Archive for December, 2007

Reader Question on a Negative Opinion on ETFs

December 9, 2007


The following question is from JS:

The following I found at What are your thoughts on this opinion?

“I do not buy ETFs because, essentially, I reckon you are buying an index. In the tech crash of 2000, indexes went down…some, way down. My dividend growth stocks went up. I’d rather pick my own assets…safer dividend-paying stocks. I only have one retirement portfolio. I don’t know if ETFs provide income or if one just tries to make gains by trading, as the name suggests. You have to pay a commission to buy and sell ETFs. And they don’t always trade at the net asset value of their underlying holdings.

John Bogle, according to The Economist, is “the most vocal critic of ETFS”. He thinks they are undermining the buy-and-hold principle of sound investing by tempting the little guy into ill-timed ‘performance chasing’. Trading commissions notched up by all this activity could overwhelm the cost advantages of ETFs. Trading is too much bother. To make it profitable you have to guess correctly twice. Once when you sell, and once when you buy back in: you could lose on both counts.

I don’t want to start an all out war between the dividend-growth and indexing schools of thought. While I’m mostly indexed, I do own some dividend-growth stocks (yes, you can call it the triumph of hope over experience, but at least it is only a portion of our portfolio). However, there is one drawback in buying just a handful of stocks: you better hope that you don’t make a mistake and choose the wrong stock because if you lose a chunk of your capital, it is very hard to make up.

That said, I think Tom Connolly criticizes ETFs for the wrong reasons: ETFs do not trade at significant discount or premium to NAV and shouldn’t be avoided just because others trade them rapidly. Closed-End Funds (CEFs), which do trade at significant discount/premium to NAV, are frequently confused with Exchange-Traded Funds (ETFs). ETFs do not vary much from the underlying NAV because when they do arbitrageurs step in to redeem or create ETF units, a feature not available with CEFs.

I find it a bit rich that Tom Connolly quotes John Bogle to attack ETFs, because Mr. Bogle’s comments are directed at investors who trade too much. While investors in the U.S. have excellent index mutual funds available from Vanguard and other low-cost providers, ETFs are the only cost-effective option for many asset classes for Canadian investors. Just like quality stocks, if you buy-and-hold ETFs that track the broad indices, you are likely to be very happy with the results.

Where’s the Nearest Bank Machine?

December 7, 2007


I’m traveling on business and couldn’t find the time to write a decent post, so here’s a collection of links that you may find useful if you are in a strange city and want to get some cash:

  1. CIBC / President’s Choice
  2. RBC Royal Bank
  3. TD Canada Trust
  4. BMO Bank of Montreal
  5. Scotiabank
  6. National Bank
  7. Laurentian Bank

Have a nice weekend!

Two Strikes against Active Management

December 5, 2007


Investing Intelligently recently wrote a nice rebuttal of Rob Carrick’s article on how actively managed funds handily beat the index during the last bear market. You may not be able to count on mutual funds outperforming the index in the next bear market though. David Breman notes in today’s Financial Post that Canadian equity funds fell 6.1% in the month of November barely beating the TSX Composite Index, which slid 6.2%:

Fans of actively managed funds will often defend the hefty management fees associated with mutual funds by saying that active management shines when markets turn volatile. That is when money-management expertise can steer dollars away from obviously overvalued, over-hyped sectors and into areas that should perform well.

The November results, however, show that this is easier said than done.

Also, Jon Chevreau confesses in a recent blog post on how he gave up on mutual funds after publishing a “Smart Funds Guide” for many years:

I stopped writing the guides after the 2000 edition because I kept asking my fund analyst coauthor how it was that the one hundred “Smart Funds” we chose often were beaten by the index by which they were measured. Each “Smart Fund” included graphics of the performance of the fund versus the index. After awhile, I started to wonder if some of the best funds didn’t beat the index, what did this say about the “Dumb Funds?”

So, why do investors continue to flock to mutual funds? Is it as John Bogle likes to say a triumph of hope over experience or is the general public unaware of the corrosive effect that high fees have on performance?