Archive for October, 2011

Does the BMO Canadian Dividend ETF (TSX: ZDV) change the dividend ETF landscape?

October 31, 2011

25 comments

If you are interested in an ETF that holds dividend-paying stocks, you might be interested in the news that the BMO Canadian Dividend ETF (TSX: ZDV) started trading just recently. The ETF holds 50 stocks that are selected based on dividend growth, dividend yield, payout ratio and liquidity and weighted by yield. The portfolio is then weighted by yield and the portfolio is rebalanced and reconstituted twice every year.

ZDV aims to undercut the two largest existing dividend ETFs – the iShares Dow Jones Canada Select Dividend ETF (TSX: XDV) and the Claymore S&P/TSX Canadian Dividend ETF (TSX: CDZ) by charging a management fee of 0.35%. In comparison, XDV charges 0.50% and CDZ charges 0.60%. iShares also has the S&P/TSX Equity Income ETF (TSX: XEI) in its line up. XEI’s management fee is 0.55%. XDV, CDZ, XEI and ZDV yield 4.08%, 3.12%*, 4.1% and 4.25% respectively.

So, which one to choose? Other than the fact that CDZ belongs in the bottom of the pack, it is not clear which of these ETFs will be a suitable holding. CDZ’s yield is far too low for a “dividend” ETF considering XIU yields 2.36%. It’s not easy making a choice between the other ETFs because the holdings are wildly different owing to the different stock selection criteria their respective indices employ. Worse, apart from XDV which keeps turnover low by making it difficult for a holding to drop out of the selection set, the other dividend ETFs will have high turnover. But XDV is not without its own set of flaws either. Financials make up more than half the holdings and the big banks alone account for more than a third of the fund.

XDV – okay MER, low turnover but high concentration in financials and banks.
CDZ – high MER, high turnover, low dividend yield.
ZDV – low MER, high turnover (?), new fund
XEI – high MER, high turnover, well diversified, relatively new fund, low volume.

* – Originally, CDZ’s yield was reported as 2.78%. It was incorrect. Thanks to reader DM for pointing it out.

This & That: Europe, Behavioural biases and more…

October 27, 2011

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Europe’s “comprehensive” solution: Markets cheered news out of Europe on a plan to address the debt crisis. The Economist magazine explains the proposed solution and why the solution may not be so “comprehensive” after all.

Behavioural Biases: Daniel Kahneman is an expert in behavioural finance. Along with Amos Tversky, Prof. Kahneman is a past winner of the Nobel Memorial Prize in Economics. He has just published a new book titled Thinking Fast and Slow. Bloomberg ran a four part series of excerpts from the book on behavioural biases and how it affects us. You can read it here, here, here and here.

How scammers work: A gold scammer who bilked investors out of tens of millions of dollars talks about how he found his victims and convinced them to invest in non-existent gold bullion.

America, the comeback kid: The Telegraph newspaper reported that due to a confluence of factors, the US may be about to reverse its economic and strategic decline.

Around the blogs

On a recent trip to China, Michael James found out that many Chinese seem to hold a dangerous belief that real estate prices never go down.

Money Smarts Blog explained how to save on calling home from a foreign country.

Million Dollar Journey shared some tips on how to save at Costco. As a regular Costco shopper, I find one could save even more by stocking up on items that are featured in the coupons.

Canadian Financial Stuff asked his bank to reduce the interest rate on his line of credit and is surprised to receive it.

Jim Yih offered some tips on how to work better with a financial advisor.

My Own Advisor shared his favourite takeaways from The Elements of Investing.

Claymore 1-10 Year Laddered Government & Corporate Bond ETFs

October 25, 2011

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Claymore’s #1 and #2 ETFs by assets under management are the Claymore 1-5 Year Laddered Corporate Bond ETF (TSX: CBO) and the Claymore 1-5 Year Laddered Government Bond ETF (TSX: CLF). So, it’s not very surprising that Claymore’s two newest ETFs are similar products moving up the yield curve. The Claymore 1-10 Year Laddered Government Bond ETF (TSX: CLG) and the Claymore 1-10 Year Laddered Corporate Bond ETF (TSX: CBH) started trading on the TSX today.

The Claymore 1-10 Year Laddered Government Bond ETF (TSX: CLG) holds 53 bonds with maturities ranging from 1 year to 10 years issued by the Federal and Provincial Goverments. The laddering strategy is implemented by reinvesting maturing bonds in a new 10 year bond. The MER of the ETF is 0.17%, the yield-to-maturity is 1.82% and the duration is 4.36 years.

The Claymore 1-10 Year Laddered Corporate Bond ETF (TSX: CBH) holds 56 investment grade corporate bonds with maturities ranging from 1 year to 10 years. The MER of the ETF is 0.28%, the yield to maturity is slightly higher at 2.79% and the duration is 4.14 years.

One or both these ETFs will be of interest to investors looking for broad exposure to the bond market. The duration (a measure of the sensitivity of bond prices to interest rate changes) of both these ETFs is higher than the iShares DEX Short Term Bond ETF (TSX: XSB, MER: 0.27%, YTM: 1.68%, Duration: 2.61) and lower than the iShares DEX Universe Bond ETF (TSX: XBB, MER: 0.32%, YTM: 2.57%, Duration: 6.43). But the MERs are quite a bit lower than both iShares ETFs and you can lower the cost of owning even further if you can buy these ETFs without a commission.

A couple of points to note: despite the name, the Claymore Laddered Bond ETFs are not quite the same as a bond ladder an investor could construct herself because unlike a ladder, the investor has no control over reinvesting maturing bonds in the ETF. Therefore the ETFs are only suitable holdings for long-term investors who are will be reinvesting maturing bonds indefinitely. Also note that the cash yield of these ETFs is quite a bit higher than the YTM, which all things being equal implies that the ETF will experience a drop in the price level over time.