The new canadian reference for ETFs !

[updated links] Canadian Capitalist has a series of excellent posts on ETFs (the best is that it's not over yet!). He's already convinced me to switch to Vanguard Total Market (VTI) for the US. One of his reader also suggested Vanguard All World except US (VEU). VTI and VEU would give you an incredible diversity for a very low MER. I'm all for that. I'm still slightly worried about the fact that the Vanguard ETFs are in US currency (non-hedged) but CC has a good point that over the long term, currency fluctuations might even out. And a bonus is that the Canadian dollar is currently historically high.

Here are the posts so far from CC on ETFs:

A Tour of ETFs: Vanguard Emerging Markets ETF

A Tour of ETFs: iShares MSCI EAFE Index Fund

A Tour of ETFs: Vanguard Total Stock Market ETF

Improving the Sleepy Portfolio

More New ETFs

A Reader asks: What do I do Next?

Mutual funds "hidden" fees: trading expenses

Thanks to Rob Carrick Saturday's column in the Globe and Mail, we are now more aware of yet another fee eating at mutual fund returns: trading expenses. They are measured by the trading expense ratio (TER) and have been disclosed for a year by mutual funds companies.

Here's the explanation from the article:

It's called the trading expense ratio, or TER, and it tells you how much your funds are spending to cover the cost of brokerage commissions for buying and selling stocks. People typically determine how much it costs to own a fund by looking at its management expense ratio, or MER. But trading expenses can be a key component of fund costs, and they're not reflected in the MER.

It's basically the equivalent of your transaction costs if you trade yourself. If you trade a lot and brings you more gains, then it's worth it (same for mutual funds). It is very likely though that you are just adding to your costs not your returns (same again for mutual funds). There are obviously exceptions in the mutual funds industry. Mr. Carrick points out that the TER in his sample vary from 0.06 to 0.95 percent. The big Canadian funds tend to have low TER. He also points out that Canadian Dividend Funds tend to have good returns and low MER/TER. So if you are going to buy mutual funds instead of ETFs or individual stocks, these would be a good place to start.

Global real estate ETFs recommendations from Rob Carrick

In his Globe and Mail column, Rob Carrick talks about following the same investment strategy as the Canada Pension Plan since it's a good model of safety. While investing in private equity is hardly (idea a model of safety in my opinion, diversifying in global real estate is a great idea. That's something I had not done so far. As you've seen in my recent posts, I am increasing my international holdings. Here's the recommendation from the article:

SPDR DJ Wilshire International Real Estate ETF and DJ Wilshire REIT ETF

Notes: The SPDR Wilshire ETF offers exposure to real estate stocks and real estate investment trusts in markets around the world, but not the United States (Canada accounts for 7.3 per cent of its assets). The American market is too big to ignore, so put about $2,000 into the DJ Wilshire REIT, which holds U.S.-based REITs, and the rest into the global ETF. The DJ Wilshire fund is a bargain thanks to an MER of 0.25 per cent, while the SPRDR fund's MER is 0.6 per cent.

There's a TSX-listed ETF that focuses on REITS in the Canadian market, but it's not an ideal choice here because it lacks global diversification. This is a major consideration right now because Canadian REITs have had a sharp runup in price lately and may offer less upside than global peers.

ETF : international dividend achievers from Powershares (PID-A)

You like CDZ (Claymore Dividends Achievers) but are looking to diversify your ETF holdings internationally? And, like me, believe that dividend achievers are the way to go? Then have a look at PID-A. It's a relatively new ETF from Powershares available on the American exchange but is based on the well established Mergent's Dividend Achievers indexes.

Instead of a passive index like XIN from iShares, PID favors companies that have been increasing their dividend payouts for the last 5 years. That gives you exposure to international companies that have a better chance at faring well under adverse markets in my opinion. Chances are that they'll keep increasing their dividends in the future as well.

So although the yield might always look small (around 2-3%), it will become greater for you based on the current buying price as the 'stock' price keeps increasing. (Notes: all the international companies in PID are ADR - American Deposit Receipts - which mean they trade on US markets. You should also look at the tax consequences of holding foreign equities.)

I would not put all my eggs in these types of ETF but I think they're a good complement to market value weighting types of ETF (passive). And it's way safer

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The Dividend Guy Blog has 10 reasons why dividend investing is good.

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Canadian Capitalist commented on ETFs ...

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For those of you who like to read lenghtier stuff, Dividend based investing has a good interview with Lowell Miller author of the Single Best Investment guide ... interesting quote from it:

When you are actually talking about investing (and that should be the major part of your assets because in today’s world, you know, lots of us are going to live to be 100 or more), you really have to avoid fixed income and you want a diversified portfolio of high yielding stocks where the dividend is going to grow. And to repeat myself – as I always do over and over again – the increasing dividends will prevent your purchasing power from being degraded by inflation, and the increasing income will also cause your principal to increase over time.

Moneysense best mutual funds for 2007 (annual ranking)

Although a lot of people including myself promote using index funds instead of mutual because of their annual fees (MER : Management Expense Ratio). Many Canadian mutual funds will charge you in excess of 2% per year of MER. Other funds though give good performance for fees lower than 2%. I hold CHOU RRSP myself and it has done very well for me over the year. I am still moving to an index fund based RRSP to minimize the effect of fees over the long term. I might decide though to keep a mix of both. Why? Because some mutual funds like CHOU RRSP have a better bear market performance than indexes like the S&P TSX 60 for example. And I like having investments that are more resilient to downturns in the stock market.

So here are the top Moneysense mutual funds for this year (from their latest printed magazine issue). I've added my own twist of only including the top fund in each category that has an MER lower than 2% and a bear market performance of A or B.

Category	Fund	Rank	5 years annual return %	Bear Market Perf.	MER %	Min. Invest. $
Canadian Equity	Chou RRSP Fund	2	15.92	A	1.74	10000
US Equity	RBC O’Shaughnessy US Value Fund	1	11.32	A	1.57	1000
Canadian Balanced	CIBC Monthly Income Fund	2	12.36	A	1.42	500
Global Equity	Saxon World Growth	6	9.21	B	1.87	5000
Small Caps	Mawer New Canada Fund	1	24.15	A	1.5	5000
Canadian Bonds	TD Real Return Bond Fund-I	1	8.53	A	1.48	100

The Global Equity category does not fare well under my criteria, but Small Caps is amazing and Canadian Equity is very decent!

What does this mean? One possible conclusion is that mutual funds with fees under 2% can be a good alternative in some cases. It might be hard to know in advance which ones to pick though. I'll have to back test my strategy to see if there are any trends ...

If you are more comfortable with mutual funds than with index funds/ETFs then definitely go with low fee funds that have proven long term records like CHOU RRSP.

Market vs Fundamental Weighted ETFs

Larry McDonald promotes the idea of fundamental ETFs vs market weighted ones. I agree with him! (thanks to Canadian Capitalist for the link)

flash post: ROBTV recommends WisdomTree ETF

If you are looking for an international ETF that focuses on dividend paying companies ( like the Canadian Claymore Dividends Achievers, CDZ), ROBTV (look at the Jan 17th archive) mentioned the WisdomTree ETF International Dividends Top 100 (DOO) [thanks to Chris for the info] .

I already hold some myself. That said, I think it might be somewhat early to know if this ETF will perform over the long term. On the other hand, I like the fact that it's diversified globally. The focus on dividends will hopefully help target good companies.

Here's the Morningstar summary:

Analyst Report SummaryThis exchange-traded fund offers exposure to the highest-yielding companies from Europe, Far East Asia, and Australia. While the ETF focuses on similar geographical regions as MSCI-EAFE trackers, it offers much-different sector and country exposure

Business Week: going global with ETFs

an older link I had forgot to post: Business week has a very good article on Global ETFs.