Let 2006 go down as the year that diversity finally came to the achingly bland Canadian ETF market.
Not a lot of diversity, mind you. We now have 27 exchanged-traded funds listed on the Toronto Stock Exchange, compared with about 350 in the United States and dozens more to come. But with the introduction of nine new ETFs in the past couple of months, things are looking up for Canadian investors who like the low cost and flexibility of these index funds that trade like a stock.
Want corporate bonds to juice up the yield from your fixed-income holdings? Then take a look at the new iShares Cdn Corporate Bond Index Fund. Want to emphasize a value approach in your Canadian stock market exposure? Try the iShares Cdn Value Index Fund. Hot for oil sands stocks? Then there's the Claymore Oil Sands Sector ETF.
"It's at a point now where you can honestly say that it's possible to build a fully diversified portfolio using ETFs exclusively in Canada," said John De Goey, an investment adviser at Burgeonvest Securities who uses ETFs in client portfolios. "I don't think you could have said that two months ago."
The choice of ETFs available to Canadian investors should be even larger within weeks thanks to the entry of a new player, Horizons BetaPro. This firm has already introduced a line of mutual funds that allows investors to profit from ups and, more importantly, downs in major stock indexes, commodities and currencies. Now, the franchise is being extended into a pair of ETFs that will provide a way to take both a bullish and bearish stance on the S&P/TSX 60 index.
If you don't mind bushwhacking your way through the ETF jungle in the United States, you can easily buy any ETF listed on the American or New York stock exchanges through a full-service or discount brokerage. Just remember that there are multiple choices in many ETF categories, and a surfeit of gimmicky new stuff that offers exposure to areas like public offerings, stocks that corporate insiders are buying, alternative energy and clean technology stocks and nanotechnology. Canada's newly enhanced selection of Canadian ETFs offers a simple, viable alternative.
A new product that interests Mr. De Goey is the Claymore BRIC ETF, which invests in the shares of companies from Brazil, Russia, Indian and China that are listed for trading on U.S. exchanges. Previously, he used a U.S. ETF for exposure to emerging market stocks like these -- the iShares MSCI Emerging Markets Fund.
The benefit of the BRIC fund is that it uses currency hedging to limit the impact the moves in the Canadian dollar would have on returns on the stocks it holds. Hedging usually makes an ETF a little more expensive to own, but the Claymore BRIC fund's 0.6-per-cent MER undercuts the 0.75 per cent charged by the iShares fund. Note that the BRIC fund is less diversified than the iShares ETF, although it does cover what are arguably the four most dynamic emerging market economies.
Adrian Mastracci, a Vancouver-based adviser who uses ETFs for his clients, said he's interested in the new iShares Cdn Corporate Bond Index Fund, which tracks the Scotia Capital all-corporate bond index.
This product is one of three new bond ETF offerings from Barclays Global Investors, along with the iShares Cdn Government Bond Index Fund and Long Bond Index Fund. "Out of the three, I would see the corporate bond fund as the top pick right now, just because that type of fund hasn't been available much before and, to me, it looks like a convenient way to get a nice, round basket of corporate bonds," Mr. Mastracci said.
The corporate bond ETF's management expense ratio is 0.4 per cent, which would leave it with a yield of 4.2 per cent or so right now. The government bond fund's yield, factoring in an MER of 0.35 per cent, would be 3.85 per cent. The iShares family also includes a bond fund that covers the entire bond universe and offers a yield of about 4 per cent, after applying its MER of 0.3 per cent.
The easiest way to get some bond exposure in your portfolio is to buy the broad bond fund and leave it at that. But if you wanted to add a little extra yield, you could mix in some of the corporate bond fund. For a more speculative approach, you could try the new iShares Long Bond Index Fund, which would work well in a falling rate environment but take a beating when rates rise.
The new crop of Canadian ETFs includes two funds that follow a long-standing trend in the United States of sifting through the mainstream stock indexes for companies with growth and value characteristics. Value investing focuses on undervalued stocks, while growth investing zeroes in on companies that are growing their revenues and earnings the fastest.
The iShares Cdn Value Index Fund is based on the Dow Jones Canada select value index, which counts five of the Big Six banks among its 110 holdings as well as EnCana Corp., Petro-Canada, Magna International Inc., Nortel Networks Corp. and a few income trusts. Dow Jones has created a growth index for the iShares family, too, and it holds such stocks as Suncor Energy Inc., Barrick Gold Corp., Canadian Imperial Bank of Commerce and Tim Hortons Inc. among its 71 names.
Academic research has shown that taking a value slant in a portfolio offers a better payoff, which suggests the value index fund as a long-term add-on to your core Canadian market exposure. That said, growth stocks have been doing well this year and could make sense as a short-term hold.
Before you buy either fund, check to make sure they don't combine with your existing holdings to overexpose you to certain stocks or sectors. For example, the iShares Growth Index Fund has a weighting of a bit more than 15 per cent in Suncor Energy Inc. and Canadian Natural Resources Ltd. These energy giants account for 7.5 per cent of the popular iShares Cdn LargeCap 60 Index Fund, and 23 per cent of the iShares Cdn Energy Sector Index Fund. Put these three funds in your portfolio and you set yourself up for a lot of pain if oil prices fall.
The most exotic of the nine new Canadian ETFs is the Claymore Oils Sands Sector ETF, which holds shares in 17 companies that are highly focused on oil sands production. The importance of the Alberta oil sands at a time of high oil prices and declining supplies is well documented, but the Claymore ETF was viewed skeptically by a couple of investment advisers.
Richard Kang, president and chief investment officer of Meridian Global Investors, said the oil sands ETF has similar holdings to the heavily traded iShares Energy Index Fund, which trades under the symbol XEG.
"I like XEG because it's already in that space," Mr. Kang said. "To me, the oil sands ETF is not significantly different enough for me to dump my XEG positions." Mr. De Goey of Burgeonvest was more dismissive, calling the oils sands ETF "almost too cute by half."
If you're interested in the oil sands ETF, Mr. Kang suggests biding your time for a month or two while you monitor how it trades in comparison to XEG. Then, after comparing basics such as the management expense ratio and the top 10 holdings, make your choice.
Watching a new ETF for a while before buying is a good policy all around, Mr. Kang added. "No one should buy a fund when it comes out. That's just silly."
New choices on the ETF menu
Nine new exchange-traded funds have been listed for trading on the Toronto Stock Exchange in the past couple of months. Here's the straight goods on each of them.
Claymore US Fundamental Index ETF
MER: 0.65 per cent.
Underlying index: FTSE-RAFI 1000 C$ hedged index
Notes: The index used by this fund weights stocks not by how big they are, as most ETFs do, but by how they rank according to four criteria that include cash dividends and free cash flow; note the MER, which is much higher than other U.S. market ETFs.
How to use it: For core exposure to the U.S. stock market, with currency hedging to screen out the impact of moves in the Canadian dollar.
Claymore Cdn Dividend & Income Achievers ETF
MER: 0.6 per cent.
Underlying index: Mergent Canadian dividend & income achievers index.
Notes: Focuses on companies that have regularly increased their dividends; income trusts make up 30 per cent of the portfolio.
How to use it: For income plus exposure to blue chips and trusts.
Claymore BRIC ETF
MER: 0.6 per cent.
Underlying index: BNY BRIC select ADR index
Notes: Holds shares of companies from Brazil, Russia, India and China that are listed on U.S. exchanges as American depositary receipts.
How to use it: A little of this fund in your portfolio will give you access to some of the world's fastest-growing economies.
Claymore Oil Sands Sector ETF
MER: 0.6 per cent.
Underlying index: Sustainable oil sands sector index.
Notes: Focuses on companies active in the Alberta oil sands.
How to use it: Offers a risky but potentially rewarding way to benefit from the vast oil sands reserves.
iShares Cdn Value Index Fund
MER: 0.5 per cent.
Underlying index: Dow Jones Canada select value index.
Notes: Holds 110 stocks with the characteristics of a value stock, which means being undervalued by various criteria.
How to use it: As an add-on to your core Canadian exposure.
iShares Cdn Growth Index Fund
MER: 0.5 per cent.
Underlying index: Dow Jones Canada select growth index.
Notes: Holds 71 stocks with the characteristics of a growth stock, which means higher rates of revenue and earnings growth.
How to use it: To add a bit of aggressiveness to your portfolio.
iShares Cdn Corporate Bond
MER: 0.4 per cent.
Underlying index: Scotia Capital all-corporate bond index.
Notes: Invests in bonds from the likes of Royal Bank, Enbridge and Bell Canada.
How to use it: Adds a little extra yield, with extra risk, to holdings in more stable government bonds.
iShares Cdn government index fund
MER: 0.35 per cent.
Underlying index: Scotia Capital all-government bond index.
Notes: Holds bonds issued by the federal government, federal agencies, provinces and municipalities.
How to use it: A core bond holding for conservative investors.
iShares Cdn Long Bond Index Fund
MER: 0.35 per cent.
Underlying index: Scotia Capital long-term bond index.
Notes: Invests in long-term bonds, which perform well when rates are falling, but are extra vulnerable when rates rise.
How to use it: As a bet on falling rates.
© 2007 The Globe and Mail. All rights reserved.
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.