Canadian Capitalist

Mortgage Free? Ask for a discount on your home insurance

Canadian Capitalist — Thu, 18 Mar 2010 14:18:17 +0000

In response to a recent post on auto and home insurance premiums going up in Ontario, Cindy, who buys her insurance through the Co-Operators, commented that her auto insurance premiums went up by 9.6 percent and home insurance went up by 22 percent. When she called, there was little the insurance company could do about the auto premiums but Cindy found that Co-Operators offered a 24 percent discount on home insurance if there was no mortgage on the home. As Cindy had recently paid off her mortgage, she qualified for the discount.

Turns out, Co-Operators is not alone. When I called our insurance provider — Belair Direct — to inquire about a discount on home insurance for a paid-off home, I was told that Belair’s discount on home insurance for a mortgage-free home is 15 percent. It’s a good bet that your insurance company may also offer a similar discount. A paid-off home is a giant step forward in achieving financial independence. Who knew that holding that mortgage burning party has side perks such as a discount on your home insurance?

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Save on Canadian Dollar to US Dollar Conversions (and vice versa)

Canadian Capitalist — Wed, 17 Mar 2010 15:31:42 +0000

Typically, the biggest cost involved in buying stocks or ETFs listed in the US markets is the foreign exchange fees. Discount brokers typically charge 1.5% or more for converting Canadian dollars into US dollars or vice-versa. If you want to convert $10,000 Canadian into US Dollars, it will cost you at least $150 at your discount brokerage. It is not charged as a separate fee but is hidden in the exchange rate at which the conversion is done.

A Canadian Money Forum member shared a neat trick for converting loonies into greenbacks and vice-versa for little more than the cost of two stock trading commissions, the buy-ask spread and a tiny amount of market risk. The idea behind the trick is to buy a highly-liquid stock that is listed in the Toronto Stock Exchange and sell the same stock in the US markets (or vice-versa if you want to convert US dollars into Canadian dollars). I’ll illustrate how to execute this trick at TD Waterhouse (read my review here) with TD Bank’s stock as an example but it should also be possible at other discount brokers and other inter-listed stocks such as Research in Motion (TSX: RIM, NASDAQ: RIMM), BCE or Potash Corporation (POT). Note that you may not want to try this strategy with a stock you already own unless you want to trigger capital gains or losses.

TD Bank trades on both the TSX and NYSE under the ticker symbol TD. To convert $10,000, first buy TD on the TSX at the current ask in your Canadian dollar account. If TD is trading at an ask of $74.58, you’ll buy 134 shares for a total cost of C$10,003.72 (assuming a $10 commission). Then you’ll call your broker and ask to “journal” TD Bank stock over to the US dollar account and sell it there at the current bid price. If TD is trading at a bid of $73.75 on the NYSE, selling 134 shares will gross $9,882.50 (USD). Since the transaction was done through a broker, TD Waterhouse will charge $39 plus 8 cents per share for a total commission of $49.72 (US), leaving you with a net of $9,832.78 (US).

You can also use the same method to convert US dollars into Canadian dollars by buying an inter-listed stock in the US markets and selling it on the TSX. The effective cost for converting to Canadian dollars to US dollars using this method works out to 63 basis points. But since the fee is more or less flat, you can save substantial amounts in conversion charges for larger sums of money. It should be pointed out that this method involves taking on the risk that the market moves sharply against you between the time you bought the stock on one exchange and phoned in the order to sell the stock in another exchange. Of course, the stock could move higher, which results in a lower conversion cost or perhaps, even leave you with a profit.

Updates

This strategy is popularly referred to as “Norbert Gambit” and is detailed on the Financial Webring Forum website.

Intelligent Speculator reports that this strategy is possible at National Bank Direct Brokerage (NBDB).

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Tracking error in TD e-Series Funds, Part 2

Canadian Capitalist — Tue, 16 Mar 2010 04:06:20 +0000

In Part 1 of this series, we examined the tracking error exhibited by the TD e-Series Canadian Bond Index Fund and the Canadian Index Fund and found that both funds track their respective benchmarks fairly well. In today’s post, we’ll look at the tracking error in the TD e-Series US Index fund and the International Index Fund.

TD e-Series US Index (TDB902)

The TD e-Series US Index Fund tracks the S&P 500 in Canadian dollars and has a MER of 0.33%. Assuming the dividend yield of S&P 500 is 2%, the withholding tax can be expected to result in a further hit of 0.3% (15% withholding tax on a 2% dividend yield). The actual tracking error of TDB902 averages 0.57% over the 2004-09 period, which is fairly close to the expected tracking error of 0.63%. However, note that the tracking error fluctuates quite a bit around the average and in some years, the fund’s returns are higher than the index.

Year	S&P 500 (in CAD)	TDB902	Difference
2004	2.8%	2.2%	0.6%
2005	1.5%	1.7%	-0.2%
2006	16.0%	14.7%	1.1%
2007	-10.3%	-11.1%	0.9%
2008	-22.6%	-21.7%	-1.1%
2009	9.1%	6.7%	2.2%

TD e-Series International Index (TDB911)

TD e-Series International Index Fund tracks the MSCI EAFE Index in Canadian Dollars. It has a MER of 0.48% but its tracking error can be expected to be higher due to the drag from withholding taxes on dividends. In 2009, TDB911 trailed the index by 4.2% but in the previous year, it returned 3.1% more than the index. On average, TDB911 has trailed the index by 0.74% over the past five years.

Year	MSCI EAFE (in CAD)	TDB911	Difference
2004	11.9%	10.9%	0.89%
2005	10.3%	10.2%	0.09%
2006	27.1%	25.5%	1.26%
2007	-5.0%	-6.0%	1.05%
2008	-30.0%	-27.9%	-3.05%
2009	14.3%	9.5%	4.20%

Both the US Index Fund and the International Index Fund track the benchmarks fairly well over the five year period ending in 2009 but the annual returns can deviate quite a bit from the index. This is especially so for the international fund because TD Mutual Funds does not fully replicate the MSCI EAFE Index but instead uses a sampling technique to select a representative subset of stocks. ETFs such as the Vanguard Europe Pacific ETF (VEA) also employ statistical methods to sample the index. Sampling can sometimes result in quite large tracking errors in annual returns, especially in volatile markets like the ones we experienced in 2008 and 2009.

Bottom line

The tracking errors in TD e-Series Funds are not way out of line of what you’d expect when you take into account costs like MERs, withholding taxes, foreign exchange fluctuations and sampling errors. TD e-Series Funds remain a great choice for low-cost, diversified portfolios, especially when modest amounts are invested on a regular basis but the funds that track foreign stock markets can have large annual tracking errors (both positive and negative).

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Tracking error in TD e-Series Funds, Part 1

Canadian Capitalist — Mon, 15 Mar 2010 04:20:10 +0000

TD e-Series funds are popular holdings in many low-cost portfolios because the funds’ MERs are among the lowest for index mutual funds in Canada. We too own TD e-Series funds in our kids’ RESP accounts because, as I noted in earlier posts, these mutual funds are ideal for relatively smaller portfolios. However, I’ve never paid much attention to the tracking error of e-Series funds even though how well a fund tracks its benchmark is an important criterion in picking an index fund. After a recent note from a reader, who noticed a large tracking error in the TD International Index Fund for 2009, I decided to examine the tracking error in e-Series funds.

TD e-Series Canadian Bond Index Fund (TDB909)

The TD e-Series Canadian Bond Index Fund, which tracks the DEX Universe Bond Index, is a popular pick for the fixed-income component of a portfolio. It sports a MER of 0.48% but it’s tracking error averages 0.62% over the 2004-2009 period.

Year	Bond Index	TDB909	Difference
2004	7.1%	6.5%	0.6%
2005	6.5%	5.7%	0.8%
2006	4.1%	3.6%	0.5%
2007	3.7%	3.2%	0.5%
2008	6.4%	5.7%	0.7%
2009	5.4%	4.6%	0.8%

TD e-Series Canadian Index Fund (TDB900)

The TD e-Series Canadian Index Fund has a MER of just 0.31%. The tracking error averages just 0.30% and the fund tracks the index fairly well as you can see from the table below.

Year	Canadian Index	TDB900	Difference
2004	14.5%	14.0%	0.44%
2005	24.1%	23.3%	0.64%
2006	17.3%	16.9%	0.34%
2007	9.8%	9.6%	0.18%
2008	-33.0%	-32.9%	-0.15%
2009	35.1%	34.6%	0.37%

Both TDB909 and TDB900 track their benchmarks reasonably well but the Canadian Bond Index does have a larger than expected tracking error. Tomorrow, we’ll take a look at the tracking error in TD e-Series US Index (TDB902) and the TD e-Series International Index (TDB911).

Note: Benchmark returns were obtained from the Libra Investments website.

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A New Direction

Canadian Capitalist — Thu, 11 Mar 2010 15:27:49 +0000

As you probably noticed, things look a little different around here. That’s because, I’m entering into a partnership with MoneySense magazine. I’m super excited about working together with MoneySense, the finest personal finance magazine in Canada, which as you know has long been a trusted source for advice on saving, planning, investing, retirement and real estate.

But you are probably wondering what it means for you. The terms of the deal are confidential but I can assure you that, apart from the look-and-feel, the blog will pretty much stay the same. I continue to own the blog and I will keep writing in the same style, manner and editorial content that you’ve come to expect. If you read my posts in your favourite RSS reader or have it delivered via e-mail, you won’t even notice anything. The blog itself looks and feels different but the intention is to keep as much of the old website features as we possibly can. Naturally, as with any change, there will be issues and if you can point them out in the comments and I’ll do my best to get it fixed. And, as always, I welcome your input in the comments.

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Active Share: Not an infallible metric

Canadian Capitalist — Thu, 11 Mar 2010 05:05:31 +0000

You have to pity the plight of the active investor as study after study demonstrates the merits of indexing for the average investor. But a recent column in the Globe & Mail by Dan Richards titled “Only the truly active fund managers lead the pack” provided many active investors an opportunity to taunt those in the passive camp. “So, what do you say to that, Mr. Index Investor?” captures the gist of many of the emails I received.

A confession first: I haven’t fully read the paper titled How active is your fund manager? A new measure that predicts performance by Martijn Cremers and Antti Petajisto of Yale University that Mr. Richards refers in his Globe article. Still, it quickly becomes pretty clear that measuring how much a fund manager deviates from the index is not an infallible metric.

First, it is necessary to define one of the metrics the Yale Professors devised to measure how much a fund deviates from the index. They call it “Active Share”, which is simply a measure of how the weightings of stocks in a mutual fund portfolio deviates from the benchmark index. Long-only mutual funds will have an active share between 0 and 100. Index mutual funds whose holdings mirror the weightings in the index have an active share of 0. A mutual fund whose holdings have no overlap with the index have an active share of 100. The authors find that mutual funds with the highest active share outperform their benchmarks by 1.49-1.59% per year after fees and transaction costs.

Unfortunately for proponents of active investing, Active Share does not provide an infallible way to pick mutual funds. To understand why, let’s do a thought experiment. Let’s assume that we have an equal-weighted index composed of just 10 stocks. Let’s further assume that 10 actively-managed mutual funds are available and each fund holds one of the 10 stocks in the index. Each fund has an active share of 90 (just 10% overlap with the index). But it is clear that they can’t all beat the index. In fact, as a group, their performance will trail the index by their average fees.

PS: I have some exciting news to share with you about the new direction the blog will be taking shortly. Later in the day, you’ll notice some changes on the blog (those of you who are reading this through RSS or email will have to click through to find out). Sorry to be mysterious and all but we are working feverishly putting on the finishing touches and we are not quite ready just yet.

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Coming soon: ING Chequing Accounts

Canadian Capitalist — Wed, 10 Mar 2010 13:35:50 +0000

With the exit of Citizen’s Bank last year, President’s Choice Financial is now the only game in town in the free chequing account space. But perhaps not for much longer. There has long been speculation on whether ING Direct will start offering chequing accounts.

A reader recently got in touch with ING Direct and asked if they are planning on offering an online chequing account similar to the Electric Orange account in the USA. The Electric Orange account is an all-electronic, paperless chequing account that allows bill payment, access to cash through ATMs, electronic money transfer etc. If you need to write a paper cheque, you have to fill out the payment details online and the cheque is mailed out by ING. Here’s ING’s response:

“We are actually currently testing our chequing accounts. The official launch should be sometime this year.”

Not much to go on but it would be interesting to see what features will be available in INGs chequing accounts.

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CBC’s Canada’s Worst Cellphone Bill

Canadian Capitalist — Tue, 09 Mar 2010 14:31:40 +0000

A recent episode of Marketplace on CBC featured cellphone customers who claimed to have Canada’s worst cellphone bills (you can watch it here). Cellphone customers had racked up thousands of dollars in charges either in air time, texting or, what appears to be fairly common, roaming charges while traveling abroad.

The typical phone horror story also involved a dispute with the phone company: the customer claims she was misinformed in the phone store and the phone company points to the contract, which says something else. The customer is in tears, the phone company sticks to its guns and it makes for great TV. Especially, when Wendy Mesley, the show’s host adds to the debate by saying those rapacious phone companies are charging 15 cents for a text that costs them a third of a cent to provide.

I’ve had my share of complaints with service providers and while I found myself sympathizing with most of the customers, it was hard to say the phone company was entirely at fault (except the lady who was incorrectly charged airtime and the phone company gave her the runaround). The hidden charges may be buried deep in the fine print but it is there and the client signed a contract agreeing to pay and the phone company is within its rights to demand payment.

I was secretly glad that we’ve ditched our pricey monthly plans and gone the pre-paid route. Our annual cell phone bills with an el cheapo plan from Speak Out Wireless available through 7-Eleven costs us less than $50 per year not including the price of a phone. Granted, not everyone can be a light cellphone user but everyone can easily find ways to cut down on their monthly bill.

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Auto & Home Insurance Premiums going up in Ontario

Canadian Capitalist — Mon, 08 Mar 2010 03:32:11 +0000

Our auto and home insurance renewal documents arrived in the mail the other day. The bad news is that insurance premiums are going up sharply in Ontario. Our auto and home insurance premiums went up by 22 and 14 percent respectively even though we did not have any claims in the past year. The hikes were not really surprising because Nordic Insurance Company, our auto insurance provider, obtained approval from the Financial Services Commission of Ontario (FSCO) for two rate increases that averaged 6.71% and 9.40% in the past year alone.

James Daw of The Star reported that the main reason for premium increases is the rapid rise in the cost of accident benefit claims. While the Ontario Government has announced changes that will allow consumers the choice to lower the medical benefits, the insurance companies are saying that they are awaiting greater clarity on the details of the reforms.

It’s possible that there is little you can do about the rise in premiums but it is worth trying to find ways to soften the blow. First, you can always shop around. Last year, I found that switching from Co-Operators to belairdirect reduced our auto premiums by a staggering 35 percent. If you find that other insurers are quoting similar numbers, it may be worth calling your current provider to try and find some savings. Maybe your driving patterns have changed or the insurance provider offers a discount that you’ve been missing out all these years. It may not amount to much but at least you’ll know you tried your best.

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Budget 2010 provides Relief for Stock Option Tax Deferral Elections

Canadian Capitalist — Thu, 04 Mar 2010 22:19:26 +0000

One of the measures in Budget 2010 (Pages 356 to 358) will be of special interest to Ottawa-area residents who elected to defer taxes on stock options. Some taxpayers who took advantage of tax deferral on stock options experienced financial difficulties when the value of the stock they received when exercising stock options declined in value. Budget 2010 proposes a special elective treatment to ensure that the tax liability on a deferred stock option benefit does not exceed the proceeds of disposition of the optioned securities taking into account tax relief resulting from the use of capital losses on the optioned securities against capital gains from other sources.

For example, let’s say you exercised options in 2001 to buy ABC at $50 and your strike price was $10. You elected to defer the taxes on the stock option benefit of $40 to the future. Your ABC stock only worth $5. If you sell ABC today, you’ll owe a tax on the stock option benefit of $40 but you’ll also have a capital loss of $45. Budget 2010 will allow you a deduction equal to the stock option benefit ($40). You’ll also declare an amount equal to half of the lesser of the stock option benefit and the capital loss on the optioned securities (1/2 of the lesser of $40 or $45) in your income as a capital gain. Essentially, the capital gain will wipe out the capital loss on the optioned securities.

If you disposed your optioned securities before 2010, you have to make an election for this special treatment on or before April 30, 2011. If you have not disposed of optioned securities before 2010, you must do so before 2015. Also, the Government has repealed the tax deferral election effective today.

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