Archive for April, 2009

Claymore Broad Emerging Markets ETF (TSX: CWO)

April 7, 2009


Claymore has just announced a new ETF to track a broad emerging market index that will be of interest to Canadians worried about estate tax implications of holding cheaper US-based emerging market ETFs such as the Vanguard Emerging Markets ETF (VWO). Unlike the soon to be announced BMO Emerging Markets ETF, CWO is truly a broad emerging market index fund. A comparison with VWO reveals an almost identical country diversification and only minor differences in the top 10 holdings. Curiously, the fact card of CWO is vague on the index that is tracked:

The Manager will select an Emerging Markets Benchmark Index such as the MSCI Emerging Markets Index, the FTSE RAFI Emerging Index or another widely recognized emerging markets index in order to provide such exposure and may change the Emerging Markets Benchmark Index in its discretion without unitholder approval.

The MER of the fund is a bit steep at 65 basis points compared to just 27 basis points (incidentally, the MER for VWO is down 3 basis points since I first wrote a post on it!) for VWO. But then again, it is hard to compete with Vanguard on fees. CWO also hedges the currency exposure of the fund, which is of dubious benefit given the high costs involved in the form of tracking errors.

Claymore should be applauded for being the first to introduce a broad market emerging market ETF in Canada. As some of Claymore’s newest funds are thinly traded and have very wide bid-ask spreads, I would hold off on considering the ETF for investment until the fund is fairly widely held.

See also: Jon Chevreau wrote about CWO in his blog.

Download The Richest Man in Babylon

April 6, 2009


When I made my list of top ten money books, some readers questioned why The Richest Man in Babylon did not make the cut. I did consider adding George Clason’s timeless classic on personal finance but in the end I went with The Wealthy Barber instead because the latter has a more modern take on the same topic.

It turns out that The Richest Man is now in the public domain and you can download the book over at the Where Does All My Money Go? website.

If you can get past the slightly grating “thou” and “thy”, the book has some sensible advice such as this:


I. Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
II. Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
III. Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
IV. Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.
V. Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.

Bucking the conventional wisdom on a fixed-rate mortgage

April 5, 2009


It is now widely-known that homeowners can save money by opting for a variable-rate mortgage over a fixed-rate mortgage in the vast majority of instances. Ben, an astute observer of financial matters, recently grappled with the question with his own mortgage and decided that with potential high inflation in the future and low spreads between fixed-rate and variable-rate, this might be one of those rare occasions when it makes sense to go fixed. According to Invis, a mortgage broker, fixed-rate mortgages can currently be had for 3.99% over 5 years compared to variable at 3.30% (Prime + 0.80%).

Should you go with a fixed-rate mortgage (FRM) or a variable-rate mortgage (VRM)? One thing is clear about questions of this nature: nothing is ever clear. In the same way that RRSP vs. mortgage vs. TFSA can never be answered definitively for all cases, the decision on whether to take a variable or fixed mortgage interest rate can also never be resolved in cookie-cutter fashion.

To paint broad strokes, banks charge a premium on FRM’s to accept the risk that money will not be so cheap in years to come – by accepting a VRM, and hence the risk, you stand to save money, historically, and on average.

Widely-reported Dr. Moshe Milevsky of York University authored a study in 2001, with a subsequent update summarized nicely here, where 90.1% of the time over 1950-2007 it was better to have chosen a VRM over a FRM (down to 77.1% if you have good negotiation skills and credit, and can secure a discounted rate). As discussed in the comments there, it would be nice to know what conditions existed in those minority of times when it was better to have a FRM, ie. historically, given that prime rate was x%, what was the probability that fixed would fare better than variable over the next finite time period?

Given that mortgage interest rates are currently at an all time low, one has to wonder whether historical studies have the same relevance when brought to bear on current market conditions. The spread between VRM and FRM is extremely slender at the moment – on a standard 5-year term closed mortgage, the best discounted VRM today is just north of 3% and the best discounted FRM is about 4%. The narrower this gap, the better one’s probability of doing better with a FRM.

Some have argued that when rates do begin to go up, as they almost certainly will in time, the increases will be modest at first and at that point early in the rise one can lock in to a fixed rate. However, it is a certainty that by the time the average Joe realizes it’s time to lock into a fixed rate, the banks will have raised the fixed rate higher than he could have gotten today. This becomes a case of pay less today on your VRM, pay more tomorrow on your FRM.

In a recent discussion, Dr. Milevsky states generally that people with a lot of assets and therefore increased ability to deal with risk should still consider a VRM. Dr. Milevsky offers that those with small home equity, or low or unstable income, may want to consider a FRM.

Historical studies aside, there are some elephants in the room these days. Job stability is at generational lows, house prices are in steady decline, the future of North American automakers hangs in the balance, and governments are pumping trillions into the financial system with uncertain results. These are uncharted waters.

Ultimately with mortgage rate choices, as with all other aspects of personal finance, it comes down to risk management. If we pull out all the stops in efforts to maximize the slice of pie at retirement, we run the risk of burning the pie, or finding we’ve arrived at the dinner table without a plate and fork. If we don’t take the occasional calculated risk, however, we may find that there’s not enough pie to eat on Tuesdays.

And as always, more important than the decision you make on VRM vs. FRM is the decision you make in your day-to-day life to control your expenses, increase your income, and direct the net savings toward paying off the mortgage and maximizing registered and non-registered investments.

[Update: You may want to check out this post on Canadian Mortgage Trends on the same topic.]