Check out the A Loonie Saved blog written by Patrick. He doesn’t update it often these days but there are some excellent articles in the archives. Have a wonderful weekend everyone!

Related Reading:

• Reader Question: How to Buy Vanguard ETFs?
• Yes, you can index using mutual funds
• Reader Question: How to Open a Vanguard Account?
• RBC Direct Investing and BMO InvestorLine Lower Commissions
• This and That

This and That: Who killed Nortel and more … is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

I’ve held accounts at TD Waterhouse, RBC Direct Investing, Scotia iTrade and Questrade and would rank them in that order. I wouldn’t read too much into a broker’s rank and would instead pick one that offers the features I’m looking for (or at least a nice fat bonus).

Some interesting tidbits from the Globe and Mail column:

• Qtrade is now offering US dollar RRSP accounts. Either Qtrade has been keeping it quiet or I missed any media coverage on this.
• Discount brokers are doing roaring business. Rob Carrick, who assembled the rankings, notes that account openings, excluding TFSAs are up in the range of 19 to 26 percent.
• Scotia Direct is going to be merged with Scotia iTrade (formerly E*Trade Canada), which is not surprising because CIBC and Scotia are still in the bottom of the heap among discount brokers.
• RBC Direct is the only broker offering lower-fee mutual funds. It is outrageous that discount brokers keep collecting trailers fees, which are supposed to compensate financial advice.

Related Reading:

• Globe and Mail’s Discount Broker Rankings
• Surviscor Discount Broker Rankings – Summer 2009
• Best Canadian Online Brokerages
• Scotia iTrade Review
• Adieu to RBC Direct Investing

2009 Globe and Mail Discount Broker Rankings is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

In yesterday’s post, we saw Ted disheartened with his results when he invested $10,000 each in the top 10 global equity mutual funds (by assets) of 2004. It so happens that Ted had also invested $10,000 each in the top 10 Canadian Equity Mutual Funds (by assets) of 2004. He had read news reports on Mackenzie Financial’s research that showed seven out of 10 beating the index. Even more impressive, every one of those funds beat the iUnits S&P/TSX 60, as XIU was called then.

Fast forward five years and Ted is curious to find out how his picks have fared against the benchmark. He has a flicker of hope. Yes, yesterday’s investigations were a bit disappointing but surely the Canadian mutual funds would bring home the bacon. After all, the five year period between July 2004 and August 2009 was a good time to own Canadian stocks. A $10,000 investment in the TSX Composite would have grown into $14,600. Here’s how Ted’s funds fared:

NITT = Not in Top Ten
Source: Globefund.com mutual fund database

Unfortuntely, Ted’s hopes are dashed once again. But, at least, he isn’t surprised any more with his findings:

1. 9 out of 10 funds trailed the index.
2. 5 out of 10 funds trailed by more than 10%.
3. One fund beat the index by a measly 2%.
4. None of the funds beat the index by more than 10% over five years.
5. 5 out of 10 funds have dropped out of the top 10 Canadian Equity Funds (by assets) of 2009.
6. If anything the data may understate the underperformance because the effect of sales loads is not considered.
7. The equally-weighted investment in all the 10 funds underperformed the benchmark by a cumulative 15.1% or an annualized 3.22%.
8. The average MER (not including any sales loads) of the funds is 2.4%.

Naturally, Ted wonders if he’d have done as well with an index fund. There were no ETFs that tracked the TSX Composite in July 2004 but the TD Canadian Equity Index e-Series fund was available back then. If Ted had invested his savings in the e-Series Fund, he’d have trailed the index by a cumulative 1.8% over the next five years, which just about equals the fund’s annual 0.31% MER. In other words, he’d still have better returns than 9 of his 10 picks.

Ted is now convinced that the funds on the list got there because of their outperformance, which (a) grew the assets already in the fund and (b) attracted a flood of new money due to the recent outperformance. Such lists are rife with survivorship bias and have no predictive ability whatsoever.

Related Reading:

• Mackenzie hits back at ETFs, Part 2
• Bear Market Outperformance, eh?
• Currency Neutral Funds Performed Poorly (Again) in 2008
• Active Management versus Index Shootout, Part 2
• So much for bear market outperformance

Returns of the Top 10 Canadian Equity Funds (by assets) of 2004 is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Let’s imagine that an interpid mutual fund investor, Ted, comes across the column in the newspaper in 2004 and thinks to himself: “Gee! This is hot stuff. Every one of the 10 mutual fund managers have beaten the benchmark in the Global Equity category. You can’t really go wrong hiring these super smart guys to invest internationally for you.” With Ted, to think is to act, so he calls his financial advisor and asks to invest an even $10,000 in each of the top funds.

It’s now 2009 and a good 5 years have passed since Ted bought into Mackenzie’s logic and invested his hard earned money in its list of super duper funds. And — you know where I’m going with this — here’s what he finds:

Performance of Large Global Funds from July 2004 to August 2009

Performance Data Source: Globefund.com Mutual Fund Database

Ted is surprised to find that over the next five years:

1. His equal weighted investment in the ten largest funds trailed the index by a cumulative 2.4%.
2. 5 out of 10 funds trailed their benchmark index.
3. 4 out of 10 funds trailed their benchmark by more than 10%.
4. 1 out of 10 funds beat the benchmark by more than 10%.
5. Trimark Fund dropped out of the list. Fidelity International Portfolio changed its name to Fidelity Global Fund. AGF International was reclassified as International Equity. Investors Global handily beat the index but the Globe Fund database notes the inception date as 2002 and it is not clear if the fund is the same one as Investors Global – C whose returns are noted here.

Finding that the chances of picking a winning fund were no better than a coin toss, Ted figures the only way he can pick outperforming funds over the next five years is getting a peek at Mackenzie’s marketing brochure from 2014. Sadly, Mackenzie’s “research” department isn’t putting it out anytime soon.

Related Reading:

• Returns of the Top 10 Canadian Equity Funds (by assets) of 2004
• Active Management versus Index Shootout, Part 2
• Mackenzie hits back at ETFs, Part 1
• Active Management versus Index Shootout, Part 1
• Currency Neutral Funds Performed Poorly (Again) in 2008

Mackenzie hits back at ETFs, Part 2 is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Price: It is galling to hear a purveyor of pricey mutual funds point out that ETFs have “hidden” costs such as transaction fees and cost of advice. Pot calling a kettle black comes to mind. An example is trotted out showing how an investor buying $1,500 worth of a 0.70% MER ETF and paying $24 in trading commissions ends up paying a total cost of 2.30%. The implication is clear: “And you thought our 2.50% fee for doing some real work is too much!”

I’m amazed that Mackenzie didn’t come up with the example of a client buying $100 worth of ETFs every month and paying $24 in trading commissions. It would have allowed them to go for the see-how-reasonable-our-fees-are angle.

Let’s talk real numbers, not made up examples. I’m mostly invested in ETFs. The weighted average MER of the funds is 0.22%. Trading commissions cost another 0.10% to 0.20% every year. I don’t pay for investment advice but even if it costs another 1%, the total cost is still a full percentage point less than Mackenzie’s mutual funds.

Performance: Claiming active strategies provide investors an opportunity to outperform is a bit like saying lottery tickets provide players a chance to become millionaires. Of course, they do. The question is what are the odds? John Bogle estimates that the odds of an active fund outperforming its benchmark are 15% over 5 years, 9% over 10 years and 5% over 25 years. Better than lotteries would be a charitable way of characterizing those odds.

Interestingly, the brochure features a table showing 8 out of 10 global equity funds outperforming the index in the 10-year period to July 31, 2009. We’ve discussed this table at length in an earlier post on Active Management versus Index Shootout. I won’t rehash the arguments again but suffice it to say that such “evidence” should be treated with caution.

We’ll look at Transparency, Tax Efficiency and Diversification in future posts. You may be interested in Larry MacDonald’s and Jon Chevreau’s take on this subject.

Related Reading:

• Mackenzie hits back at ETFs, Part 2
• Portfolio Size for Choosing ETFs over Index Funds
• Yes, you can index using mutual funds
• Active Management versus Index Shootout, Part 1
• Reader Question: How to Buy Vanguard ETFs?

Mackenzie hits back at ETFs, Part 1 is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Happy Halloween! Have fun trick-or-treating!

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• More Exchange-Traded Funds from BMO
• This and That # 103
• Claymore 1-5 Yr Laddered Government Bond ETF
• Portfolio Case Study 1, Part 2
• Personal Finance Clinic: Unbundling ETFs & XIN versus VEA

This and That: Spendthrift celebrities and more… is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Let us set the record straight. The report makes it clear that, eighteen years from now, a four-year degree would cost an estimated $92,369 in 2009 dollars for a student living away from home and $68,373 for a student living at home. An undergraduate degree currently costs $77,132 and $51,763 respectively. In other words, an university degree would cost about $15,237 more in 2009 dollars for a student living away from home, not the $60,000 you would have inferred from media reports. Granted, the actual increase isn’t exactly petty change but it can be planned for in advance:

Assuming an annual rate of return of 6.8 per cent on a balanced growth portfolio, the annual contribution to an RESP needed to cover the future cost of an undergraduate degree is $2,475 for students living away from home and $1,725 for students living at home. Alternatively, parents may wish to use a Tax Free Savings Account (TFSA) to ease the burden on saving. The annual contribution to a TFSA would need to be $2,900 for students living away from home and $2,150 for students living at home.

So, take a deep breath and relax. Yes, a university degree might become an even more expensive proposition but it is an investment that will still produce satisfactory returns in the form of a higher paycheque. You can plan for it in advance but if you are unable to cover or save for the increase, students can pitch in through summer jobs or co-op terms.

Related Reading:

• TFSA versus RESP
• FAQs on Tax-Free Savings Accounts
• Increasing Cost of Living
• Ideas for your Tax-Free Savings Account (TFSA)
• The MER on Group Scholarship Plans

Cost of a Future University Degree: $92,369 is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Prepaid Credit cards are not as big here as in the US but a few are available — Royal Bank, for instance, offers a prepaid Visa card. I don’t think these cards make very good gifts but you can use them for online purchases where you don’t want to put the information on your main credit card “out there”. You often hear of retailers not stopping withdrawals or charging too much; with a prepaid card you can limit your risk for a fee of $5 or less.

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Reader Tip: Use Prepaid Credit Cards for Online Purchases is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

1. BMO Short Federal Bond ETF (Ticker: ZFS; MER: 0.20%) tracks an index of bonds maturing in one to five years and issued or guaranteed by the Government of Canada or its agencies.
2. BMO Short Provincial Bond ETF (Ticker: ZPS; MER: 0.25%) tracks an index of bonds maturing in one to five years and issued or guaranteed by the provincial governments or their agencies.
3. BMO Short Corporate Bond ETF (Ticker: ZCS; MER: 0.30%) tracks an index of investment-grade corporate bonds maturing in one to five years.
4. BMO High Yield US Corporate Bond Hedged to CAD ETF (Ticker: ZHY; MER: 0.65%) tracks the performance of the US high yield corporate bond market and hedges its US dollar exposure.
5. BMO S&P/TSX Equal Weight Bank ETF (Ticker: ZEB; MER: 0.55%) tracks the performance of an equal weighted index of the big six banks: Royal Bank (RY), TD Bank (TD), Bank of Nova Scotia (BNS), Bank of Montreal (BMO), CIBC (CM) and National Bank (NA).
6. BMO S&P/TSX Equal Weight Oil and Gas ETF (Ticker: ZEO; MER: 0.55%) tracks the performance of an equal weighted index of 13 major oil and gas stocks listed on the TSX.
7. BMO S&P/TSX Equal Weight Global Base Metals Hedged to CAD ETF (Ticker: ZMT; MER: 0.55%) tracks the performance of an equal weighted index of 33 global mining equities and hedges its US dollar exposure.

While the High Yield US Corporate Bond ETF appears to be a slightly interesting unique product for an investor looking into junk bonds, it is hard to get excited about the rest of BMO’s new ETFs — iShares CDN Short Bond Index ETF (XSB) already provides exposure to short-term bonds and Claymore has the sector ETFs covered. It is still early days but BMO seems to have trouble gaining traction with its ETFs. The BMO Dow Jones Canada Titans 60 ETF (ZCN), which has gathered the most assets and was introduced in May, has an average volume of 10,000 and wide bid-ask spreads. Its competitor iShares CDN LargeCap 60 (XIU), admittedly, has a huge head start but its volume runs in the millions and the bid-ask spread is tiny.

You can find more information on BMO ETFs here and the prospectus is available in SEDAR.

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• Exchange-Traded Funds from BMO Asset Management
• A Tour of ETFs: iShares Bond ETFs (XSB, XBB)
• New iUnits ETFs
• More New ETFs
• Claymore 1-5 Yr Laddered Government Bond ETF

More Exchange-Traded Funds from BMO is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

How can such freezes be imposed? LSIF investors ponied up the cash and took tax credits in return for agreeing to a long period of illiquidity, but the industry has not delivered its end of the bargain. What’s galling is it means hanging on even longer to money-losing investments with high management expense ratios (MERs). According to Morningstar, the median MER of the category is 5.5%, more than double mutual funds.

Fortunately, at least in Ontario, LSIFs may be on their last legs. Starting in 2010, the province will begin phasing out the 15% Ontario tax credit for LSIF investments.

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• RRSP Tip # 1: Avoid Venture Capital Funds
• Dumping the Labour-Sponsored Investment Fund
• RRSP Tip # 3: Investments to Avoid
• Labour Funds Are Best Avoided
• Stampeding out of the stock market

One More Reason to Avoid Labour-Sponsored Funds is brought to you by Canadian Capitalist -- Helping you to invest & prosper.