Archive for June, 2006

The Debate Over Indexing

June 29, 2006


WisdomTree, a new provider of ETFs has launched 20 new ETFs based on proprietary, fundamental indices. Most of these new ETFs represent asset classes for which (as far as I know) dividend ETFs were not available: a MidCap Dividend ETF, a SmallCap Dividend ETF and a whole bunch of foreign dividend ETFs. Fees range from 0.28% to 0.58%.

Before you jump into these new-fangled investment products, you need to be aware of a lively debate between the proponents of fundamental indices and those of traditional market-capitalization weighted indices.

Prof. Jeremy Siegel, who is serving as an advisor for WisdomTree, suggests that a fundamental index based on dividends provides a way of avoiding some of the market noise inherent in traditional indices. WisdomTree also claims that back testing indicates that the firm’s six indices beat their comparable market-cap weighted indices for periods of 1964-2005, 1980-2005 and 1996-2005.

Prof. Burton Malkiel and Jack Bogle, founder of Vanguard, point out that fundamental indices are not without faults. For instance, stocks that do not pay a dividend are entirely excluded from WisdomTree’s indices. Traditional index funds also have lower costs and more importantly lower turnover. It should be added that at least initially, these new ETFs will be thinly traded and hence will sport high bid-ask spreads.

Fundamental indices may have a better risk and return profile but for now, I am going to follow Jack Bogle’s advice: “I know I will capture my fair share of the total market’s return if I own a market index fund. I don’t know whether these new paradigms will be better or whether they will be worse.”

Excellent Reader Comments

June 28, 2006


In response to yesterday’s post, reader JB left the following comment:

I’ve placed some cash into several GICs (30 day cashable) at 3.95%. As interest rates increase I’ll roll it over into a higher paying GIC. I’ve gone from 3.5 to 3.75 to 3.95 in the last 3 months. I thought this seemed like a good idea. Is there any advantage to have the money in a high-interest savings account instead?

JB also further explanied that he invests through BMO InvestorLine and got the idea from this post on Larry MacDonald’s blog. Thanks for the excellent tip, JB!

As an aside, ActionDirect probably has to be the worst among the big five bank’s discount brokers. I’ve been mildly annoyed before that they offer absolutely no stock or research reports. While researching this post, I found that the website provides absolutely no information such as whether a GIC is cashable. If I have to call them to find out basic information like this wasting my time and theirs, what is the point of a discount brokerage? You would think that some rinky-dink outfit, not the biggest bank in this country, runs ActionDirect.

Update: Check out the excellent comments to yesterday’s post. The consensus is that a cashable GIC beats the Altamira CashPerformer as there are no redemption charges.

Rob Carrick’s Tip

June 27, 2006


Getting a decent yield on the cash in a brokerage account is a hassle. Most money market accounts charge a MER of 0.9% and transferring money to a high-interest savings account is not practical for funds held inside a RRSP.

Rob Carrick, personal finance columnist for the Globe and Mail, offers an excellent tip for the cash portion of your portfolio: The Altamira CashPerformer (AIS100). The CashPerformer offers a current yield of 3.75% and can be purchased through your discount broker (I checked with RBC ActionDirect). Here are the key features:

  • CashPerformer is just like a high-interest savings account. It is insured by CDIC, up to a maximum of $100,000.
  • Interest is calculated on daily balances and paid monthly.
  • There is no minimum limit but discount brokers impose a limit. Action Direct, for instance, imposes a minimum initial investment of $1,000 and subsequent minimum additions of $500.

Altamira also offers a US Dollar CashPerformer (AIS101) that pays a rate of 4.5%. There is no CDIC coverage and I am not sure if any protection is available.

Update: The overwhelming consensus in the comments seems to be that AIS100 might not be an ideal choice for parking your cash at discount brokers because of redemption fees and penalties. I checked with RBC Direct Investing and they charge a 1% Early Redemption fee if this fund is sold within 120 days.