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Investors who want to take an indexing approach to their money are constantly being told that they need to be patient. A passive ETF portfolio will pay off over time, the experts insist, but people need to be prepared to stay with it for the long haul.
Q – I bought iShares Universe Bond ETF (TSX: XBB) after reading your book Sleep-Easy Investing, and am a fan. I wonder now when (or if) I should get out of it as interest rates rise. Won't this fund decrease in value if inflation kicks in? Thanks so much, really enjoy your investing expertise. – Maureen P., Calgary
Q – My portfolio consists of mutual funds and GICs. I would like to decrease my costs by also using ETFs (exchange-traded funds). I have read some of your suggestions in the Mutual Funds/ETFs Update newsletter and would like to gradually transfer some of my more expensive mutual funds into ETFs. Do it gradually or all at once? Am I correct in assuming that the cost of ETFs varies through the day (unlike mutual funds) so is timing in the day important or should I just place an order based on my longer-term goals? Are commissions/fees tax deductible? My broker charges me a fee for mutual fund; is that deducible? – Ross P.
Canada's ETF (exchange-traded funds) universe continues to expand, both in terms of dollars invested and in the number of products being offered. But are we getting too much of a good thing? I believe we are.
Last month, BlackRock Inc., which acquired the iShares products from Barclays Global Investors, announced the launch of six new ETFs for the Canadian market. The company said the new funds give Canadians more exposure to emerging markets and to the U.S. fixed-income market.
But the emerging markets entries, which include four of the six new funds, are really nothing more than Canadianized versions of products that already exist in the U.S. market, except that we're being asked to pay more for them.
For example, the iShares MSCI Brazil Index Fund (TSX: XBZ) basically invests in units of the U.S. version of the ETF of the same name which trades on the NYSE under the symbol EWZ. However, the Canadian MER of 0.75% is 10 basis points (0.1%) higher than the U.S. version. Any broker can sell you the less expensive U.S. fund just as easily.
It's a similar story with the iShares China Index Fund (TSX: XCH) which is really a repackaged version of the iShares FTSE/Xinhua China 25 Index Fund (NYSE: FXI) except the MER difference in this case is 12 basis points.
The other two emerging markets entries are the iShares S&P CNX Nifty India Index Fund (TSX: XID) and the iShares S&P Latin America 40 Index Fund (TSX: XLA). The former invests in units of the iShares S&P Nifty 50 India Index Fund (NDQ: INDY), which is nine basis points cheaper in terms of MER. The latter invests in the U.S. fund of the same name, which trades under the symbol ILF on the New York Stock Exchange. It is 15 basis points cheaper.
The two U.S. fixed-income funds at least offer the benefit of currency hedging as part of their fee. The iShares U.S. High Yield Bond CAD-Hedged Index Fund trades under the symbol XHY on the TSX. It invests mainly in units of the iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG), which has an MER that is 10 basis points lower.
The iShares U.S. IG Corporate Bond CAD-Hedged Index Fund (TSX: XIG) is a clone of the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD), with the Canadian version carrying a 0.3% MER compared to 0.15% for the NYSE fund.
Heather Pelant, the head of iShares Canada, says there are two reasons why Canadians might prefer to buy their version of the fund. The first is the saving on foreign exchange conversion which she estimates can amount to between 2% and 4% on a round-trip purchase and subsequent sale.
A secondary reason is U.S. estate tax considerations. It's a complex issue, but Canadians who own real estate in the U.S. need to keep a close eye on the total value of all U.S. securities in their portfolio. The U.S. iShares units count as part of that total, whereas the new Canadian ones do not.
You have to decide if either of these factors is worth the premium MER you pay for the Canadian units. If you have U.S. cash available and do not own property in the States, the units that trade in New York are the better choice.
Fund Company: Claymore Investments Fund Type: Canadian Equity Rating: $$$ Style: Index, with active overlay Risk Level: Medium Load Status: Brokerage commissions apply RRSP Suitability: Good Segregated Fund: No Manager: Claymore Management Team, since inception (February 2006) MER: 0.65%
