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.

Owning Too Many Mutual Funds a Bad Idea

I used to own many mutual funds in my account at TD Canada Trust. A glance at an old statement shows that at one time, I owned the following funds in the Canadian portion of my portfolio:

TD Canadian Equity Fund
TD Canadian Index Fund
TD Dividend Growth Fund
TD Blue Chip Equity Fund
TD Canadian Small Cap Equity

What is wrong with being invested in so many funds at once? The problem is that with 4 funds, primarily large-cap funds, I was over-diversifying and basically forming an index for myself. I was owning the entire market, which is what indexes do anyways, and diluting the active management within each of the funds. But I was not paying what I should have been paying for an index (MER <= 0.25%). These funds have MERs of at least 2%, except for the index fund. So basically I was buying the equivalent of an index, but paying through the nose for it. The effect of a high MER eating into your returns every year can be huge. Don't make the same mistake I made. Get an index for the large-caps, and no more than one other large cap fund. Perhaps owning an actively-managed small-cap fund as well. If I had to do it again at TD, I would have bought TD Canadian Index Fund and TD Canadian Small Cap Equity. The other large-cap funds (TD Canadian Equity, TD Canadian Dividend, and TD Blue Chip Equity) are not significantly better than the indexes themselves, so I would rather take the low-cost index fund. The small-cap fund gives me some exposure to smaller companies which are not owned by the index.

Selling ETFs to buy index funds a bad idea

A friend recently asked me:

I’m just about to switch my ETF‘s to mutual index funds so I can contribute monthly without the transaction fees associated with ETF’s. I found a few funds from Altamira that have MER fees of 0.54. That seems pretty good to me…not quite as good as the 0.17% that you get for the iShares S&P TSX 60 ETF’s, but I think the ability to automatically contribute monthly makes up for the additional 0.36% in MER fees.

They wanted my opinion on this before they went ahead and did it. My reply was:

I wouldn’t switch if I were you because you’ll pay commission on the sale. If you are already invested in an ETF I would just hold it and let it grow. . . Definitely if you want to contribute monthly you should put your money into a mutual fund. Obviously no one would recommend buying ETFs monthly with the kind of monthly amounts you’re probably putting in, so really you have no choice. Just don’t sell the ETFs you already own.

The only reason I could see for you wanting to sell your ETF is if the mutual funds you are interested in required some sort of initial minimum. That would have surprised me though, because all of TD‘s funds for example, only require a minimum RSP investment of $100, and minimum subsequent investment of $100.

Basically if you are putting in small amounts per month, use mutual funds, that’s what they are for, if you have large amounts, get stocks or ETF indexes. When the amounts in mutual funds are large enough, it might make sense to transfer them into an ETF. But it’s up to the individual, especially if the difference in MER is so small, you might as well just leave it in mutual funds.

The MER on those mutual funds are really low which is great, so I would say buy them every month, but just don’t sell the ETFs you already own.

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.”

Stocks end lower, rattled by housing

It looks like the shit is starting to hit the fan in the housing market. It’s starting to spill into the stock market with this announcement from Toll Brothers Inc. and more and more into the mainstream (unfortunately it probably hasn’t caught on with the speculative condo owners yet). Weston Boone, vice president of listed trading at Legg Mason Wood Walker says:

A soft real-estate market is not good for the consumer. It is not going to bode well going forward. You have to take into consideration the rising interest-rate environment. There aren’t a lot of catalysts for positive sentiment in the market.

Hopefully by the time the market is in the bottom of it’s trough, I’ll have enough of a down payment saved up. Historically, the time from peak to trough has lasted at least 7 quarters (or 1.75 years) in Vancouver. So I am extremely content to not be invested in real estate at this time. Not only is my rent far below the mortgage payment I would pay for the same place, but we can pick up leave with a month’s notice at any time. No, rent is certainly NOT throwing your money away.

Berkshire Hathaway Undervalued?

This article, Berkshire’s a Bargain lays out a convincing argument to buy Berkshire Hathaway:

“Rather than the historical increases in book value of 22% or 19%, I assumed that Berkshire’s book value only grows by 15% per year for the next 10 years. At that rate, the book value per share would go from $57,010 today to $230,637 by 2015. I then assumed that in 2015, the stock would be trading at a historical low in terms of multiple of book value (1.35 times). That would mean that the shares would be priced at $311,360. On the basis of those assumptions, if I buy the shares today at $85,200, I would earn a 265% return on my initial investment or a compound annual rate of return of 13.8%. On a risk-adjusted basis, I have a hard time coming up with anything that comes close.”

He refers to this site, which calculates Berkshire Hathaway’s intrinsic value. The author quotes Buffet in 1995, when his stock was trading at 2.44 times book value (price/book value of 2.44) as saying “historically, Berkshire shares have sold modestly below intrinsic value. But recently, the discount has disappeared, and occasionally a modest premium has prevailed.” Then, in 2000 when “new hot issues” (as Graham would describe them) were at their peak, boring stocks like Buffett’s were trading at lows. Berkshire Hathaway was trading at 1.35 times book value. When this Fool article was published on November 2, Berkshire was trading at 1.5 times book ratio (which he says is still a bargain), and is today trading at 1.58 times book value.

The only assumption that I did not like at first was the fact that he assumes that Berkshire’s book value will increase just has it has in the past. However, Warren Buffett is seen as a value investor, and I am confident in the value investing approach and Warren Buffett’s track record to believe that he can achieve even the most conservative gain of 15% increase in book value over the next 10 years.

Although BRK.A is difficult to afford because the cost of one share is currently just over $90,000 USD, the B shares, BRK.B should be affordable for many, at just under $3,000 USD per share.

ETFs, the Inflation Fighter

The article, ETFs, the Inflation Fighter, talks about how sectors such as energy, utilities, and health care can help your portfolio during periods of high inflation. Historically, these sectors have done well during these periods. Sectors which are worse off during periods of “inflation acceleration” are consumer-discretionary, financial, industrial, and information-technology. My own advisor has recommended I overweight my portfolio in the energy markets (which does well during periods of high inflation and rising interest rates), especially since the S&P TSX indexes are heavily weighted in the financial sector (which does poorly during periods of high inflation and rising interest rates).

I have no idea why the title was “ETFs, the inflation fighter.” ETFs are just one way of investing in the stock market, and clearly not ALL ETFs are inflation fighters. Well, Ghosh works for Standard & Poor, so that might explain the bias towards an ETF rather than a managed mutual fund or individual stocks.

Why Invest in Stocks?

This article, Armchair Millionaire Community Bulletin: All the Wrong Reasons to Invest in the Stock Market, gives some good reasons to invest in the stock market. He says that “as you make your investing decisions, don’t be misled by clichés that insist that stocks are simply the ‘best’ investments out there. You’ll need to dig deeper to learn whether stocks are genuinely right for you.” This goes for any type of investment.

Another advantage of stocks is that they “give you an excellent hedge against inflation. So while inflation will eat away at your portfolio at the rate of 3 percent or so a year, stocks will out pace inflation to provide you with a positive net return over time.” This is discussed in Chapter 2 of the Intelligent Investor, where Jason Zweig says in his commentary “In 50 of those 64 five-year periods, stocks outpaced inflation.” In periods of very high inflation, companies and their stocks will suffer, however.

Finally the author, Lewis Schiff says: “Shares of stocks rise and fall–sometimes dramatically–but that does not mean that investing in stocks is gambling. There are no guarantees in gambling, but stock investing does give you one guarantee: By buying shares of a company’s stock, you will get a share of that company’s future earnings and growth. So on a very small scale, when you invest in the stock market, you get in on the growth of capital markets. And there is one thing that has been proven over time: Capital markets work.”

The article linked to in the first paragraph comes from www.armchairmillionaire.com, a site based around the book by the same name. It has some good points about saving and investing, similar to those in the Wealthy Barber: invest monthly into an RRSP (or US-equivalent), and contributing another 10% of your gross income to another fund. He emphasizes dollar-cost averaging and has a good conservative approach to investing in the stock market. He suggests investing in a mix of index funds, large-caps, small-caps, and an international fund.