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ETFs offer a cut-rate, transparent alternative

And now for a glimpse into the mind of investment adviser Adrian Mastracci as he designs a portfolio for a typical high-net-worth client.

"Certainly, one could use a whole variety of mutual funds," says Mr. Mastracci, who heads Vancouver's KCM Wealth Management Inc. "But that's not the way to go because the management expense ratios on those things are too expensive. I use ETFs."

That's the nickname for exchange-traded funds, the savvy investor's alternative to mutual funds. ETFs are index funds that are listed on stock exchanges instead of being sold by fund companies. You need a brokerage account to buy an ETF, be it a cheap on-line broker offering $29 trades or a full-service broker at three times the price.

Low fees are one of Mr. Mastracci's favourite things about ETFs. The ones he uses have an average management expense ratio, or MER, of 0.25 to 0.30 per cent, compared with 2.4 per cent for a typical mutual fund. Mr. Mastracci levies his own fee on top of the ETF charge, but his clients still pay less than if they owned mutual funds.

There are 16 ETFs listed on the Toronto Stock Exchange and another 145 or so on the American and New York stock exchanges. Each tracks a particular index, be it a benchmark like the S&P/TSX 60 or composite indexes, the S&P 500 or the Morgan Stanley Capital International Europe, Australasia Far East Index. From this vast selection, Mr. Mastracci generally uses only about six of the most popular.

For Canadian equity exposure, he'll use either the iUnits S&P/TSX 60 Index Fund, known as the i60, or possibly the TD S&P/TSX Composite Index Fund.

For the U.S. market, either the iShares S&P 500 Index Fund or the iUnits S&P 500 Index RSP Fund.

For global stocks, there's the iUnits MSCI International Equity Index RSP Fund.

There's a pair of TSX-listed bond ETFs that can be used as proxies for Government of Canada five- and 10-year bonds, but Mr. Mastracci isn't using those right now. With interest rates rising, he thinks shorter-term bonds are better bets.

Beyond low costs, Mr. Mastracci likes the transparency of ETFs. While it's difficult to tell what stocks a fund manager is buying and selling, there's no mystery to ETFs because they're based on a transparent index.

© 2007 The Globe and Mail. All rights reserved.

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