231), which has large holdings in the United States, France, the Netherlands and Germany. From 2010 through 2012, the F series returned well over 5% annually, outperforming Canadian short-term bonds by a wide margin.
Vanguard recently announced plans to launch an ETF like this for US investors: the Vanguard Total International Bond Index Fund will have its largest holdings in Japan, France, Germany and the United Kingdom and will be hedged to US dollars. Allan Roth—a US adviser, indexing advocate, and blogger at CBS MoneyWatch—tweeted this week that the offering was “the first new ETF/mutual fund I’ve been excited about in two years.”
What new index ETFs would you like to see, and why? You may not be eligible to enter First Asset’s contest, but that doesn’t mean you can’t share your own wish list.
I like your Complete Couch Potato model portfolio. What would be really nice is an ETF that included that mix of assets and rebalanced annually. That would be great for a lazy couch potato like me!
I would be slightly interested in the international bond ETF for the extra diversification, but most likely would not take up more than a quarter of my bond holdings.
For the international equity ETF that does not use currency hedging, I would only be interested for that in a non-registered account. For a registered account, I am quite happy with VXUS. Due to VXUS being a US-listed ETF I miss out on foreign tax credits if held in a non-registered account so I think this new international ETF would be very good.
I’d like to see a TSX composite equal weight ETF. Based on the concept of value and smaller cap stocks doing better than the average, it suggests an ETF like that could offer significantly different performance than the standard market weighted caps. Equal weight S&P 500 ETFs have been outperforming the market weighted S&P 500 for I believe 10-15 years.
Personally if I could have any fund I wanted, right now I’d like a Canadian-domiciled version of PDN. But given that PDN itself can barely attract enough investment to stay afloat, I’m not going to hold my breath…
(I agree that unhedged, broad EAFE and emerging funds are more useful in general. :) Haven’t seen a convincing argument for foreign bonds though, hedged or otherwise.)
You hit the nail on the head Dan: an unhedged ETF version of TDB911, tracking the MSCI EAFE or similar.
Alternately, I’d take individual, unhedged ETFs tracking the MSCI Europe and MSCI Pacific indices as that covers EAFE territory but offers some advantages over a single EAFE fund. See this Rick Ferri article.
Is there already an unhedged ETF tracking the US Wilshire 5000?
hey jon .ING Direct offers that with our Streetwise portfolios. 4 indexes that are rebalanced quarterly. MER just over 1 % that includes advice from Streetwise coaches.
Dale @Streetwise
Thanks for all the great ideas.
@Canadian Dividend Blogger: You may know that Horizons an equal-weight S&P/TSX 60 ETF. Using this strategy with the composite index would be impractical because of liquidity concerns.
@CJ: There’s currently no total-market US equity ETF without hedging, but my guess is that Vanguard will bring one out soon. It will almost certainly just be a wrapper for VTI, however, which will make it tax-inefficient in an RRSP.
Cool post. It’s nice to dream. Ditto on the unhedged international ETF. I would say as of today, this is where I feel the biggest “hole” in my portfolio is. (Although I have to concede, my opinions on that matter are largely formed as a result of reading much of the material on this site – so I suppose it’s a good thing that I arrived at that conclusion as well. Means at least I know how to read! :-)
I’ll throw out another more abstract one that my heart would really love, but my brain fears likely won’t sell: Some sort of better Ethical/Responsible Fund. My standard S&P or even TSX fund contains a lot of companies that I admit I am not overly proud to hold – tobacco companies, big pharma, etc. Frankly it’s not hard to see how one could even have ethical issues with Canadian Big Oil or Big Banks these days. I am presently aware of only one fund in Canada that’s even close (XEN). And I am fully aware of all the difficulties and “grey area” in implementing a fund like that, as well as the likelihood that it would underperform. But it’s something that I’d be willing to devote a portion of my allocation to, knowing fully well it will likely underperform, because I believe it it. Perhaps if enough other people did, then it wouldn’t underperform…
I don’t think a composite equal weight ETF would be impractical; companies can’t make it on the composite without a minimum liquidity component, which is usually around $1M/day in volume even for the smaller companies, which are about $700M-$1B in market cap.
I agree that a TSX Composite EW fund would be practical, at least it it doesn’t grow too large. Unless the fund’s AUM change wildly over time (most ETFs grow/shrink only gradually), liquidity is not much of a concern. Spreads might be wider than they would be for something like XIU, but acceptable for long term holds.
Another possibility could be a GIC ETF. There are a lot of smaller bank/credit unions around Canada (and presumably the US) that offer fairly reasonable GIC rates (up to 2.9% in Manitoba). Most people don’t have time to chase after the extra 1.5% on their own time but an ETF that took care of that might be just the ticket. In the end, I’m not sure if it would be any better than a bond index, but it might give people more piece of mind and make them willing to keep a slightly higher percentage of their portfolio in cash while they’re waiting to rebalance their portfolio.
If your wish of an international bond fund materialized, what will be your asset allocation % for this ETF?
@Ben B: I’m not sure such a beast would be possible, since GICs are not liquid, so I’m not sure a market maker could create and redeem units of a fund like this. Remember, you can’t get those five-year GIC rates unless you’re prepared to hold the GIC for five years.
@Francis: I think that would depend on your overall allocation to fixed income. If my portfolio were 20% or 30% fixed income, I would not likely use any international component. But if had 60% or 70% allocated to bonds, I might consider putting one quarter to one third of that in a global bond fund.
Perhaps not an ETF of GICs, but more to the point, perhaps what is being asked for is some place to effectively park cash. So maybe more like a High Interest Savings Account ETF? I know there are a few HISA Mutual Funds today (I think you’ve actually posted about them on this site), but no ETF variant that I’m aware of?
Yes, a GIC fund, if possible, would have to be implemented as a closed end fund. And it could trade at a discount/premium to NAV. If it trades at a premium, the fund could issue new units, but if it trades at a discount it can only buy back units as the GICs mature.
You would also lose the benefit of CDIC insurance and have fees to cover–not sure that this would be worthwhile.
@CCP: The underlying assets of a REIT aren’t particularly liquid either but the units that are traded on the open market certainly can be, so I’m not sure if that would necessarily be as big of a concern? Also, depending on the amount of assets under management, it wouldn’t be shouldn’t take very long to create a reasonable ladder that ensure that GIC’s are always renewing and the interest rate remains reasonably constant and secure.
Perhaps I’m trying to simply things too much here…
But how about a single Fama-French type ETF that is small cap and value oriented. So instead of buying 6 or so funds to capture small cap & value by various geographies, I can just by one ETF. One could allocate 5-10% of this to a very basic couch potato strategy to get that small cap/value tilt and still have no more than 5 total EFTs.
@Danno: iShares (formerly Claymore) has a money market ETF. But with investment savings accounts available with T+1 settlement, I don’t see why anyone would use an exchange-traded instrument with a bid-ask spread and an MER to park cash. ISAs remain the best vehicle for this purpose.
For those unfamiliar with ISAs see this post:
http://www.canadiancapitalist.com/high-interest-savings-accounts-at-discount-brokers/
I would like to see a family of very simple and very low MER balanced ETFs that automatically rebalance with a variety of different asset allocations that use the lowest cost/best ETFs from any provider. There are products on the market already like this but the fees are too high (eg. up to 1.2%) or they are not liquid, or maybe they are too complex. If there was sufficient interest the MER could be below 0.5% and maybe as low as 0.3% if the rebalancing was effectively free.
Such a product could be the one stop do it yourself solution to RSP TFSA angst and inaction because the only decision is the level of risk.
I want the same thing you want. An International Bond ETF but unhedged.
The new US listed Vanguard product doesn’t do it for me as for some reason they’ve decided to hedge it and of course they hedge it to the US dollar. As such, as of no interest to me.
Not sure why First Asset isn’t taking entries from private individuals in this contest. To be honest, they can skip the contest part of it; I just want an International Bond ETF!
@Ben B: The problem is that GICs do not trade on the open market, so it would be virtually impossible to manage this as an open ended fund. When there were inflows from new investors or redemption by existing investors there would be no way to maintain the ladder. This is fairly easy with bonds, because there’s a secondary market. As Andrew F says, this would have to be a closed-end fund to be feasible, and even then once you added an MER any advantage would be lost.
@Jimmy: Great idea: what you describe would basically be an ETF version of Dimensional funds.
@Mark H: If you want an international bond ETF with no currency hedging, you can already get one from SPDR (see the link in the post). The currency hedging is actually key to the strategy, in my opinion. Check out the Vanguard paper (also linked above) for an explanation.
This is probably too specialized for the couch potato philosophy, but I would invest in an Ethical Funds ETF – international or global – made up of companies that have a proven track record of environmental responsibility, a good human rights record and excellent employee relations. They would have to give a reasonable dividend and be low beta.
You read my mind:
“International equity ETF that does not use currency hedging” AND invests directly from Canada. No withholding taxes.
Currency hedging would be redundant since it’s usually against the USD and impractical against multiple foreign currencies.
@JPalmer: Actually I think some kind of SRI index fund would be a welcome addition to the ETF landscape: I think many investors would agree that the Jantzi index tracked by XEN has some problems, namely that it is hugely bank-dominated.
@Calvin: Just to clarify, Canadian-domiciled international equity ETFs hedge to the Canadian dollar, not the US dollar. Also, we should be clear that Canadian ETFs that hold international stocks directly would still be subject to non-recoverable withholding taxes in RRSPs and TFSAs. There would be withholding taxes in a non-registered account, too, though these are recoverable.
CCP, your comment on wanting to see an ETF like TDB911 has me a little confused.
As a TD client I can get the E-series funds and avoid commissions, but I had come to the decision to allocate using a combination of TD, Vanguard, and BMO in complete couch potato style like this:
Canadian Equity TDB900 20%
US Equity VTI 20%
Int. Equity VXUS 20%
REIT ZRE 10%
Real Return Bonds ZRR 10%
Canadian Bonds TDB909 20%
I will be making a $22,000 investment in total, but can expect to max out next year’s contribution (about $13K from 2012 income then $17K+ etc.) shortly based on refund/income. My goal is to start with the biggest lump as early as possible as I am lucky to have anexpectation of future earnings increase as a young lawyer.
Your comment makes me wonder if I should just substitute the TD E-Series funds for the Vanguard products. My main reasons for choosing Vanguard were hedging, emerging market coverage, and greater all market coverage.
Any thoughts are appreciated.
PS – Much of what I have read recently talks about gold equities as a good buy as they have largely under performed the rise in cost of gold. Maybe a comparison of these ETFS would be good for a future column:
BMO Junior Gold Index ETF (ZJG)
BMO S&P/TSX Equal Weight Global Gold Index ETF (ZGD)
Horizons Enhanced Income Gold Producers Advisor Class (HEP.A)
Horizons Enhanced Income Gold Producers ETF Common Class (HEP)
iShares S&P/TSX Global Gold Index Fund( XGD)
Cheers!
@Young Lawyer: I’m a big fan of VXUS and hold it myself. However, I do think it would be useful to have an international ETF that trades in Canadian dollars, and all of the current Canadian offerings use currency hedging. A Canadian domiciled fund would also be slightly more tax-efficient in a non-registered account.
Re: your comment, “My main reasons for choosing Vanguard were hedging, emerging market coverage, and greater all market coverage,” I agree with the last two points, but I’m just being realistic: I don’t think the Canadian market can support a fund like VXUS that holds 6,000+ stocks. But the first point is incorrect: the Vanguard ETFs do not use hedging.
I do not recommend narrow sector funds like those you’ve listed, regardless of their supposed valuations.
@CCP – I suppose I meant the currency/withholding tax considerations of holding US ETFs rather than ‘hedging’. My mistake, they obviously aren’t hedged, and I really appreciated the article on that subject by the way.
A telecom etf. Equal weighted. With dividends of course.
How does one choose from the big 3? Then add in some of the others.
Just a thought!
I’d like to see a Canadian equivalent of VXUS — a non-hedged version VXCA. I could then have my American and International equity positions covered by one domestic fund without having to use Norbert’s gambit or washing trades to purchase US etfs.
Hi, I just read your recent Money Sense article on ETF All-Stars, and this blog post is somewhat related. In the Money Sense article you suggest that the new Vanguard S&P 500 ETF (VFV) is an”all star” in the US equities category. Presumably an international equity ETF as suggested in this article without currency hedging and with a low MER would also at some point make the all-star list. In the Money Sense article it also suggests only ETFs listed on the TSX made the all-star list, and that because of the high currency transaction costs involved, funds listed on the NYSE aren’t necessarily recommended.
So, a couple questions and a suggestion: why are your model portfolios still showing VTI (why not move to VFV)? I do understand that VTI tracks a larger indexed portfolio of stocks than the S&P 500 (i.e., VFV) and has a lower MER, but the higher currency transaction costs seem like they’d kill the benefits of either of these. And then what about tax implications, do they differ between these two funds? My suggestion then is an article on this blog that really summarizes all costs of investing in different types of US equity ETFs – including TSX vs NYSE listed, currency hedged vs. not, currency transaction costs both buying and selling, MER, taxes in registered/non-registered accounts, etc – and if we could fit in a similar summary of international equity ETFs, all the better. I feel like I’m getting lost in the weeds a bit on all of this, so I guess that’s on my own wishlist.
@Jacob: Thanks for comment. Your assessment is pretty much right on: I like VTI over VFV because of the broader index and the lower management fee. It is also more tax-efficient if you’re holding it in a RRSP, which saves you approximately 30 basis points you would otherwise pay in withholding taxes. However, the tradeoff is that you have to buy and sell in US dollars, and if you are unable to do this efficiently, then VFV is probably a better choice.
I have written about this tradeoff a few times. Note that some of the specific info in the older posts may be out of date:
https://canadiancouchpotato.com/2010/01/24/should-you-buy-us-listed-etfs/
https://canadiancouchpotato.com/2010/10/18/are-us-listed-etfs-really-cheaper/
https://canadiancouchpotato.com/2012/12/17/how-much-are-you-paying-for-us-dollars/
I realize from the discussion above that there is not currently an etf available (yet), but can anyone tell me where I can find historical returns for an MSCI EAFE index in C$, unhedged?
@Eric: The index returns are included in this spreadsheet:
http://libra-investments.com/Total-returns.xls
What I would like to see is an UNethical fund. Holding just one asset in say tobacco is scary due to possible litigation but it would be nice to see a high dividend chain smoking gun toting carbon spewing money making machine that is made up of the companies ethical funds refuse to hold. By being diversified it helps mitigate the risk.
Too bad SIN.TO is already taken as that would be a good name!
There is a US unethical fund. It’s called the VICE fund. Much like you ask. Tobacco gambling, etc.
I guess my wishlist would be a one stop shopping etf , with low fees & regular rebalancing for the millions of boomers retiring & require income. I presently use XTR & CBO for bonds, XPF for preferreds, XRE for reits, XDV & CDZ for dividends but ideally an etf that uses these ( or others I’m missing) to create one ” BOOMER ETF” Another one that uses the equivelent etfs in US dollars that has US preferreds, dividends, reits & bonds in a US BOOMER ETF that rebalances would be another one I would love to own. Imagine if you only had to own two etfs ( one Canadian, one US) that spits out 5-7% in dividends that you didn’t have to rebalance & worry about?
On my wish, I would like to see Canadian equivalents of VT-N, VTI-N, VEU-N, and VXUS-N trading on the TSX. Unhedged and in Canadian dollars. Heck, better yet, give me the mutual fund version and throw in Admiral Shares. Is anyone from Vanguard listening??? :)
I wish there were Canadian and emerging market small / micro cap ETFs securities that hold stocks of companies starting immediately below where XIC and VWO leave off. For EAFE stocks, there is SCZ that complements VEA without overlap. Why not the same for Canada and the developing world?
Question for Dan from this blog – your comment: “That would reduce the impact of foreign withholding taxes in both non-registered accounts and RRSPs” worried me a little. I hold a lot of VTI, VEA, SCZ and VWO in my RRSP and I thought that one benefit was that there was no 15% withholding tax on the dividends from these ETFs. Am I wrong?
@Noel: IF you hold a US-listed ETF that holds international (non-US) stocks, the international portion of the withholding taxes is still lost. That can’t be avoided. But right now, funds such as XIN, VEF, and VEE have two layers of withholding tax (US and foreign) if they’re held in an RRSP. A Canadian ETF that held the foreign stocks directly would have only one layer.
@CCP:
What do you think of CIBC’s Global Bond Index Fund? It’s a mutual fund, not an ETF, but it seem similar to DFA fund and is available for DIY investors.
The MER is quite high though, 1.2% for regular accounts, 0.75% for Premium Class (accounts with over 50k)
https://www.cibc.com/ca/mutual-funds/no-load-income/global-bond-indx-fund-premium.html
https://www.cibc.com/ca/pdf/mutual-funds/cibc-sp-2012-en-wamend-no1.pdf
@Jas: I’ve looked at that fund, but the returns have been dismal compared with other global bond funds out there and I’m not sure why. I don’t believe it uses currency hedging, so if you want unhedged exposure to global bonds (and I’m not sure that’s a smart idea) then a better choice would be a US-listed ETF in this asset class.
My question is on ishare etf “FIE”. Is the yield of 7.08 % sustainable. It appears to be offering a much higher yields than most etfs.
@JJL: The vast majority of FIE’s distributions seem to be return of capital. ROC generates an income stream but it is not a return on investment: it is simply the fund giving you back part of your original stake.
As a follow up to the last question on FIE, do you know what the breakdown is on how much is dividends, ROC etc? Thanks
@Brian: This information is published on the iShares site, though it has not been updated for 2012 yet:
http://ca.ishares.com/product_info/fund/distributions/FIE.htm
@Brian: Would it be better to hold such an etf in my TFSA for tax purposes?
@JJL. I can only speak for myself but I prefer to keep my Canadian preferreds and common stock in my non registered accounts to take advantage of the dividend tax credit. I keep my US etf in my RRSP because there is no witholding tax if held that way and I keep my bonds ( CBO and XTR) in my tfsa to avoid any tax. BTW I use XPF as my preferred index as it is NothAmerican rather than limiting it to just Canadian
I am still quite confused on this ROC. Are you telling me that these ETFS are pulling a fast one on me by basically paying me with my own money? In other words, are the distributions overstated?
@JJL: I wouldn’t describe it as “pulling a fast one,” but return of capital is indeed a portion of your original investment being returned to you. This can actually be quite convenient if you are living off the distributions from your portfolio, since it can generate a predictable cash flow, and the ROC portion is not immediately taxable. It’s just important to understand that a 6% distribution does not mean a 6% return.
This Globe article is a good primer on ROC:
http://www.theglobeandmail.com/globe-investor/investor-education/what-return-of-capital-means-to-fund-investors/article547291/
I would like to see a canadian version of AdvisorShares DBIZ ETF, it is not an index etf (MER is a bit high) but I find the whole business cycle idea very interesting. Any thoughts on it?