New iUnits: Dividend Index and Real Return Index

Four new ETFs were announced by Barclays Canada a couple of weeks ago.

XMA and XTR provide sector exposure: Providing investors with exposure to the Canadian materials sector, XMA will replicate, to the extent possible, the performance of the S&P/TSX Capped Materials Index. XTR is designed to provide investors with exposure to the Canadian income trusts sector by replicating, to the extent possible, the performance of the S&P/TSX Income Trust Index. XMA and XTR will join Barclays Canada’s other sector iUnits funds, including energy (TSX:XEG), financials (TSX:XFN), gold (TSX:XGD), technology (TSX:XIT) and REITS (TSX:XRE) to provide investors with the ability to target investments in some of the largest and most popular Canadian equity sectors / segments.

XDV provides yield opportunities: Designed to provide investors with exposure to higher yielding, dividend paying Canadian stocks, XDV will replicate, to the extent possible, the performance of the Dow Jones Canada Select Dividend Index. XDV will focus on investing in stocks with higher yields, proven dividend growth and dividend sustainability and higher liquidity.

XRB provides inflation protection: To provide fixed income investors with an inflation-protected investment, XRB is designed to replicate, to the extent possible, the performance of the Scotia Capital Real Return Bond Index.

I am personally going to be staying away from the income trust fund (I don’t know enough about the quality of the trusts in the S&P/TSX Income Trust Index).

I Googled for “Dow Jones Canada Select Dividend Index” and apparently it was just launched on December 5, 2005. Here’s the description:

The Dow Jones Canada Select Dividend Index’s 30 components are selected from the Dow Jones Canada Total Market Index, which represents 95% of the country’s float-adjusted market capitalization. To be included in the index–which is calculated in both Canadian and U.S. dollars–stocks must have a nonnegative, historical, five-year dividend-per-share growth rate; a payout ratio of less than 80% for all companies; and daily average dollar volume of $1 million for three months prior to the annual review. Stocks that meet these criteria are then ranked in descending order by indicated annual dividend yield, and the top 30 components are selected for the index. The index is weighted by indicated annual dividend, and the weight of any
one component is capped at 10%.

Cut and run: portfolio update

After reading this bearish post, “Sell some winners and most of your losers” I am thinking of increasing the cash-equivalents (bonds, money market, cash) portion of my portfolio.

I have an all-equity portfolio right now at TD, but I am just a few months away from transferring all my investments to Clearsight. Just waiting for the no-sell period to expire on some of my funds so I don’t get dinged with early redemption feeds. Once I switch to Clearsight I will assume a 25-75 bonds/equities ratio eventually. So I do not see this as a market timing strategy, but simply a re-allocation to where I will be in a few months/years from now anyways. This is my portfolio at TD as of now:

Fund % of holdings
TD CDN Equity 4.450%
TD CDN Money Mkt 7.680%
TD CDN Small-Cap Equity 4.460%
TD Emerging Mkt 1.770%
TD Global Select 13.320%
TD Science &Tech 3.480%
TD Energy 4.920%
TD US RSP Index-e 10.770%
TD Int’l Index-e 11.030%
TD CDN Blue Chip Equity 14.470%
TD Dividend Growth 14.230%
TD US Mid-Cap Growth 14.230%

The reason the money market fund is there is because that is the only thing I could put money into that doesn’t have a 90-day no-sell period. Before the monthly transfers from Clearsight were in effect I wanted to put my money somewhere (so I couldn’t spend it). Don’t ask me why I don’t have 25% bonds in my TD portfolio. I actually used to have at least that much but for some reason (can’t even remember), I sold them. That’s partly the reason I’m leaving TD. I want an advisor between me and my portfolio to stop myself from excessive trading and pointless fiddling. I think I’ll sell the Science & Tech fund. I’ve wanted to get rid of that for a long time. I have nothing good to say about tech funds or technology stocks in general. History has proved time and time again that they are nothing but trouble. I will probably also sell TD CDN Equity which has had a good run and did not perform as well in the previous bear market as did TD Dividend Growth or TD Blue-chip Equity.

I do not have access to the original article, but here is part of what The Big Picture quoted:

The disquieting overwhelming agreement among Street folk that we’re in a rally mode whose only real danger is that of missing out on the fun and profit that lie ahead is not the sole reason for our skepticism. The inevitable speculative excess that such an attitude begets is another tangible cause for unease. Speculation, of course, is always with us. And thank heavens it is, since it’s truly a vital investment ingredient, adding spice and whetting appetites. Heck, without speculation, Wall Street would be the epitome of dullness. But it’s the classic good thing that you can quickly and easily get too much of.

And whether you feel we’ve reached that state depends mostly, we reckon, on whether you own a stock that’s kicking up its speculative heels or not. What is clear, however, is that there’s no shortage of such stocks and their numbers do seem to be steadily rising. Here, we suspect the revived passion for momentum investing, the opportunistic approach of many hedge-fund managers, reminiscent of the day traders in the late ‘Nineties, to buy anything that moves, and the hyperventilating habitués of the online chat rooms are major stimulants

. . .

Stepping back a ways to get a little broader perspective, it seems to us that we are witnessing the beginnings of the end of the fabled era of easy money. And anyway you slice it, that shapes up as not exactly good news for a lot of businesses that battened rich in that extraordinary era

I do NOT listen to this kind of stuff. I do not buy in to any predictions about what the stock market is going to do next as it is completely unpredictable. I like to have a balanced asset allocation and rebalance from time to time. Predictions like these are not anything to be taken seriously or to lose sleep over; they are only a reminder that it is wise to not be 100% in equities.

The Flattening Yield Curve

What started making me look into bonds (which spurred me to write the last article) today was this article on Bill Cara’s site, “It’s all in the slope, folks,” which suggests that the yield curve in the US is starting to look like it did in 1999, and that it is getting close to being inverted, which has often signaled the start of a US recession in the past. He used this really neat applet to look at the yield curve at any point in the last 7 years. Here are his predictions:

Note the similarity between the yield curve of today and as at year-end 1999.

If yields of today jumped to those of 1999-2000, by roughly +150 basis points across the board, then I believe that the present housing market bubble would pop, rather than have the air let out slowly as is now happening.

Should the Treasury continue to print money the way it has, and the way it must in order to meet the fiscal deficit of government, then there will be inflationary pressures.

And should the Fed continue to raise rates the way it has, and the way it must in order to stabilize prices (i.e., combat inflation), then the more downward pressure there will be on economic growth. These are also deflationary pressures.

As long as the U.S. Treasury continues to reflate, and the Fed continues to tighten, the yield curve will continue to flatten, and will soon invert, similar to what happened in 2000.

According to the Wikipedia article on Yield Curve:

An inverted curve occurs when long-term yields fall below short-term yields. Under this abnormal and contradictory situation, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. An inverted curve may indicate a worsening economic situation in the future.

Bond Values and Interest Rates

I have to admit that until a little while ago, I did not completely understand the reason for why bond prices rise or fall depending on the prevailing interest rates. Although it made sense to me that a bond earning a lower coupon rate than currently available bonds should fall in market price because it will be less desirable than the currently available bonds, I knew there were some concepts I was missing. Once I started reading more about the basics of bonds, I realized that bonds are a lot simpler than most people think. Here are some interesting articles that I have looked at recently:

  • This article, Bond Values and Interest Rates, does a pretty good job at explaining the effect interest rates have on bond values. That web page also features an animated cat!? (if anyone can explain the cat’s relation to bonds I would be grateful). That site also has a few articles about bonds vs. stocks which I would like to comment on one day, but I need to think about it some more.
  • Investopedia‘s bond basics tutorial is a great introduction to the basics of bonds.
  • Investopedia’s advanced bond analysis tutorial is excellent from what I have seen so far. I have just looked at the section about “duration” because that’s what I was interested in and I really liked the diagrams and explanations.

iUnits conversions approved

The iUnits unitholders of the ETFs (Exchange-traded funds) XIC, XGV, XSP, and XIN have approved changes to the underlying investment objectives (ie. they have changed the underlying index being tracked by these ETFs).

  • The new investment objectives of XIC and XGV are to replicate the S&P/TSX Capped Composite Index and the Scotia Capital Short Term Bond Index, respectively. The Funds’ new names are the “iUnits Composite Cdn Eq Capped Index Fund” and the “iUnits Short Bond Index Fund,” respectively. As of November 16, 2005, the ticker symbol for the iUnits Short Bond Index Fund will change to “XSB” on the Toronto Stock Exchange.
  • The new investment objectives of XSP and XIN are to replicate the S&P 500 Hedged to Canadian Dollars Index and the MSCI EAFE 100% Hedged to CAD Dollars Index, respectively. These are the same indexes these funds previously replicated, except the currency exposure is now hedged to reduce the risk of exchange rate fluctuations affecting the returns of XSP and XIN.

Information regarding the increase in the MER (Management Expense Ratio) for XIC is curiously absent from this press release. Not only that, but links to the original press release announcing the unitholders meeting (which mentioned the commission increase) and the information circular outlining the changes to the iUnits ETFs are now absent from the iUnits home page.

Proposed Changes to XIC, XGV, XSP, XIN

Barclay’s is having a special meeting of unitholders, to decide on proposed changes to iUnits ETFs: XIC, XGV, XSP, XIN [pdf]. The most significant proposed change is to have XIC track the S&P TSX Composite rather than the TSX 60 index. Reasons given are:

  1. More securities and more diversified exposure to large-cap, mid-cap and small-cap stocks improves diversification which helps reduce volatility risk.
  2. The Composite Index is the most widely used benchmark of Canadian equity performance, which improves investors’ ability to compare results to other Canadian equity funds.
  3. Offering funds which track the S&P/TSX 60 Index and the S&P TSX Composite Index provides investors in iUnits funds with more choice.
  4. The increased fee reflects the time, expertise and expense involved in managing a portfolio of over 200 securities versus 60 securities.

XIU, the non-capped S&P TSX60-tracking ETF will still exist, it is only the capped XIC which is being changed.

XGV is becoming more diversified, to include provincial, municipal, and corporate bonds, rather than just Government of Canada bonds. It will now be tracking the Scotia Capital Short Term Bond Index.

XSP (S&P 500 tracker) and XIN (MSCI EAFE International Index tracker) will now be unaffected by exchange fluctuations. I assume this was done because of what happened in the last couple years, where Canadian investors’ in the US indexes were hurt by the falling US dollar in relation to the Canadian dollar (and every other currency for that matter).

We will know on November 15 the outcome of the vote by unitholders on the proposed changes. More detailed information can be found in the information circular.

REITS vs. the Stock Market

Think that real estate is hands-down a better investment than the stock market? I found some data on REITs (Real-Estate Investment Trusts) compared to the stock market, and on first glance it looks as if the stock market outperformed the real estate market from 1975-1993 and also from 1990-1996. Be wary, especially now that we are in a real estate peak, of people telling you that real estate is the best investment out there. Be also wary of those who tell you that it was the “best investment they ever made.” As David Chilton says, for many of those people, “it’s usually the only investment that they’ve ever made.”