Archive for the 'Indexes' Category

My Portfolio’s Performance for 2006

Published
by
Dave
1 year, 5 months ago
in Calculations, ETFs, Indexes, Investing, Mutual Funds, My Portfolio, Psychology and RRSP
. 5 Comments

I finally crunched the final numbers and here is how we did in 2006:


Annualized returns
From: 2006-01-01 to 2006-12-31
===============================
TD Stuff: 14.24%
Templeton International Stock Fund: 28.79%
S&P TSX 60 Index ETF: 13.28%
E&P Growth Opportunities Fund: 5.97%
CI Value Trust Fund: 8.89%
TD Canadian Bond Fund (Wife): 8.30%
TD Canadian Bond Fund (Dave): 4.19%
Cash (Wife): 1.71%
Cash (Dave): 6.17%
===============================
Overall: 12.17%

I got these numbers by making a list of all the inflows and outflows; not just into the entire RRSP but into cash, into the investments, out of the investments, out of cash, and so on. Every transaction is a double-entry transaction, except for the final balance (outflow) and the cash inflows from my chequing account (inflow). I could have just looked at cash flows into my RRSP and the final balances but I wanted to see the breakdown between the different components. Once I had the cash flows for each individual investments I did an Internal Rate of Return for each individually. I also did an overall calculation for the entire portfolio (shown at the bottom). Considering that the EAFE index went up 23.47% last year, the S&P 500 went up 13.62%, and the TSX went up 14.51%, we didn’t do too well. All of the stuff there except for the “TD Stuff” we only owned since March when we switched to Clearsight from TD. So I lost to the the indexes I mentioned above. The reason is because we had a sizable bond portion of about 25% and we were also carrying around a lot of cash (not literally) this year for whatever reason. Well part of the reason was that Clearsight dumped my advisor after they were bought by Wellington West and I ceased communication with them after that as I switched to E*Trade. So I didn’t do any trading during that time and our cash pilled up a bit too much.

The reason that my cash account went up by 6.17% annualized is because the dividends from the iShares S&P TSX 60 Index ETF (XIU) do not get reinvested (ie. it’s not a DRIP) but instead go into my cash account. So the dividends show up as sort of a capital gain in the cash account. One way for me to fix this would be to aggregate the cash inflows and outflows from cash and the iShares XIU and get the annualized return for that combination. That would give the annualized return including inflation. But once I buy another dividend-paying ETF, then what? The final 12.17% annualized return takes into account all the unrealized capital gains and dividends that went into the cash account and the dividends on the TD Canadian Bond Fund that were reinvested.

I really love these calculations. It really shows how well YOU did regardless of that the mutual fund’s NAV or the ETF’s market price did. Look at the TD Canadian Bond Fund for example. My wife got 8.3% annualized on hers and I only got 4.19%. This was because I bought it at a worse time. What’s the lesson here? That you should try to time the market? NO! You can’t time the market (so give up trying). The best way in my opinion is to trade completely randomly (hard to do) or just trade at some regular interval (easy to do) regardless of what the market is doing. Too many investors panic when their investments lose value and chase performance in bull markets. These behaviours lead to lower annualized returns for your portfolio, regardless of what the underlying mutual fund or ETF’s published returns were.

I wrote about investors and their bad timing before. Here is one of the quotes from that blog post:

The results indicated that, as with most active funds, investors’ timing decisions were costly when it came to index funds. The dollar-weighted returns for virtually all large-cap index funds were worse than their official returns for the trailing 10-year period through the end of the third quarter 2005. As the table below shows, poor timing cost Vanguard 500 shareholders 2.7 percentage points of returns per year over the past decade. That’s not chump change.

So I hope to see from these calculations how good/bad my timing is. By this time next year I will have an all ETF portfolio so I will be able to compare my annualized return in index X with the return of index X over the same period.

Popularity: 39% [?]

Foreign Exchange Costs Associated With USD Investments in an RRSP

Published
by
Dave
1 year, 5 months ago
in Calculations, Costs, ETFs, Indexes and Mutual Funds
. 5 Comments

I have been looking at adding an emerging markets component to my portfolio. I look at my choice as either being Vanguard’s VMO ($USD), iShares’ EEM ($USD), or a Canadian mutual fund offering (such as the TD Emerging Markets Fund or the Altamira Global Discovery Fund. Unfortunately there are no Canadian ETFs investing in emerging markets.

The Vanguard Emerging Markets Fund has an MER of 0.30%. The iShares MSCI Emerging Markets Index Fund has an MER of 0.70%. Once again Vanguard seems to have the lowest-cost ETFs around. The TD Emerging Markets Fund has an MER of 2.88%, and the only thing the Altamira Global Discovery Fund is discovering is how to take MERs to astronomical levels, with an MER of 3.42%. Looks like the Altamira fund is beating the MSCI Emerging Markets Index (CAD$) but those gains are paying for the MER and it ends up just matching the index.

I decided that between the Vanguard VWO and the iShares EEM I would rather go with VMO as the MER is smaller. They hold virtually the same indexes underneath. The VMO one is a “Select” MCSI Emerging Makrts index that was designed especially for Vanguard a long time ago for one of their mutual funds. VMO also has more stocks. It’s daily volume is less than EEM but still high at 400k on average which is what EEM was at a few years ago.

The next thing I was worrying about was the foreign exchange. I have CAD dollars sitting in my E*Trade RRSP. If I buy VMO, E*Trade will convert the CAD to USD and purchase VMO. When I sell VMO (eventually) E*Trade will sell the VMO and covert the USD to CAD. So my CAD dollars gets converted into USD once at a rate of say 1.18 dollars CAD for every dollar USD. Then when I sell VMO they will only give me something like 1.14 dollars CAD for every dollar USD. I don’t know what E*Trade’s spread usually is (if anyone knows, please tell me) but I assume it will be 4-5%.

So I did some calculations to see how bad this hit works out to be on an annualized basis. In other words, what would the effective MER of owning VMO as opposed to a Canadian mutual fund be? I’ll assume that VMO always goes up by 10% every year, has an MER of 0.30%, the nominal foreign exchange rate is 1.16% and the spread is 4%. So obviously if you buy VMO and sell it quickly (say, within a year), it will have increased by 10% but the foreign exchange spread has stolen away 4%. A bit worse than the mutual funds then. But what if you hold it for a long time? It’s going to get better over time. If you hold it for two years, it will increase to 1.1*1.1 = 1.21 of it’s original value but it’s multiplied by (1-0.04) due to the foreign exchange, now what’s the effective annualized return there? It’s about (1.12*0.96)^(1/2)=7.78%, so that’s an effective MER of 2.22%. Already we are better than the mutual funds. (I’ve made an approximation above…it’s not exactly 0.04 that I should be using, it’s 1-(1.14/1.18)… but nevermind, if you want to know more, ask me). If you keep going with the years you’ll get the following graph:

Effective MER for USD Investment

So it looks like it falls off pretty rapidly. Gets down close to 0.5% MER which is not bad. Essentially you can just think of the the foreign exchange hit as multiplying the PV by some number, so it lowers your PV. Over time the effect of lower PV is lessened as the investment grows due to compounding. Note also that I neglected commissions in the above analysis.

Keep in mind that with EEM this graph would be shifted upwards a bit. Since I have beaten the two mutual funds above by a long shot as far as cost goes, I think I might by some shares of VMO. I’ll make it about 5% of our portfolio and then I’ll make an effort to hold it for at least 10 years, where that curve really starts to flatten out.

Popularity: 35% [?]

Equal-Weight S&P 500 Index

Published
by
Dave
1 year, 6 months ago
in ETFs and Indexes
. 2 Comments

I found a little report on the equal weighted S&P 500 Index “Are equal weighted indexes better than market cap weighted indexes?” It summarizes what we knew already, that the S&P 500 Equal Weight Index holds more of more of the smaller large-caps and less of the large large-caps and so its superior performance of late can be attributed to the better recent performance of the mid-caps over large-caps:

There is nothing wrong with the S&P 500 Index – it is a well-constructed and maintained passive benchmark. For those who do not like market capitalization-weighted indexes,
the S&P 500 Equal Weight Index is an alternative. But as I have shown in Figure 1 through Figure 4, the S&P 500 Equal Weight Index behaves more like value and mid to small-cap indexes . . . Thus, if one wants to get the exposure to the factors that influence the S&P 500 Equal Weight Index, then they probably could combine a group of passive market capitalization-weighted indexes to produce a similar pattern of returns. Given the cost of replicating an equal weighted index (brokerage costs associated with periodic rebalancing), it would seem investors could do better over the long term by using a combination of lower cost, lower maintenance, market capitalization weighted index funds as opposed to an equally-weighted index fund to gain the portfolio sensitivities desired.

He is correct in that there are higher costs associated with an equal weight index. The rebalancing bonus is small but it might cancel out or even trump the effect of the slightly larger MER on the ETF that matches the S&P 500 Equal-Weight Index, the Rydex S&P Equal Weight ETF (RSP).

Popularity: 7% [?]

S&P TSX 60 Equal-Weighted Index

Published
by
Dave
2 years, 8 months ago
in Advisors/Brokers, Indexes, Investing and Stocks
. 5 Comments

For those who don’t already know, I am not a fan of market-cap-weighted indexes like all the S&P Canadian indexes and the US S&P 500. In the US S&P has the S&P Equal-Weight Index and there is an ETF that tracks it, the Rydex S&P Equal Weight ETF. In Canada there is no such index provided by S&P and no ETF. I knew that there was no Canadian ETF in existence that was equal-weighted but I thought that there must be at some theory, data-mining, or an informal index out there.

Yesterday, I finally found something: an equal-weighted index for the S&P TSX 60. After what seemed like hours digging through Google search results and varying the keywords I gave to Google, I finally found a company called Shaunessy Investment Counsel in Alberta that has formed such an index which they invest in using their clients’ money. The performance as of September 30, 2005 is shown here, where they also mention that the index is “equal weighted, re-balanced quarterly.” An older Shaunessy news article I found on Google compared this index to the S&P TSX 60 Index and shows excellent results, which I will reproduce below:

Canadian Large Cap versus Index Comparison
Rates of Return Ended June 30 2004

Q2 04 Year to Date One Year Three Years Five Years
TSX 60 TRI -0.1% 4.1% 22.1% 4.1% 4.7%
SIC 60 EWI* 2.5% 4.3% 26.2% 8.9% 9.9%
Mercer Median 0.9% 5.4% 25.3% 6.9% 10.0%
Source: RBC Capital Markets, Mercer Investment Consulting, Shaunessy Investment Counsel (SIC)
* Price Index only constructed by Shaunessy Investment Counsel

The “Mercer Median” is the median performance of a whole bunch of mutual funds, from the “Mercer Institutional Pooled Funds report.” They also note that “the EWI is a price index and does not include dividends which would add at least another 1-1.5% to total returns.” The results are even more impressive if you take into account the dividends paid.

Don’t get your hopes up about buying a piece of the index from Shaunessey. They require a $2 million minimum to be a client. To just buy the index and not have a “fully-managed” portfolio with them, you will need to invest $6,666,666 million (0.15% as percent of assets, minimum fee is $10,000). More evidence that the more money one has, the more access one has to better investment advice and services.

It is possible to create your own S&P TSX 60 Equal-Weighted Index (EWI), however, paying $50 commission for each stock would become prohibitively expensive. To keep your commissions to 1% of your initial purchase you would need $300,000 total assets. And rebalancing every quarter would also become very expensive.

Another way to have an approximation to Shaunessey’s index would be to buy certain amounts of sector ETFs and rebalance the allocation of each ETF regularly; however, within each sector ETF the stocks would still be market-cap-weighted.

The best way I can think of to create your own S&P TSX 60 EWI is to use Shareowner . It looks like you could buy 60 stocks for $36 using Shareowner and have your dividends reinvested for free.

Popularity: 11% [?]

New iUnits: Dividend Index and Real Return Index

Published
by
Dave
2 years, 8 months ago
in Bonds/Fixed Income, ETFs, Indexes and Stocks
. 0 Comments

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%.

Popularity: 14% [?]

S&P 500 equal-weighted index

Published
by
Dave
2 years, 8 months ago
in Asset Allocation, Costs, ETFs, Indexes and Stocks
. 1 Comment

Found an old article from 2004 about the S&P Equal Weighted Index, “Buy the S&P 500 with better returns,” which can be bought under the Rydex S&P Equal Weight EFT (RSP). The S&P Equal Weight index holds all the stocks in the S&P 500 index equally (0.2% each). Rebalancing works like this:

If the share price of one of the companies in the index climbs sharply, the Rydex fund pares it down to a 0.2% weighting when the portfolio is rebalanced every quarter. If a stock tumbles, more is added. Thus the fund is continuously funneling profits from stronger to weaker issues; in effect, selling high and buying low.

I wouldn’t even really call this value investing. This is just common sense. If you created a portfolio yourself of 60 stocks, like the S&P TSX 60 index, would you weight them according to their market capitalization? Probably not. If one of the stocks in your portfolio went up by 50% and another went down by 50%, would you sell the one that went up and buy more of the one that went down? Yes, you probably should, if your transaction costs aren’t too high. If you want to think of it as value investing, that’s fine. I guess compared to the run-of-the-mill S&P500 it is certainly more value-oriented:

“This is a poor man’s value tilt,” says Robert Deere, head of domestic equities for Dimensional Fund Advisors, the foremost operator of customized index funds for institutions.

DFA heavily favors small and downtrodden stocks, citing academic research that shows they outperform big-cap growth stocks over long periods. Since this fund does that implicitly, “I would expect it to give you a higher return — no doubt about it,” he says.

The article pooh-poohs the Rydex Equal Weighted Index’s MERs, “The ETF’s expense ratio is 0.4%. That’s more than three times that of the Spider, eroding indexing’s greatest advantage.” But that hasn’t hurt its returns. According to the article the equal-weighted index has beaten the market-weighted index by 2% over the past 10 years,

Rydex says that the equal-weighted index has greatly outperformed the market-weighted index over the last 10 years, delivering annualized returns of 14%, compared with 12% for the index.

However, this document on S&P’s website puts the 10-year annualized returns at 12% and 9.3% respectively. I will definitely be buying RSP over SPY and not because I am chasing after good past returns but because the methodology makes sense.

Popularity: 4% [?]

Is the S&P 500 a passive index or an actively managed mutual fund?

Published
by
Dave
2 years, 8 months ago
in ETFs, Indexes and Investing
. 3 Comments

I uncovered and interesting article, “The S&P 500 is a mutual fund - and a bad one,” written in 2002. As someone who has considered buying shares of SPY to make up the major part of his US portfolio, this article, claiming that the S&P 500 is a bad mutual fund was a must read. In it, Jon D. Markman says:

“Unlike most index publishers, such as the Nasdaq and Dow Jones, Standard & Poor’s adds and subtracts stocks from its three broad indexes — the largecap 500, the Midcap 400 ($MID.X) and the Smallcap 600 ($SML.X) frequently in accordance with a largely subjective list of criteria that includes market capitalization, liquidity and their representation of industrial sectors.” [emphasis mine]

The S&P 500 is supposed to be representative of “the market” (not the US economy which consists of 306 privately-owned US companies with revenues of at least $1 billion) and one of the ways they do this, is by matching the sector allocation of the entire US stock market (small-caps and all, almost 10,000 stocks as of 2005) to the index. In 2000, according to Mr. Markman, the S&P had a 14% weighting in technology stocks by market capitalization whereas the entire U.S. market had a weighting of 18% in technology stocks by market cap. The people at S&P proceeded to add the tech stocks with the next-largest market caps to its index, removing stocks in industries that had now become “over-weighted” compared to the entire US market sector allocations. Many of these technology-related stocks were at their peaks in 2000, and extremely over-valued. The S&P then held on to these stocks as they plummeted and lost sometimes greater than 80% of their peak values.

In their quest for ultimate sector diversification, they have performed one of the most banal rebalancing operations I have ever seen: buying tech stocks based on high momentum and high valuation. Standard portfolio rebalancing operations would normally involve selling stocks which have recently advanced to such a large degree so as to have overweight positions, compared to their original weightings. The tech stocks which were already in the S&P500 index had advanced significantly and the S&P500 was overweight in these positions compared to a few years ago, and probably should have sold off some shares in the technology sector; however, the broader market (including the large number of high tech companies barely post-IPO and with no earnings) just happened to have advanced even more (to make up 18% of the market vs. 14% for the S&P500), thereby triggering a technology stock buying spree for the S&P500 index managers.

This would be enough to put any holder of SPY in an uproar. Especially if SPY was a mutual fund with a mutual fund manager. Only the SPY (or S&P500 Composite) is in fact NOT a mutual fund, as the title of the above article claims, it is just an index. It was designed to be some representative figure of the value (as currently being traded) of the US stock market. This article, although it is misguided in laying blame on the people at S&P, highlights some key downsides of indexes, especially the ones based on market value, and sector allocation. There are also many other silly things which go into factoring how much of each stock is held, such as liquidity and available float. You get what you pay for I guess. ETFs which follow the major indexes are popular because of their low fees and the ability to beat the returns of a significant number of equity mutual funds. But the indexes are not mutual funds, and they are not supposed to be smart. They follow a passive strategy and stick to it.

There are other indexes out there which do not follow this type of methodology. Two of which I know of are the S&P Equal Weight Index (replicated by the Rydex S&P Equal Weight ETF), and also the Dow Jones Canada TopCap Value Index (replicated by TD Select Canadian Value Index Fund ETF). From Rydex’s website,

Equal weighting also offers increased diversification as compared to its cap-weighted counterpart. The composition of the securities of the S&P 500 Index combined with quarterly rebalancing avoids over concentration in popular (or momentum) sectors, such as the domination of the Information Technology sector that occurred in the S&P 500 in 1999 – 2000.

The S&P Equal Weight Index is just another alternative, and a good one if you want to avoid what happened to the S&500 in 1999-2000. I would not be surprised if the S&P Equal Weight Index was born out what happened in the late 1990s bull market, in the same way that the S&P TSX 60 capped index was created after Nortel became a huge percentage of the TSX 60 index during that same period.

See also: “The Hidden Risks of Index Investing” which I found out about from this article on the Investing Guide blog.

This article was first published on October 31, 2005

Popularity: 6% [?]

DRIPs for iUnits ETFs

Published
by
Dave
2 years, 9 months ago
in ETFs, Indexes and Mutual Funds
. 0 Comments

As a follow-up to my previous post where I quoted a site that said ETF distributions could only be paid out in cash, I just found out from a comment on the canadiancapitalist.com that it is possible to have distributions from iUnits ETFs re-invested through a DRIP:

Dividend reinvestment plans let you take advantage of the power of compounding. Instead of receiving cash dividends from the company, you may purchase more of a company’s stock by having the dividends reinvested. Your brokerage firm may offer a dividend reinvestment plan that allows for the reinvestment of cash distributions on iUnits. Cash distributions, in the form of income, return of capital or dividends could then be reinvested in additional units of the same fund. You should check with your brokerage firm to see whether you will be charged for this service.

iUnits (Barclays) lists four companies which offer DRIPs for iUnits, three of which are Canadian big-bank brokerage affiliates. The one that wasn’t, Canadian ShareOwner Investments Inc. states “to enjoy complete dividend reinvestment and the lowest trading commissions in Canada, your iUnits need to be in an account at ShareOwner.”

The iUnits.com website goes on to say that “as demand increases, more firms will likely have DRIPS available on iUnits.”

I still can not see a huge advantage to DRIPs, except that using them would reduce the cash-drag in an investor’s account ever so slightly. I recently talked to my advisor about cash distributions the ETF I will be buying soon and our plan will be just to roll the cash into my regular monthly purchases within my RRSP.

Popularity: 8% [?]

ETFs vs. Index Mutual Funds

Published
by
Dave
2 years, 9 months ago
in Costs, ETFs, Indexes and Mutual Funds
. 1 Comment

I found an informative Comparison of ETFs and Index Mutual Funds. It has some great information about the internals of ETFs and how they compare to index mutual funds. Notably, that “overall, there are few pros and many cons to using ETFs.” This came as a bit of a surprise to me. Much of what the article says is true, although told in a way that is biased towards index mutual funds. Some of the information is out of date such as: “ETFs have poor coverage of foreign style/size indexes. If you wanted to buy a foreign value ETF, for example, you would not be able to do so at present” and “there are few bond ETF options available at present.” I think these two points are no longer true.

One big difference between ETFs and mutual funds is that “they [ETFs] pay out distributions as cash. If you want to then reinvest that cash, you need to take some action to do so (and incur whatever transaction costs apply).” Although I initially found this annoying, it is really no big deal because the distributions can easily be re-invested into no-load mutual funds on a monthly basis along with other cash. Since you SHOULD be dollar-cost averaging on at least a monthly basis this should not be a problem for most people.

With many low-MER index mutual funds out there (and I expect to see even more, with possibly even lower MERs), the low-MER advantage of ETF is not a huge deal. I still think that the best option is to buy index mutual funds (with as low an MER as possible) on a monthly basis and switch them into index ETFs when the cost of making the ETF purchase (from commissions) becomes a small percentage of the total amount to be invested.

Popularity: 4% [?]

iUnits conversions approved

Published
by
Dave
2 years, 9 months ago
in Bonds/Fixed Income, ETFs, Indexes and Stocks
. 0 Comments

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.

Popularity: 4% [?]

www.financialwebring.com