It is a bit quiet on the Canadian Money Forum this week owing to the holidays but check out this thread that contains some excellent posts on the basics of bonds.

1. Voting for the “best of the blogs” continues on the Globe & Mail website. iBankCoin, a blog liberally sprinkled with four-letter words is a runaway winner at 533 votes but Million Dollar Journey (311 votes) and Squawkfox (296 votes) are headed towards a photo finish. The votes will be tallied on Monday and your vote may decide who goes home with the silver medal.
2. This week, Bernie Madoff was sentenced to 150 years in prison for running the largest Ponzi scheme in history. Jonathan Chevreau wonders if investors should diversify among money managers in the post-Madoff world. Then again, hiring multiple money managers isn’t without its share of problems.
3. Larry Swedroe explains how to avoid being scammed by the Bernie Madoffs of the world.
4. Avner Mandelman reckons that investors can estimate the intrinsic value of certain securities rather easily.
5. Michael James says that the assaults on private-sector pensions will, unfortunately, continue.
6. On Canada Day, Four Pillars highlighted some of the newer financial blogs.
7. I almost chocked on my morning coffee when I read the title of Gail’s post: The Upside of Credit Cards. Gail hasn’t gone over to the dark side — she explains that credit cards are simply a tool and there are benefits in using them responsibly.
8. Million Dollar Journey featured a post that answered some common questions regarding financial coaching.
9. I find a written investment policy statement incredibly useful in keeping emotions in check during periods of euphoria or panic. Financial Highway explains the basics of an IPS.
10. Money Energy says that stress can lead to bad money decisions.

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I’ve been tardy in keeping the Sleepy Portfolio in line with the target allocation (cash — 5%, bonds — 20%, stocks — 70% and REITs — 5%), failing to rebalance earlier in the year. As a result, the low-risk part of the portfolio had a higher allocation compared to target and the portfolio missed out on some of the strong rebound in the equity markets. Still, the portfolio is up 5.2% year-to-date and fixed-income and cash still make up 32.7%, compared to a target of 25%.

Fortunately, I was paying more attention to our portfolios, rebalancing it regularly when adding new savings to our accounts. As a result, our portfolios performed much better and are up 16% YTD. I did get around the rebalancing the Sleepy Portfolio and will post an update next week.

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No post today on account of our nation’s birthday. Happy Canada Day everyone!

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On Earth Day 2009, Loblaws started charging 5 cents for disposable plastic bags. Initially, I grumbled that grocery stores have found a way to make a tidy profit on an item that costs them, perhaps, 2 cents. But, paying an extra 50 cents for plastic bags has a way of changing consumer behaviour in a hurry. I wasn’t about to allow Loblaws to continue to ding me nickels, so I threw a few reusable bags in the trunk the next time I went shopping. At the checkout, I found a less publicized side to the story: Loblaws gives a bonus of 50 PC Points (worth about 5 cents) for every reusable bag. In other words, it is not a simple rip off: Loblaws penalizes customers who use plastic bags and rewards those who ditch them. The company also says that part of the proceeds goes to environmental causes but it is possible that some of the levy falls to the bottom line.

The program is a fascinating case study in how incentives influence behaviour. Loblaws had been trying to entice customers to opt for reusable bags by offering 50 PC Points with little success. But, when a 5 cent charge was instituted, the company says customers reduced the use of plastic bags by 55%. Metro, which recently instituted a 5 cent levy, also reports a 70% reduction in disposable plastic bags. I’m not surprised – we don’t buy plastic bags at Loblaws anymore.

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In a comment to an earlier post (see New iShares Emerging Market and World ETFs), Henry noted that the iShares MSCI Emerging Markets ETF (EEM) seemed to track the index better than the Vanguard Emerging Markets ETF (VWO). As you can see from the Google Finance chart below, since 2007 EEM’s return is more than 2% better than VWO.

Since both ETFs track the same MSCI Emerging Markets Index (VWO’s mandate was changed to track this index in August 2006), it was puzzling why there should be a significant difference in performance between the two. In fact, EEM has a significant tracking error as you can see in the table below (negative tracking error meansETF returns were higher than the index):

The difference in tracking errors is probably due to the different methods employed by the ETFs to track the index. The MSCI Emerging Markets Index has 733 stocks but VWO holds 791 (probably due to some overlap between stocks listed in emerging markets and ADRs) and EEM only 338. It seems that Vanguard tries to replicate the index as much as possible while iShares employs “representative sampling” to track the index. According to the iShares prospectus:

“Representative sampling” is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the Underlying Index.

Over a longer time-frame, EEM it appears that the iShares sampling strategy is successful. Since inception the tracking error of EEM is -0.28%.

PS: The winner of the Thrill of a Lifetime giveaway is Sam for his comment on Four Pillars. Thanks to everyone for participating.

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You can find this year’s listing of the the Best Financial Blogs in today’s Globe and Mail. I picked Canadian Financial DIY, Michael James on Money, Million Dollar Journey, Thicken My Wallet and Where Does All My Money Go? as my personal favourites. The Wealthy Boomer, Four Pillars, The Dividend Guy Blog, Canadian Mortgage Trends, Wellington Fund Blog and Squawk Fox were picked as “best” by other writers. An online poll (scroll to the end of this page) will let you vote for your favourite. Vote early and vote often; you are allowed to pick five of your favourites (I can say this with a straight face as I’m not on the ballot)!

1. It doesn’t make sense to keep playing the game after you have won it. Larry Swedroe writes in his Wise Investing blog that investors need to consider whether they are taking appropriate risks.
2. It may be common sense (which isn’t all that common in the investing world) but John Bogle’s message to investors is refreshingly consistent.
3. The rules regarding Tax-Free Savings Accounts are evolving. Rob Carrick takes a look at Ontario’s legislation regarding naming TFSA beneficiaries.
4. Larry MacDonald and Jon Chevreau weigh in on the two new ETFs from iShares: the emerging markets and World ETF.
5. Michael James finds a lesson on how economic incentives affect consumer behaviour in the 5-cent levy on grocery bags.
6. Million Dollar Journey calls Individual Pension Plans (IPP), a RRSP for the affluent.
7. Mr. Cheap rebuts Squawkfox’s contention that good debt is a lie.
8. Finding their portfolios decimated, many investors are throwing the financial equivalent of a “hail Mary” pass. In this wonderful post, Thicken My Wallet points out the flaws in such a strategy.
9. The Financial Blogger wonders if Canadian banks are still good investments.
10. Perhaps the economy is sprouting green shoots but it is also bleeding jobs. Riscario Insider has some tips for bulletproofing your job.

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iShares Canada is finally introducing two new ETFs that provide exposure to foreign stocks: iShares CDN Emerging Markets ETF (XEM) and iShares CDN MSCI World ETF (XWD). Both ETFs started trading on the Toronto Stock Exchange yesterday.

XEM simply holds the iShares MSCI Emerging Markets ETF (EEM), which in turn tracks the MSCI Emerging Markets Index. The total MER for XEM is 0.82%, which includes EEM’s MER of 0.72%. XEM has plenty of Canadian competition now: the Claymore Emerging Markets ETF (CWO, MER of 0.65%) and the soon-to-be launched BMO Emerging Markets ETF (MER of 0.535%). The Vanguard Emerging Markets ETF (VWO) remains the cheapest way to get exposure to emerging markets — the MER is 0.25% and there is no extra performance drag due to withholding taxes.

XWD tracks the MSCI World Index, which despite its name excludes emerging markets. It tracks stocks in the developed markets of Canada, United States and the traditional EAFE markets. The MER of the ETF is 0.45%. XWD is likely to be uninteresting for investors because, for one thing, it holds Canadian stocks. It is also unattractive from a fee perspective: VTI plus VEA has a blended MER of less than one-quarter the cost of XWD.

PS: If you switched to RBC Direct Investing last fall to take advantage of the 1% bonus offer, check your accounts. The bonuses are being paid out this week.

PPS: Don’t forget to participate in the Thrill of a Lifetime giveaway. The odds are still attractive and the contest closes in less than 2 days.

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Credit conditions have eased substantially since last fall but try telling that to the Canadian big banks. The banks are continuing to increase the interest rates on secured and unsecured lines of credit. On the Canadian Money Forum, one member reported that the interest on his existing secured line of credit with ScotiaBank is going up by 1%. Others had reported earlier that TD Bank, CIBC and PC Financial had jacked up their rates. I have a SLOC with Royal Bank and the interest rate has stayed at Prime but I wonder how long a few banks will remain holdouts. Our Credit Line Agreement clearly states that Royal Bank can change the terms of the agreement:

We may make changes to this Agreement at any time. If we do, we will let you know before the changes take effect. If your Royal Credit Line is used or any amounts remain unpaid after the effective date of a change, it will mean that you have agreed to the change.

If a bank decides to increase interest rates, there is little that customers can do. The agreements clearly state that the bank can decide to change the terms and threatening to take your business elsewhere is unlikely to have sway the bank: new lines of credit are at least equally expensive.

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Jon Chevreau recently blogged (see John Bogle says investors getting killed by ETFs) on John Bogle’s analysis of returns experienced by investors in Exchange-Traded Funds (ETFs) and the results are not pretty: In 68 out of 79 ETFs, the returns experienced by investors lagged that of the ETFs themselves by an average of 4.5%. Bogle also found that investors in ETFs did much worse than investors in index mutual funds. In some categories such as large-cap stocks and small-cap stocks, the gap was particularly large — more than 7%. And the shortfall was as much as 12% in REITs! These results mirror that of the famed DALBAR study, which consistently finds mutual fund investors earning lower returns than the funds themselves (see Investors Behaving Badly).

I think the comparison of index mutual fund investors to those of ETFs is a bit simplistic. Unlike mutual funds, which are purchased by retail investors with the intention of holding for the long-term, the motivation for buying ETFs varies according to the type of investor. Some are passive investors who intend to hold ETFs in an indexed portfolio for the long-term. But most ETF buyers and sellers are traders who hope to profit from short-term movements. The popularity of ETFs with traders can be seen in the contrast in volume between Vanguard and iShares ETFs that track the same index. Despite charging less than half in fees, Vanguard ETFs such as the Emerging Markets ETF (VWO) and Europe Pacific ETF (VEA) have much lower trading volume than their corresponding iShares ETFs. Long-term investors would care more about the lower fees but traders would be primarily concerned with liquidity and low bid/ask spreads, not a MER difference of a few tenths of a basis point. Therefore, it shouldn’t be entirely surprising that, as a group, the returns from trading badly trail the overall market.

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Where Does All My Money Go?, Four Pillars and I are teaming up and holding a joint giveaway for one lucky recipient to receive a thrill of a lifetime driving a Reynard Formula 2000 race car on a real race track courtesy of The Bridgestone Racing Academy!

The exact details of the prize, which is valued at $245, is available here.

Contest Rules

1. You can earn an entry by copying any one sentence from anywhere on the school’s website (www.race2000.com) and pasting it in a comment on ANY or ALL THREE of our blogs’ respective contest posts.
2. You can earn up to one entry per blog. So if you leave a valid comment on all three blogs, you will receive three (3) entries into the contest.
3. Entries will be accepted until 11:59 PM EDT on Saturday, June 27th, 2009. A winner will be announced and/or contacted on or before Monday June 29th, 2009.
4. Winner is responsible for their own transportation and/or accommodations if necessary.
5. The prize has no cash value, but is transferable, and is only good for enrolment in the Thrill Of A Lifetime Reynard - 1 Session school.
6. You are subject to all the Bridgestone Racing Academy’s rules and restrictions.
7. You must provide a valid email address in the comment form - but note that your email address will not be visible to anyone but the blog owners, and your information is never shared or sold. The winner will be contacted by this email address. If the winner has not responded to us within 1 week, a new winner will be selected from the other entries. (So make sure you get your email address right and you check your junk-mail folders after the contest ends!)
8. If you receive this post via e-mail, click on the article heading to visit the website, scroll down to the end of the page, type in your comment under “Leave a Comment” and click “Submit” (and don’t forget to visit the other blogs and leave comments there to increase your odds of winning!).

Don’t forget that you can earn additional entries by commenting on Where Does All My Money Go? and Four Pillars. Thanks again to The Bridgestone Racing Academy and bonne chance everyone!

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