1. The iShares MSCI Brazil Index Fund (TSX:XBZ) holds the US-listed ETF of the same name (NYSE Arca: EWZ) and tracks the Brazilian stock market. The MER is 0.75%.
2. The iShares S&P Latin America 40 Index Fund (TSX: XLA) again holds the US-listed ETF of the same name (NYSE Arca: ILF) and tracks markets in Latin America. The fund has a 61% allocation to Brazil, a 23% allocation to Mexico and 11% allocation to Chile. The MER is 0.65%.
3. The iShares S&P CNX Nifty India Index Fund (TSX: XID) holds the US-listed iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY). The Nifty 50 index tracks the performance of stocks listed on India’s National Stock Exchange. The MER is 0.98%.
4. The iShares China Index Fund (TSX: XCH) holds the US-listed iShares FTSE / Xinhua China 25 Index Fund (NYSE Arca: FXI). FXI is a popular ETF with investors wanting to add exposure to the Chinese stock market. The MER is 0.85%.
5. The other two ETFs introduced by iShares offer currency-neutral exposure to the US fixed income sector. iShares U.S. IG Corporate Bond Index Fund (TSX: XIG) holds the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE Arca: LQD) and offers a currency-hedged exposure to US investment grade corporate bonds. The MER is 0.30%.
6. The iShares U.S. High Yield Bond Index Fund (TSX: XHY) holds the iShares iBoxx $ High Yield Corporate Bond Fund (NYSE Arca: HYG) and offers a currency-hedged exposure to US junk bonds.

It is interesting to note that the new iShares Emerging Market ETFs do not hedge the currency exposure but still charge a 0.10% to 0.15% extra fee simply to hold another US-listed ETF. Assuming an investor wants to add China or India to their portfolio, why wouldn’t they simply buy the US-listed version and save a fraction of the fees?

Related Reading:

• BMO expands its ETF line up (again)
• More Exchange-Traded Funds from BMO
• A Tour of ETFs: Vanguard Emerging Markets ETF
• More New ETFs
• New iUnits ETFs

Six new ETFs from iShares is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

BMO Mid Corporate Bond Index ETF (ZCM). MER: 0.30%
BMO Long Corporate Bond Index ETF (ZLC). MER: 0.30%
BMO Aggregate Bond Index ETF (ZAG). MER: 0.28%
BMO Global Infrastructure Index ETF (ZGI). MER: 0.55%
BMO China Equity Hedged to CAD ETF (ZCH). MER: 0.65%
BMO India Equity Hedged to CAD ETF (ZID). MER: 0.65%
BMO Equal Weight Utilities Index ETF (ZUT). MER: 0.55%
BMO Nasdaq 100 Equity Hedged to CAD Index ETF (ZQQ). MER: 0.35%
BMO Junior Gold Index ETF (ZJG). MER: 0.55%

Apart from the fixed-income ETFs, which track the DEX bond indices, and perhaps the infrastructure ETF, it is hard to see any of these new ETFs appealing to long-term, buy-and-hold type investors. ZAG, which tracks the broad Canadian bond market might be equivalent to the iShares CDN Bond Index Fund (XBB) but it fills a huge gap in BMO’s existing ETFs that track broad markets. The two corporate bond ETFs might appeal to fixed-income investors who want a little more yield in exchange for credit and interest rate risk but personally, I prefer to take risk with the equity portion of the portfolio especially since corporate bonds are highly correlated with stocks.

I’ve heard arguments that infrastructure is a separate asset class that merits its own allocation in a portfolio but it simply sounds like a fad to me. Besides, infrastructure stocks such as TransCanada (TSX: TRP) and Enbridge (TSX: ENB) are already part of the broad Canadian market.

You can confidently bet that the China and India ETFs will see a good uptake among the investing public because China and perhaps, India, are among the hottest BRIC markets. Still, it is worth asking: what investing rationale could there possibly be for adding exposure to American Depository Receipts from a single, far-away emerging market in one’s portfolio? Or to a single sector such as utility, technology or junior gold for that matter. The answer is not much but I won’t be surprised if these ETFs are popular with the speculating public.

You may also be interested in reading Jon Chevreau’s take on BMO’s new ETFs.

Related Reading:

• Six new ETFs from iShares
• Exchange-Traded Funds from BMO Asset Management
• More Exchange-Traded Funds from BMO
• More New ETFs
• A Tour of ETFs: Vanguard Emerging Markets ETF

BMO expands its ETF line up (again) is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Fortunately, MSCI Barra reports the returns of MSCI EAFE and other MSCI indices in local currencies on their website. Armed with that data, we can look at how well XIN tracks the MSCI EAFE in local currency terms. The following table shows the annual total returns of MSCI EAFE Index in its local currencies (column 3) with XIN (column 4). The results are consistent with our earlier analysis of the tracking error of XSP. XIN shows an annualized tracking error of 1.83%, which is more than a full percentage point lower than the tracking error shown by XSP but still wide enough to suggest that currency hedging is highly likely to be unprofitable.

 
When a Canadian investor holds a foreign investment directly, they take on the risk that currency fluctuations will affect their returns. Sometimes, the fluctuations will be in the investor’s favour. Other times, as Canadian investors directly holding US securities can readily attest to, fluctuations will hurt returns. Canadian investors in the iShares MSCI EAFE Index Fund (EFA) would have experienced a significant boost from the currency effect. In local currency terms, the MSCI EAFE Index lost 10.2% over the 2006 to 2009 period. Since investors in XIN trailed the index by an annualized 1.83%, XIN’s loss over the same four year period is 16.8%. However, a Canadian investor holding EFA directly would have a loss of just 5.8% over the same time period.

The verdict on currency-hedging then (based on an admittedly short history of just 4 years) is clear: Long-term investors are highly unlikely to profit from hedging their currency exposure because currency effects have to overcome significantly large tracking errors simply to break even. When currency effects are negative (as it was the case of the CAD/USD over 2006 to 2009), currency-hedging still did not show a profit due to tracking error. With positive currency effects, currency-hedged investors are trailing even more because investors did not get the currency boost and paid for their hedging efforts through tracking error.

* – MSCI EAFE Index tracks stock markets in Europe, Australasia and Far East and holds securities that trade in countries such as Japan, the UK and Germany.

Related Reading:

• The Costs of Currency Hedging
• A Tour of ETFs: iShares MSCI EAFE Index Fund
• Flavours of an Index Fund
• Revisiting the Tracking Error For Currency-Hedged Funds
• The Costs of Currency Hedging: Taxes

Performance of the Currency-Neutral MSCI EAFE Index Fund is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

It is hard to get excited about these new-fangled mutual funds because rather than providing investors with a genuinely better product, Invesco Trimark’s approach smacks of a fund company trying to cash in on a hot trend. The first thing you notice about these funds is that five of the six new funds track narrow, niche sectors such as Agriculture, Water, Precious metals, Clean Energy and China –hardly the first, or for that matter, last, choice of index investors.

The funds are also pricey — the cheapest fund sports a fee* of 1.65% and all the funds are front-end loaded. The new fund line up has just one fund that can be called broad market: the PowerShares FTSE RAFI Emerging Markets. It has a fee, excluding operating expenses and taxes of 1.90%. In comparison, a financial advisor licensed to sell stocks and charging a 1% fee would be able to capture emerging market exposure for less than 1.5% including MERs and trading commissions.

Investors should keep in mind that the ideal ETFs track broad-market indices efficiently at a very low cost. All other ETFs or mutual funds holding them should be approached with caution.

PS: Rob Carrick says these mutual funds are taking ETFs to the masses.

PPS: Michael James isn’t impressed with the new funds: “they walk and talk like mutual funds, but advisors can call them ETFs”.

Related Reading:

• Why do ETF Investors do worse than Index Mutual Fund Investors?
• CIBC Index Mutual Funds
• Reader Question: How to Buy Vanguard ETFs?
• New Dividend ETF
• ETFs, but at what cost?

New PowerShares Mutual Funds is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Let’s imagine that an interpid mutual fund investor, Ted, comes across the column in the newspaper in 2004 and thinks to himself: “Gee! This is hot stuff. Every one of the 10 mutual fund managers have beaten the benchmark in the Global Equity category. You can’t really go wrong hiring these super smart guys to invest internationally for you.” With Ted, to think is to act, so he calls his financial advisor and asks to invest an even $10,000 in each of the top funds.

It’s now 2009 and a good 5 years have passed since Ted bought into Mackenzie’s logic and invested his hard earned money in its list of super duper funds. And — you know where I’m going with this — here’s what he finds:

Performance of Large Global Funds from July 2004 to August 2009

Performance Data Source: Globefund.com Mutual Fund Database

Ted is surprised to find that over the next five years:

1. His equal weighted investment in the ten largest funds trailed the index by a cumulative 2.4%.
2. 5 out of 10 funds trailed their benchmark index.
3. 4 out of 10 funds trailed their benchmark by more than 10%.
4. 1 out of 10 funds beat the benchmark by more than 10%.
5. Trimark Fund dropped out of the list. Fidelity International Portfolio changed its name to Fidelity Global Fund. AGF International was reclassified as International Equity. Investors Global handily beat the index but the Globe Fund database notes the inception date as 2002 and it is not clear if the fund is the same one as Investors Global – C whose returns are noted here.

Finding that the chances of picking a winning fund were no better than a coin toss, Ted figures the only way he can pick outperforming funds over the next five years is getting a peek at Mackenzie’s marketing brochure from 2014. Sadly, Mackenzie’s “research” department isn’t putting it out anytime soon.

Related Reading:

• Returns of the Top 10 Canadian Equity Funds (by assets) of 2004
• Active Management versus Index Shootout, Part 2
• Mackenzie hits back at ETFs, Part 1
• Tracking error in TD e-Series Funds, Part 1
• Active Management versus Index Shootout, Part 1

Mackenzie hits back at ETFs, Part 2 is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Price: It is galling to hear a purveyor of pricey mutual funds point out that ETFs have “hidden” costs such as transaction fees and cost of advice. Pot calling a kettle black comes to mind. An example is trotted out showing how an investor buying $1,500 worth of a 0.70% MER ETF and paying $24 in trading commissions ends up paying a total cost of 2.30%. The implication is clear: “And you thought our 2.50% fee for doing some real work is too much!”

I’m amazed that Mackenzie didn’t come up with the example of a client buying $100 worth of ETFs every month and paying $24 in trading commissions. It would have allowed them to go for the see-how-reasonable-our-fees-are angle.

Let’s talk real numbers, not made up examples. I’m mostly invested in ETFs. The weighted average MER of the funds is 0.22%. Trading commissions cost another 0.10% to 0.20% every year. I don’t pay for investment advice but even if it costs another 1%, the total cost is still a full percentage point less than Mackenzie’s mutual funds.

Performance: Claiming active strategies provide investors an opportunity to outperform is a bit like saying lottery tickets provide players a chance to become millionaires. Of course, they do. The question is what are the odds? John Bogle estimates that the odds of an active fund outperforming its benchmark are 15% over 5 years, 9% over 10 years and 5% over 25 years. Better than lotteries would be a charitable way of characterizing those odds.

Interestingly, the brochure features a table showing 8 out of 10 global equity funds outperforming the index in the 10-year period to July 31, 2009. We’ve discussed this table at length in an earlier post on Active Management versus Index Shootout. I won’t rehash the arguments again but suffice it to say that such “evidence” should be treated with caution.

We’ll look at Transparency, Tax Efficiency and Diversification in future posts. You may be interested in Larry MacDonald’s and Jon Chevreau’s take on this subject.

Related Reading:

• Mackenzie hits back at ETFs, Part 2
• Portfolio Size for Choosing ETFs over Index Funds
• Yes, you can index using mutual funds
• Active Management versus Index Shootout, Part 1
• Reader Question: How to Buy Vanguard ETFs?

Mackenzie hits back at ETFs, Part 1 is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

1. BMO Short Federal Bond ETF (Ticker: ZFS; MER: 0.20%) tracks an index of bonds maturing in one to five years and issued or guaranteed by the Government of Canada or its agencies.
2. BMO Short Provincial Bond ETF (Ticker: ZPS; MER: 0.25%) tracks an index of bonds maturing in one to five years and issued or guaranteed by the provincial governments or their agencies.
3. BMO Short Corporate Bond ETF (Ticker: ZCS; MER: 0.30%) tracks an index of investment-grade corporate bonds maturing in one to five years.
4. BMO High Yield US Corporate Bond Hedged to CAD ETF (Ticker: ZHY; MER: 0.65%) tracks the performance of the US high yield corporate bond market and hedges its US dollar exposure.
5. BMO S&P/TSX Equal Weight Bank ETF (Ticker: ZEB; MER: 0.55%) tracks the performance of an equal weighted index of the big six banks: Royal Bank (RY), TD Bank (TD), Bank of Nova Scotia (BNS), Bank of Montreal (BMO), CIBC (CM) and National Bank (NA).
6. BMO S&P/TSX Equal Weight Oil and Gas ETF (Ticker: ZEO; MER: 0.55%) tracks the performance of an equal weighted index of 13 major oil and gas stocks listed on the TSX.
7. BMO S&P/TSX Equal Weight Global Base Metals Hedged to CAD ETF (Ticker: ZMT; MER: 0.55%) tracks the performance of an equal weighted index of 33 global mining equities and hedges its US dollar exposure.

While the High Yield US Corporate Bond ETF appears to be a slightly interesting unique product for an investor looking into junk bonds, it is hard to get excited about the rest of BMO’s new ETFs — iShares CDN Short Bond Index ETF (XSB) already provides exposure to short-term bonds and Claymore has the sector ETFs covered. It is still early days but BMO seems to have trouble gaining traction with its ETFs. The BMO Dow Jones Canada Titans 60 ETF (ZCN), which has gathered the most assets and was introduced in May, has an average volume of 10,000 and wide bid-ask spreads. Its competitor iShares CDN LargeCap 60 (XIU), admittedly, has a huge head start but its volume runs in the millions and the bid-ask spread is tiny.

You can find more information on BMO ETFs here and the prospectus is available in SEDAR.

Related Reading:

• Six new ETFs from iShares
• BMO expands its ETF line up (again)
• Exchange-Traded Funds from BMO Asset Management
• A Tour of ETFs: iShares Bond ETFs (XSB, XBB)
• New iUnits ETFs

More Exchange-Traded Funds from BMO is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

The ETFs in the two spreadsheets below are sorted on how much in fees (column 5) each ETF earns for the vendor (total fees = total assets * management fee). The idea is to figure out which ETFs are more likely to be liquidated due to too little assets or too little trading volumes. This isn’t mere idle speculation — ETF closures are reaching epidemic proportions south of the border.

Ron Rowland, a money manager, maintains an ETF Deathwatch on the Invest with an Edge website. To qualify, an US-listed ETF must be at least 6 months old and have an average daily value trade of $100,000 or less (which according to Mr. Rowland is the cut-off for a sustainable fund). The good news is that the vast majority of iShares and Claymore ETFs appear sustainable according to Mr. Rowland’s criterion. The bad news? iShares CDN Jantzi Social Index Fund (XEN) and Claymore S&P Global Water Index Fund (CWW) would have qualified for the list.

Related Reading:

• More New ETFs
• Wrap ETFs from Claymore
• Switching from Index Mutual Funds to ETFs
• XDV versus CDZ
• Why do ETF Investors do worse than Index Mutual Fund Investors?

A look at ETF Trading Volumes and Total Assets is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

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 means ETF 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.

Related Reading:

• Tracking error in TD e-Series Funds, Part 2
• New iShares Emerging Market and World ETFs
• Tracking error in TD e-Series Funds, Part 1
• A Tour of ETFs: Vanguard Emerging Markets ETF
• Performance of the Currency-Neutral MSCI EAFE Index Fund

Tracking Error in Emerging Markets ETFs is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

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.

Related Reading:

• A Tour of ETFs: Vanguard FTSE All-World Ex-US ETF (VEU)
• Six new ETFs from iShares
• A Tour of ETFs: Vanguard Emerging Markets ETF
• Tracking Error in Emerging Markets ETFs
• Exchange-Traded Funds from BMO Asset Management

New iShares Emerging Market and World ETFs is brought to you by Canadian Capitalist -- Helping you to invest & prosper.