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A Directory of - The Canadian ETF Association

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ETF Investing
YOUR GUIDE TO
Fall 2014
В©
Regulatory
Landscape
ETF
Strategies
Smart
Beta
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Smart Beta ETFs
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management to ETF
investors.
Asia &
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Portfolio
Management
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Consider international
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ETFs.
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Investing
Tips
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PLUS:
A Directory of
ETF Providers and Related Professionals
Investment
Costs
It’s never been more affordable to own Canada.
And the US. And the world.
Strengthen your core investments.
The iShares Core Series for Canadian investors is a suite of low-cost funds that helps you build
a solid, affordable foundation on core asset classes. So you strengthen up a long-term base that
can help you keep more of what you earn and build more with what you have.
Whatever your investment goals, there’s a broad selection of iShares funds to help you tailor
solutions to meet them.
Visit iShares.ca/core to learn more.
XQB
0.12%
XEI
0.20%
XSQ
0.12%
XIC
0.05%
CANADIAN EQUITIES
XSH
0.12%
BROAD MARKET
EQUITY INCOME
XLB
0.18%
CANADIAN FIXED INCOME
XIC
XEI
US EQUITIES
US EQUITY
US EQUITY (HEDGED)
XUS
0.10%
BROAD BOND
SHORT BOND
SHORT CREDIT
LONG BOND
XQB
XSQ
XSH
XLB
INTERNATIONAL EQUITIES
XUS
XSP
INTERNATIONAL EQUITY
EMERGING MARKETS EQUITY
XEF
XEC
XEC
0.25%
XSP
0.10%
XEF
0.20%
iShares by BlackRock, trusted to manage more money than any other п¬Ѓrm in the world.
iSharesВ® ETFs are managed by BlackRock Asset Management Canada Limited. Commissions, management fees and expenses all may
be associated with investing in iShares ETFs. Please read the relevant prospectus before investing. The funds are not guaranteed,
their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made, as
appropriate, only with guidance from a qualified professional. В© 2014 BlackRock Asset Management Canada Limited. All rights reserved.
L6+$5(6 and %/$&.52&. are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used
with permission. iSC-1256-0814
Guest Editorial
Canada’s Home to
Exchange-Traded Funds
T
oronto Stock Exchange
(TSX) was the originator of
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traded fund (ETF) almost 25
years ago and today continues to
be at the forefront of this growing
industry. Home to more than 300 ETFs providing
exposure to all the major asset classes, industry
sectors and geographic regions as well as many
different investment strategies, TSX has earned its
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VJGUGV[RGUQHЖ‚PCPEKCNRTQFWEVU
The Canadian ETF market has experienced
steady growth so far in 2014, with $5.5 billion in net
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asset growth of 14.4% in the Canadian ETF market
exceeds both the global growth rate and that of
the U.S. market. The expansion of the asset base of
'6(UNKUVGFQP65:JCUDGPGЖ‚VGFHTQOVJGEQPVKPWGF
upswing performance of equity markets in Canada,
the U.S. and other regions around the world. That
upsurge, however, represents only a part of the ETF
industry’s growth story. Amongst both retail and
institutional investors seeking out alternative
Ж‚PCPEKCN RTQFWEVU '6(U CTG KPETGCUKPIN[ DGKPI
considered viable investment tools to provide the
solutions they are looking for.
Many observers would argue that the ETF
industry is still in the early stages of its evolution and
that the momentum seen to date will only continue.
The choices that ETFs offer investors are broad –
from core investments seeking beta, to targeted
exposures, to generating alpha. More competition,
continued innovation and regulatory reforms requiring
more transparency on investment costs should all
contribute to the next stage in the evolution of this
industry.
TSX is proud to be home to Canada’s ETFs and is
committed to continue to support the industry as it
grows and evolves.
Amelia Nedovich
Head, Business Development, ETFs and Structured
Products
Toronto Stock Exchange
;QWECPЖ‚PFOQTGKPHQTOCVKQPQP'6(UQP65:
at tmx.com/etf.
*As at August 31, 2014.
This is not intended as advice or an endorsement or recommendation of any
securities, class of securities or the merits of investing generally. Consult
YKVJ C Ж‚PCPEKCN RTQHGUUKQPCN RTKQT VQ CP[ KPXGUVOGPV FGEKUKQP 6JKU CTVKENG
is provided for information purposes only. Neither TMX Group Limited nor
CP[QHKVUCHЖ‚NKCVGFEQORCPKGUIWCTCPVGGUVJGEQORNGVGPGUUQHVJGKPHQTOC
tion contained in this article and we are not responsible for any errors or
omissions in your use of, or reliance on, the information.
В©2014 TSX Inc. All rights reserved. Do not sell or modify this document
without TSX Inc.’s prior written consent.
TABLE OF CO NTE NT S
The (not so) new kid on the block:
YJ[DQPF'6(UCTGЖ‚PCNN[
taking centre stage
5
Tactically Investing in Fixed income
by Mark Raes
7
The Importance of Hedging
International Bonds
9
by Pat Chiefalo
by Atul Tiwari
New Cost and Performance
Disclosure may Highlight the
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11
May You Live in Interesting
Times!
12
Chronicling the ETF Story:
Entering Act II
13
Clearing the Air: Explosion
of ETFs Clouds Investors’
Decisions
17
The advantages of low-volatility
global strategies
21
How would Thomas Edison
Design an ETF Portfolio?
23
Canadian ETF Industry – Growing,
but not Thriving …
24
Directory of ETF Providers
and Related Professionals
25
by Kevin Rusli & Jennifer Woo
by Drew Millard
by Tyler Mordy & Robyn Graham
by Karl Cheong
by Michael Cooke
by Tim, Daniel & James Morton
by Yves Rebetez
YOUR GUIDE TO ETF INVESTING
3
CONTRIBUTORS
Pat Chiefalo, CFA
Pat Chiefalo, CFA, Managing Director, BlackRock Canada, is the head of Product for
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GZRGTKGPEGJGJCUGUVCDNKUJGFJKOUGNHCUQPGQH%CPCFCoURTGGOKPGPVGZRGTVUQP'6(U
YYYKUJCTGUEC
Mark Raes
The knowledge source
for everything ETF
in Canada
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&DQDGLDQВ©LQYHVWRUV
Mark Raes, CFA, MBA, is Head of Product, BMO Asset Management Inc.
and is responsible for overseeing the product suite for BMO ETFs
and BMO Mutual Funds.
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Atul Tiwari
Atul Tiwari is managing director of Vanguard Investments Canada Inc.
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Kevin Rusli and Jennifer Woo
Kevin and Jennifer are lawyers in the Investment Products &
Asset Management Group at Blake, Cassels & Graydon LLP.
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Karl Cheong, CFA
Karl Cheong is Senior Vice President at First Trust Portfolios Canada.
He has over 12 years of experience in product structuring, asset allocation
and sales.
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For more information contact
Pat Dunwoody, Executive Director
Tyler Mordy and Robyn Graham
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President, Institutional Services for HAHN Investment Stewards.
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«÷««‡««SDWGXQZRRG\#FHWIDFD
Michael Cooke
+PJKUTQNGCV2QYGT5JCTGU%CPCFC/KEJCGNKPVGITCVGU2QYGT5JCTGUGZEJCPIGVTCFGF
products into the Canadian retail and institutional markets to bring the best of Invesco
PowerShares’ global expertise to Canadian investment professionals and their clients.
В«&(7)$В«0HPEHUV
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The Morton Group
The Morton Group of CIBC Wood Gundy has been managing the
wealth of a select group of Canadian families, trusts, and
foundations for the past 35 years.
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$IILOLDWHВ«0HPEHUV
Yves Rebetez
;XGU4GDGVG\KUVJG(QWPFGTQHVJGYGDUKVG'6(+PUKIJVCPCNNGPEQORCUUKPITGUQWTEG
dedicated to Canadian Exchange Traded Funds. Prior to launching ETF insight, Yves
was VP, ETFs and Structured Products at RBC Dominion Securities. Yves is a CFA.
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YOUR GUIDE TO ETF INVESTING
IS PUBLISHED BY BRIGHTS ROBERTS INC.
Brights Roberts Inc.
(7)«6WUDWHJLVWV««3RUWIROLR«0DQDJHUV
John J. De Goey
Tim Morton
Ian Roberts
[email protected]
Jeff Black
Andy Gawenda
[email protected]
Brights Roberts Inc.
2200 Yonge St., Suite 608
Toronto, Ontario M4S 2C6
For advertising/editorial
inquiries call 416-485-0103
www.brightsroberts.com
Brent Vendermeer
Alan Fusty
Reg Jackson
David Bruce
Your Guide to ETF InvestingВ©
В© Copyright 2014 Brights Roberts Inc. All Rights Reserved
The statements and statistics contained in this publication were obtained from sources believed to be
William Vastis
4
Ray Dragons
YOUR GUIDE TO ETF INVESTING
Thane Stenner
Terry Shaunessy
Mike Bowman
reliable, but we cannot represent that they are accurate or complete. This material is published for general
information only. The publishers assume no liability for п¬Ѓnancial or other decisions based on this information.
Readers should obtain professional advice before applying any ideas mentioned to their own personal
situation to ensure their individual circumstances have been properly considered. E&OE OCTOBER 2014
The (not so) new kid on the block:
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centre stage
As an analyst, I was a
very strong advocate that
one of the best ways for in
vestors to gain exposure to
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through an exchange traded
fund (ETF). Here at Black
Rock I continue to support
this. To my mind, ETFs offer
a number of key advantages
over individual bonds, but
I appreciate that not all
investors are fully aware of
these aspects. Equity ETFs
have been around in Canada
for 25 years, which makes
bond ETFs relatively new
entrants having launched
only 10 years ago in basket
form. Retail investors are,
in general, probably more
familiar with investing in
equities than in bonds. So
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ETFs have come a very long
way in a relatively short time,
it’s understandable that
the investing public is still
getting to know them.
As investors become
more familiar with these
products, I think they will
see some pretty clear
advantages over direct
bond holdings. First, bond
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and are easy to buy and
# DQPF '6( V[RKECNN[
VTCEMUCPKPFGZ. While there
are a few actively managed
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purposes we’ll focus on
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generally seek to track the
performance of an index
(minus fees and expenses).
These products comprise
the majority of bond ETFs
out there.
Like equity indexes,
bond indexes typically target
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market, such as a sector
(e.g. government, corporate
investment grade, corpo
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a region (e.g. Canada, US,
International, etc.), or maturity
range (e.g. short: typically
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turities, and so on). Bond
indexes can also combine
these elements in a variety
of ways, allowing investors
to access both broad and
narrow segments of the
bond market through the
ETFs that track them. For
example, you can access
the broad Canadian bond
market through a fund like
the iShares Canadian Bond
Continued on page 6
Canadian Fixed Income ETF Assets are over $22 Billion
$25,000
$20,000
Total AUM ($B)
Pat Chiefalo
sell. Second, they provide
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with sometimes hundreds or
thousands of bonds in each
fund. And third, ongoing
portfolio management of
the ETF ensures that inves
tors maintain their target
exposures in terms of credit,
duration and so on.
This suggests to me that
there is still an education
gap among investors when
it comes to bond ETFs. To
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it’s important to understand
how they work. So here are
three key elements that ev
ery investor should know
about bond ETFs:
$15,000
$10,000
$5,000
$0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
$TQCF%TGFKV'/)QXV)QXV%TGFKV*KIJ;KGNF+PЖѓCVKQP.GXGTCIGF//
Source: BlackRock and Bloomberg as of August 31, 2014 expressed in $ millions
YOUR GUIDE TO ETF INVESTING
5
The (not so) new kid on the block: why bond ETFs
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Continued from page 5
Universe Index ETF (XBB),
focus further and gain expo
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duration Canadian bonds to
hold in the core of your port
folio with the iShares Core
Short Term High Quality
Canadian Bond Index ETF
(XSQ), or you can target
a laddered strategy of
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bonds with a fund like the
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Corporate Bond Index ETF
(CBO).
Bottom line: Understanding
the underlying index is key
to knowing what you own in
a bond ETF.
2. A bond ETF’s current
price is visible and updated throughout the day on
an exchange. While some
investors appreciate the
fact that they can trade an
ETF intraday, others may
never take advantage of
this feature. And that’s okay,
because the mere fact that
bond ETFs trade on the stock
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tors. The reason: they pro
vide price transparency in an
otherwise opaque market.
Individual bonds trade
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16%
which means that buyers
and sellers negotiate indi
vidually in order to reach
a deal. As a result, bonds
can be hard to track down
and quotes from different
brokers can vary widely. In
contrast, investors can see
bond ETF execution prices
on an exchange throughout
the trading day, as well as
live bid/ask prices at which
investors are willing to buy
and sell these ETFs. Being
able to see the price at which
you can buy and sell the ETF
allows you to make more
informed decisions about
your bond investments. This
can be particularly powerful
during periods of time when
markets are moving quickly
or segments of the bond
market are experiencing
illiquidity (as happened,
infamously,
during
the
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Bottom line: Whether you
intend to trade or not, the
fact that bond ETFs offer
low cost transparent pricing arms you with valuable
information that can help
you make an informed
investment decision.
3. A bond ETF is managed by a human (sometimes several). A common
misconception about bond
ETFs is that they simply
hold all the securities in the
index they track, rendering
a portfolio manager unnec
GUUCT[6JKUKUCEVWCNN[CЖѓCV
tering assumption, because
if a bond ETF manager is
doing the job correctly,
investors are simply getting
the exposure they expect,
without much deviation
from the performance of
the underlying index (oth
erwise known as tracking
error). Ideally, the actions of
the bond ETF manager are
invisible.
The truth is that a lot of
work goes on behind the
scenes to make this happen.
Bond indexes can hold
hundreds and sometimes
thousands of bonds, some
of which are illiquid or
thinly traded. At iShares,
our ETF managers place
a priority on sound fund
construction and leverage
the knowledge and global
resources of the world’s larg
est asset manager – parent
company BlackRock – to
ensure that bond port
folios track their under
lying indexes as closely
as possible, using only the
securities that are avail
able at any given time. This
can be particularly tricky
in certain situations (for
example, an illiquid market
UGIOGPVNKMGJKIJ[KGNFDWV
a good manager is able to
navigate a range of market
environments.
Bottom line: Bond ETFs
do have portfolio managers, and not all of them are
created equal. A skilled
manager will continually
work to minimize tracking
error so that investors get
the exposure they want.
Of course, there’s much
more to the story than this,
but these three points really
get to the heart of what a
bond ETF is.
Pat Chiefalo
Pat Chiefalo, CFA, Managing Director,
BlackRock Canada, is the head of Product
HQTVJGKPFWUVT[NGCFKPIK5JCTGU%CPCFC
business. With over 15 years of industry
experience, he has established himself as
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ETFs.
www.ishares.ca
iSharesВ®'6(UCTGOCPCIGFD[$NCEM4QEM#UUGV/CPCIGOGPV%CPCFC.KOKVGF%QOOKUUKQPUVTCKNKPIEQOOKUUKQPUOCPCIGOGPV
HGGUCPFGZRGPUGUCNNOC[DGCUUQEKCVGFYKVJKPXGUVKPIKPK5JCTGU'6(U2NGCUGTGCFVJGTGNGXCPVRTQURGEVWUDGHQTGKPXGUVKPI6JG
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FGEKUKQPUUJQWNFDGOCFGCUCRRTQRTKCVGQPN[YKVJIWKFCPEGHTQOCSWCNKЖ‚GFRTQHGUUKQPCN
:$$:53CPF%$1CTGPQVKPCP[YC[URQPUQTGFGPFQTUGFUQNFQTRTQOQVGFD[(65'6/:(65'VJG.QPFQP5VQEM'ZEJCPIG)TQWREQORCPKGU
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CVTCFGOCTMQH65:+PECPFKUWUGFWPFGTNKEGPEGp(65'В®qKUCVTCFGOCTMQHVJG(65'+PVGTPCVKQPCN.KOKVGFKP%CPCFCCPFKUWUGFD[(65'6/:
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iSC-1336-0914
6
YOUR GUIDE TO ETF INVESTING
Tactically Investing in Fixed income
Bank of Canada - 10 Year Yields
4.0
Mark Raes
If there is one thing we
can be sure of with interest rate predictions, it’s
that no one is sure where
they’re headed. Normally
we’d review the magnitude of prediction misses,
and while that has proven
to be wide, this year many
prognosticators got the
direction wrong as well.
Using the ten year bond as
a proxy for the market, back
in December 2013, leading
economists were predicting
rates above 3%, more than
a percent higher than the
current yield of just over 2%.
What does this mean?
Over the 30 year bond bull
market, where interest rates
were continually tightening,
a full market or even long
duration tilted portfolio was
effective. Now, when we’re
much closer to the bottom
of the interest rate cycle, the
first look should be on the
fixed income side, where in
the past, portfolio construction has been heavily focused
on the equity holdings.
Plus, in the current low
interest rate environment,
volatility is much more impactful to portfolios, as there
is less of an income cushion
to soften any shifts.
ETFs are a complete
game changer for rebalancing fixed income, both
Yields (%)
3.5
3.0
2.6
2.5
Actual BOC
10Yr Yields
2.0
1.5
1
-0
09
20
7
-0
09
20
1
-0
10
20
01
7
-0
10
20
11
20
in terms of buy and hold
positions as well as tactical
investing. Compared to
direct bond holdings, they
offer better liquidity, instant
diversification, and perhaps
most importantly, transparency, by moving an overthe-counter (OTC) asset
class to exchange trading.
While true active management adds value, ETFs
add more diverse market
exposures at lower costs
than portfolios that hug the
market.
The availability of fixed
income ETFs in Canada has
increased dramatically, from
only 10 five years ago, to
75 today. Not only have the
exposures become more
precise, new non-traditional
exposures have been added
as well, across high yield,
emerging markets, floating
rate bonds and international
markets.
For tactical investing, two
approaches can be used to
implement changes. The first
is to rely on a broad market
product where active management or a rules based
approach is used to adjust
7
-0
11
20
1
-0
12
20
07
2-
1
20
1
-0
13
20
7
-0
13
20
01
4-
1
20
7
-0
14
20
the portfolio. The second is
to use targeted ETFs.
With a broad market approach, the key is to select
a manager that can deliver
meaningful changes. The
ETF should be able to cross
geographies, duration, and
the credit spectrum. Strategic bond or total return
approaches are proving to
be effective and popular
tools to help navigate the
markets. Interestingly, even
traditional active managers
are seeing the benefits of
using ETFs to implement
portfolio changes, as ETFs
are becoming a more accepted holding in actively
managed mutual funds.
Targeted ETFs are a valuable tool for implementing
tactical and strategic views.
The most common approach
is to build the fixed income
portfolio completely through
building block ETFs, delivering diversified, low cost
exposures. A second popular
tactic is to devote a liquidity sleeve, of 20% to 30%
of the fixed income portfolio towards these ETFs. The
efficiency of ETFs allows
investors to quickly respond
to market surprises, central
bank announcements or
statistical releases.
BMO ETFs has been
innovative
in
launching
a complete cross section of
the Canadian investment
grade bond universe. This
includes nine ETFs, sliced
by term (short, mid, and
long) and by credit (federal,
provincial, corporate).
BMO Short
Corporate
Bond
BMO Mid
Corporate
Bond
BMO Long
Corporate
Bond
ZCS
ZCM
ZLC
BMO Short
Provincial
Bond
BMO Mid
Provincial
Bond
BMO Long
Provincial
Bond
ZPS
ZMP
ZPL
BMO Short
Federal
Bond
BMO Mid
Federal
Bond
BMO Long
Federal
Bond
ZFS
ZFM
ZFL
Over the past five calendar
years, the returns have
ranged an average of 15%
based on the underlying
indexes.
The result is that investors and portfolio managers alike are finding multiple
uses for fixed income ETFs
both as broad market strategic solutions and targeted
exposures. These ETFs are
now much more prevalent
in portfolios reflecting their
efficiency and diversification,
and their varied applications.
Mark Raes
Head of Product, Global Structured
Investments, BMO Asset Management Inc.
BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager
and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with
investments in exchange traded funds. Please read the prospectus before investing. Exchange traded funds are not guaranteed,
their values change frequently and past performance may not be repeated.
Your Guide to etF investinG
7
Pay
less
Earn
more
With low-cost ETFs from Vanguard, investors can earn more over time by keeping more
of what they make. And the savings can really add up. Over the next 20 years, the average
Canadian portfolio could be ahead $237,560. Now that’s a conversation worth having.
Visit vanguardcanada.ca/costcompare to learn more
Winner - Canada
Vanguard Investments Canada Inc.
2013 Morningstar ETF Provider of the Year
2013 Morningstar Best Equity ETF
Morningstar Awards 2013 В©.
Morningstar, Inc. All Rights Reserved. Awarded to Vanguard Investments Canada Inc. for Morningstar ETF Provider of the Year and Best Equity ETF,
Canada. For further information about the Morningstar Awards, including information relating to the criteria upon which the awards are based, please
visit www.investmentawards.com. The hypothetical example does not represent any particular investment. The cost savings reflect a comparison
between Vanguard ETFTM fees and average Canadian mutual fund fees. The comparison is based on a 6% annual return, an initial investment of
$250,000, an average 2.01% MER for mutual funds and an average 0.22% MER for Vanguard ETFs. The MERs are asset-weighted as of December
31, 2013. Vanguard ETF MERs were sourced from the Management Reports of Fund Performance. The mutual fund industry MERs were sourced from
Investor Economics. Without waivers and absorptions, the Vanguard ETF MERs would have been higher. Vanguard Investments Canada Inc. expects to
continue absorbing or waiving certain fees indefinitely, but may, in its discretion, discontinue this practice at any time. For more detailed information
visit, vanguardcanada.ca. Inflation and other potential costs are also not considered. Investments in the Vanguard ETFs can be made through a financial
advisor or on-line brokerage account. В© 2014 Vanguard Investments Canada Inc. All rights reserved.
The Importance of Hedging
International Bonds
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Why is it so important
to be hedged?
Atul Tiwari
Since
international
bonds
represent
an
increasing share of global
markets, it’s harder to
justify their absence from
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Our own research shows
that adding international
bonds to a portfolio can
help
reduce
portfolio
volatility, assuming that
the currency exposure is
hedged.
Investing in international
bonds entails exposure
to currency risk. Although
currency
movements
tend to be driven by
fundamental factors over
long horizons, it is well
documented that curren
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from fair value in the short
to intermediate term,
creating return volatility
above the level inherent to
the underlying bonds.
As a result, currency
exposure
tends
to
overwhelm the attractive
and potentially diversify
ing characteristics of inter
national bonds. For that
reason, investors inter
ested in diversifying their
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portfolio should consid
er hedging the currency
exposure by investing in a
fund that employs curren
cy hedging as part of the
investment process.
Bond characteristics
By removing currency
risk, you are letting inter
national bonds perform
as bonds. As a result,
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national bonds, when
accounting for currency
hedging, become more
local in character.
Some may argue that
since currency hedging
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tional bond returns in line
with local bond returns,
then why bother with
international bond diversi
Ж‚ECVKQP!
Although this has been
true over a very long
horizon, over shorter and
intermediate horizons, the
differences between bond
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Continued on page 10
Returns of domestic and international bond markets from perspective of investors in the
stated country, 1985–2013
12%
10
6
4
2
0
Australia
Canada
France
Japan
Domestic market return
Return contribution of hedging currency
International market return in local terms (absent currency movement)
Total hedge international return
United Kingdom
United States
Switzerland
Sources: Vanguard calculations, based
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+PFGZYKVJTGVWTPUOGCUWTGFKPVJCVEQWPVT[oUEWTTGPE[p+PVGTPCVKQPCNOCTMGVTGVWTPKPNQECNVGTOU
CDUGPVEWTTGPE[OQXGOGPVq
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contribution of hedging currency” is the difference in return between the international index measured in hedged terms versus local
terms. We used France as a proxy for euro-area investors, because of a lack of history for the broad monetary area.
YOUR GUIDE TO ETF INVESTING
9
ETFs in Canada
Top 10 ETFs by Assets Under Management (AUM)
:+7 K5JCTGU5265:+PFGZ'6(
:52 K5JCTGU%QTG52+PFGZ%*GFIGF'6(
:5$ K5JCTGU%CPCFKCP5JQTV6GTO$QPF+PFGZ'6(
CBO K5JCTGU;T.CFFGTGF%QTRQTCVG$QPF(WPF
:+% K5JCTGU5265:%CRRGF%QORQUKVG+PFGZ'6(
:&8 K5JCTGU&QY,QPGU%CPCFC5GNGEV&KXKFGPF+PFGZ'6(
:$$ K5JCTGU%CPCFKCP7PKXGTUG$QPF+PFGZ'6(
:%$ K5JCTGU%CPCFKCP%QTRQTCVG$QPF+PFGZ'6(
ZSP $/152+PFGZ'6(
CPD K5JCTGU5265:%&02TGHGTTGF5JCTG+PFGZ(WPF
The Importance of Hedging
International Bonds
Continued from page 9
Source: ETFinsight DB as at August 31, 2014
Top 10 U.S. ETFs by AUM
:52 K5JCTGU%QTG52+PFGZ%*GFIGF'6(
ZSP $/152+PFGZ'6(
ZHY $/1*KIJ;KGNF75%QTRQTCVG$QPF*GFIGF%#&+PFGZ'6( :*; K5JCTGU75*KIJ;KGNF$QPF+PFGZ
%#&*GFIGF'6(
ZIC
$/1/KF6GTO75+)%QTRQTCVG$QPF+PFGZ'6(
ZUE $/152*GFIGFVQ%#&+PFGZ'6(
ZMU $/1/KF6GTO75+)%QTRQTCVG$QPF*GFIGFVQ%#&+PFGZ'6(
$496,266,653
ZSU $/15JQTV6GTO75+)%QTRQTCVG$QPF*GFIGFVQ%#&+PFGZ'6( CHB K5JCTGU#FXCPVCIGF*KIJ;KGNF$QPF+PFGZ(WPF
%#&*GFIGF ZFH $/1(NQCVKPI4CVG*KIJ;KGNF'6(
Source: ETFinsight DB as at August 31, 2014
Top 5 Dividend ETFs by AUM
:&8 iShares Dow Jones Canada Select Dividend Index ETF
CDZ K5JCTGU5265:%CPCFKCP&KXKFGPF+PFGZ(WPF
ZDV $/1%CPCFKCP&KXKFGPF'6(
CUD K5JCTGU5275&KXKFGPF)TQYGTU+PFGZ(WPF
%#&*GFIGF
:'+
iShares Core S&P/TSX Composite High Dividend Index ETF Source: ETFinsight DB as at August 31, 2014
Sectors Trailing 12M AUM Growth
AUM 3/31/13
AUM 3/31/14
Growth
North America Sectors
U.S. Sectors
International Sectors
Canada Sectors
Source: ETFinsight DB as at August 31, 2014
Top 10 ETFs by Year over Year Performance
1Y Total Return
HVI
$GVC2TQ528+:5JQTV6GTO(WVWTGU+PXGTUG'6(
ZID
$/1+PFKC'SWKV[+PFGZ'6(
:+&
K5JCTGU+PFKC+PFGZ'6(
ZUH
$/1'SWCN9GKIJV75*GCNVJ%CTG*GFIGF%#&+PFGZ'6( ZGI
BMO Global Infrastructure Index ETF
ZJN
$/1,WPKQT)CU+PFGZ'6(
ZCH
BMO China Equity Index ETF
34.96%
QQC
PowerShares QQQ (CAD Hedged) Index ETF
34.61%
36.54%
:33 K5JCTGU0#5&#3%#&JGFIGF
ZQQ
34.52%
BMO NASDAQ 100 Equity Hedged CAD Index ETF
Source: ETFinsight DB as at August 31, 2014
10
YOUR GUIDE TO ETF INVESTING
NGCFKPIVQCFKXGTUKЖ‚ECVKQP
DGPGЖ‚V C UOQQVJGT CPF
more preferable return
RTQЖ‚NG HQT KPXGUVQTU YJQ
own both international
and local bonds.
How hedging works
It’s useful to think of
hedging as a form of
protection from the effects
of a transaction—whether
gains or losses—by taking
a position in one type of
investment to offset the
risk of another security,
less the execution cost of
employing the hedge.
Currency hedging often
involves the use of forward
contracts, in which two
parties agree to exchange
a set amount of one curren
cy for another at a prede
termined exchange rate at
some future date, typically
one week or one month
ahead. These contracts
allow investors to trade
the risk that a currency will
move in the future, effec
tively “locking in” a set
exchange rate today and
eliminating the volatility of
currency movement from
their portfolio.
Two distinct risks can
accompany this type of
hedging strategy. First, the
ETF’s performance may
deviate from its bench
mark index. Vanguard
anticipates that risk to be
minimal because we strictly
follow the index currency
hedging methodology of
Barclays, which provides
the benchmarks for our
two new bond ETFs,
Vanguard U.S. Aggre
gate Bond Index ETF
%#&JGFIGF 8$7 CPF
8CPIWCTF )NQDCN GZ75
Aggregate Bond Index
'6(
%#&JGFIGF
8$)
Second, the forward
contract may fail to fully
hedge the movement of
the underlying currency.
The purchase of a forward
contract locks in a currency
GZEJCPIGTCVGCVCURGEKЖ‚E
date in the future. Because
currencies appreciate or
depreciate against one
another every day, the
contract may result in the
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WPFGTJGFIGF CV VJG GPF
of the month. By follow
ing the Barclays method
ology, Vanguard seeks
to mitigate any resulting
foreign currency exposure
by rolling forward and
adjusting
its
hedging
position each month.
Atul Tiwari
Atul Tiwari is managing director of
Vanguard Investments Canada Inc.
YYYXCPIWCTFECPCFCEC
New Cost and Performance
Disclosure may Highlight the
$GPGЖ‚VUQH'6(U
Kevin Rusli
Jennifer Woo
The Canadian regulatory
landscape has slowly been
phasing in the introduc
tion of a new Client Relationship Model (coined by
the regulators as CRM 2).
CRM 2 is intended to
develop a more transpar
ent and uniform disclosure
regime to help ensure that
investors are fully informed
before making investment
T R A N S I T I O N
July 2014||||||||||||||||||
T O
decisions – primarily by making
them aware of what they
pay their advisors and how
their investments have per
formed. Many industry ob
servers expect that these
changes will serve to better
illustrate some of the key
DGPGЖ‚VUQHKPXGUVKPIKP'6(U
Key changes an investor
can expect to see as part of
CRM 2, are set out below:
C R M
2
July 2015
July 2016
Pre-Trade Cost
Disclosure
Account Statement
Information
At account opening, disclosure
of all account charges and
transaction fees charged by
VJGЖ‚TO
Enhanced disclosure on
periodic account statements
(at least once every 3 months),
such as:
VJGOCTMGVXCNWGQHGCEJ
security;
Annual Performance
Reporting/Annual Charges
Reporting/ Enhanced Trade
%QPЖ‚TOCVKQPU
Prior to purchase or sale,
disclosure of direct and indirect
charges associated with the
purchase or sale of a security
(including deferred sales charg
es and trailing commissions).
A general explanation of how
such investment performance
benchmarks might be used to
assess the performance of a
client’s investment.
YJKEJUGEWTKVKGUOKIJVDG
subject to deferred sales
charges on subsequent sales.
Disclosure of the cost of each
security position (either “book
cost” or “original cost”),
including an explanation of
such costs.
For Investment Funds,
BLAKES MEANS BUSINESS.
Blake, Cassels & Graydon LLP | blakes.com
An annual investment perfor
mance report that discloses the
market value of all cash and
securities at the beginning and
GPFQHGCEJOQPVJRGTKQF
the market value of deposits
and transfers into and out of
the account during the
OQPVJRGTKQFCPFVJG
annualized return (net of
charges) for the 1, 3, 5 and 10
year periods (and since account
opening) preceding the report.
An annual summary of all charg
es incurred by the client during
VJGOQPVJRGTKQFEQXGTGF
by the investment performance
report, including the type
and amount of compensation
TGEGKXGFD[VJGЖ‚TO
GIVJG
dollar amount in trailing commis
UKQPUTGEGKXGFD[VJGЖ‚TO
6TCFGEQPЖ‚TOCVKQPUVQFKUENQUG
the amount of each transaction
charge, deferred sales charge or
other change, including the total
amount of all such charges.
Without a doubt, CRM 2
will have a direct impact on
the businesses of many ad
visors and dealers, but their
anticipated impact on the
broader investing public and
their choices will largely de
pend on whether or not they
choose to ignore or absorb
this new information.
The full effect of CRM 2
will allow clients to under
stand the value they are re
ceiving from their advisors
and the true performance
of their investments, relative
to the costs they are paying.
Several industry participants
expect that these disclosure
changes will positively affect
the ETF industry, as investors
may be more likely to take
notice of the fundamental
DCEMVQDCUKEU CFXCPVCIGU
that many ETF investments
can provide: low costs, broad
KPFGZRGTHQTOCPEGFKXGTUKЖ‚
ECVKQPCPFVCZGHЖ‚EKGPE[
Will these regulatory
changes lend some insight
to investors as to why
Warren Buffett recently en
dorsed ETF investments for
JKU QYP JGKTU! $[ ,WN[ 2016 you will be in a better
position to check your own
account statements and
compare the detailed results
for yourself.
Kevin Rusli
Jennifer Woo
YYYDNCMGUEQO
YYYDNCMGUEQO
Kevin is a lawyer in the Investment Products
& Asset Management Group at Blake, Cassels
& Graydon LLP. Kevin regularly advises domestic
and foreign asset managers in the structuring
and implementation of various types of
Canadian investment fund platforms.
Jennifer is a lawyer in the Investment Products
& Asset Management Group at Blake, Cassels
& Graydon LLP. Jennifer regularly advises
domestic and foreign issuers, as well as
fund managers, advisers and dealers with
respect to Canadian securities law matters.
YOUR GUIDE TO ETF INVESTING
11
May You Live in Interesting Times!
+PXGUVQTUCTGNQQMKPIVQYCTF#UKCCPF#UKC2CEKЖ‚EHQTUGTKQWUKPVGTPCVKQPCNFKXGTUKЖ‚ECVKQP
Drew Millard
These are interesting
times for Asia, to be sure,
with both China and India –
the world’s two most popu
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roads. China, on the one
hand, is looking to boost
liquidity – to wit an injec
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its Central Bank into its 5
largest banks on September
VJKPETGCUGNGPFKPICPF
introduce preferred share is
suance. This, broadly speak
ing in the context of focusing
on engineering a soft land
ing, aka getting its economy
to a meaningfully lower, but
sustainable growth rate than
it earlier enjoyed, while re
lying on its manufacturing
and exports prowess. As
for India, reform is squarely
on the agenda, as far as its
new prime minister Naren
dra Modi getting elected
on the promise of fostering
UKIPKЖ‚ECPV TGHQTOU CKOGF CV
making the country an easier
place in which to conduct
business.
For China, the current
agenda should help drive
equity prices in a positive di
rection near term. Beyond
this, rooting out corruption
KP %JKPCoU UVCVGQYPGF
enterprises,
and
broad
structural reform aimed at
establishing private sector
companies as legitimate
world players ought to pave
the way for further upside.
Greater access – anyone with
a Hong Kong based broker
12
YOUR GUIDE TO ETF INVESTING
age account will soon be
able to purchase “A”shares
in China, and conversely
Chinese investors will be
able to purchase Hong Kong
NKUVGFUJCTGURCXGUVJGTQCF
ahead as far as ensuring that
Chinese stocks end up repre
UGPVKPICUKIPKЖ‚ECPVN[JKIJGT
share of Emerging Markets
exposure than is presently
the case.
For India, some of the
immediate goals include
speeding up the pace of
infrastructure project com
pletion and increasing the
allowed amount of foreign
investment in related indus
tries. Quarterly GDP grew
D[ DGVYGGP #RTKN CPF
June, the fastest pace in
more than two years, driven
largely by success in the
manufacturing and min
ing sectors. Global senti
ments about India seem to
be falling in line, with a net
$15.2 billion of international
ECRKVCN ЖѓQYKPI KPVQ +PFKCP
UVQEMU [GCTVQFCVG YKVJ
OKNNKQPKPVJGЖ‚TUVYGGM
of September alone.
Against this backdrop
of US markets facing the
prospect of rising rates in
2015 while Europe remains
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investors could be looking
VQYCTF#UKCCPF#UKC2CEKЖ‚E
as more serious international
FKXGTUKЖ‚ECVKQPFGUVKPCVKQPUs
unless of course, they view
the prospect of the FED
raising rates next year as
JCXKPIRQUUKDN[UGTKQWUTGRGT
cussions on the region.
Exposure to Asia/Asia
2CEKЖ‚E ECP DG CEEGUUGF KP
a variety of ways through
ETFs:
1) Emerging Markets ETFs:
r K5JCTGU/5%+'OGTIKPI
/CTMGVU+PFGZ'6(
:'/
r 8CPIWCTF(65''OGTIKPI
/CTMGVU+PFGZ'6(
8''
r $/1/5%+'OGTIKPI
/CTMGVU'SWKV[+PFGZ'6(
<'/
r K5JCTGU%QTG/5%+
'OGTIKPI/CTMGVU+/+
'6(
:'%
r K5JCTGU4#(+'OGTIKPI
%91
Each provides some ex
posure to both China and
India, as well as to other
Asian nations that should
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China and India’s ascendency.
1H EQWTUG VJG VTCFGQHH CU
far as the breadth of expo
sure covered by EM ETFs, is
that you may get nations into
the mix at weightings that
don’t necessarily match pre
cisely what you are after.
$4+%
Another ETF to look at
for exposure to Chinese and
Indian equities is the K5JCTGU
$4+% +PFGZ (WPF %$3.
While this ETF delivers more
exposure to China, its India
pEQPVGPVqKUUKIPKЖ‚ECPVN[NQY
GTCV5QYJKNG%$3
might deliver a percentage
of Chinese exposure you
Continued on page 22
Chronicling the ETF Story:
Entering Act II
Tyler Mordy
Robyn Graham
“ Why then the
world’s mine oyster
/ Which I with
sword will open.”
from Shakespeare’s
The Merry Wives of
Windsor
The rise of exchangetraded funds is akin to a
dramatic play that continues
to surge forward in new and,
for many, unexpected ways.
Act I of the ETF revolution
was prologue — an introductory phase to the investment vehicle itself.
ETF manufacturers set
the scene and growth for
them was primarily achieved
by big brand recognition
and being first to market.
They were wildly successful
in increasing awareness of
the basic benefits of the ETF
structure — low cost, intraday trading, tax efficiency,
etc.
Proliferation
ensued,
with the number and types
of ETFs limited only by
the creativity of the architects developing them.
Witness, for example, the
recent popularity of so-called
“smart beta” ETFs, a plethora of new yield strategies,
and ETFs designed to offset
a widely predicted rise in
interest rates. ETFs also surfaced in asset classes that
were previously restricted to
foreign investors and were
now “opening up”. Recently,
that has meant China. The
Deutsche X-trackers Harvest
CSI 300 China A-Shares ETF
(ASHR) is the first ETF offering direct access to mainland China stocks.
We are all believers now.
But the plot is now thickening and we are moving beyond this product-driven
phase, into what we have
dubbed “Act II”.
Act II will be driven by
a more educated investor.
The most important contextual feature of Act II’s
narrative is an emphasis
on the investment process
using ETFs. What is the best
approach to construct and
maintain a global ETF portfolio? It’s a natural follow-on
question after being convinced of the benefits of
ETFs. And, it’s a challenge in
an industry where many professionals have developed
their skill set in stock picking.
To be sure, ETF investing
is, in many ways, a return to
the basics — casting aside
much of the legacy portfolio architecture erected in
the 1980s and 1990s (i.e.
the rigid “silo” approach
to investing where professional managers only select
securities in one investment
class) and pursuing less-constrained global multi-asset
class investing.
Total ETF Assets by Number of ETF Strategists
200
$95.0
$90.0
$120.0
$120.0
150
$0.0
2008
2009
2010
Total Assets in USD$ Billions (LHS)
2011
$54.0
$38.0
$5.8
$30.0
$28.0
100
$16.9
$60.0
2012
50
Investors can now have
views on a wide variety of
asset classes, macroeconomic regimes, and risk
factors. This has meant that
many ETF investors are
effectively active managers
that select asset classes
rather than individual stocks
or bonds. The potential is
more diversification, lower
cost, and, ultimately, far better portfolio results.
Act II is also a story
of empowerment. ETFs
have revolutionized portfolio management by offering a much wider tool set.
Emerging from this development is a new breed of
asset manager — the ETF
Strategist. These are professional “multi asset class”
investors who specialize in
assembling ETF portfolios
(we are part of this collective and it is a very exciting
time to be stewards of client
capital).
Looking ahead, the ETF
industry is entering a more
mature period. There will be
new managers, pressure on
fees, and consolidation. It
will become a more efficient
industry and, ultimately,
better for the end investor.
But, make no mistake,
ETFs are entering a new
upswing in the development
of better portfolios. The
curtain has only just risen.
Tyler Mordy
Tyler Mordy is President and co-CIO for HAHN
Investment Stewards. Since joining the firm in
2003, Tyler has become a recognized innovator
in the design and application of “global
macro” ETF portfolios. He is widely quoted and
interviewed by the financial media for his views
on global investment strategy and ETF trends.
www.hahninvest.com
Robyn Graham, Vice President Institutional
2013
2014 (Est)
Number of ETF Investment Strategists (RHS)
0
Source: Blackrock
Services. Robyn is responsible for managing
HAHN’s institutional, sub-advisory and family
office relationships and has over 25 years of
investment industry experience serving high
net worth and institutional clients, consultants
and financial professionals.
www.hahninvest.com
Your Guide to etF investinG
13
The truth about what you pay
for your investments.
Are you willing to give up almost half your potential
wealth so someone else can manage your investments?
Millions of Canadians are doing exactly that — without
even knowing it.
Canadians’ savings in mutual fund investments recently
surpassed $1 trillion. But it’s not all good news. Canadians
pay the highest fees in the world. And what’s worse, most
investors don’t even know it. Hidden items like “trailer fees”
are confusing and seldom understood. When Morningstar
ranked 24 countries on their fund fees, Canada was the
only country that received a failing grade of �F’.
The median Canadian equity fund carries an annual fee
of 2.42%. That might not sound large but as the graph
demonstrates, even small numbers can erode hundreds
of thousands of dollars from your potential wealth.
Every dollar you pay in fees today never gets the chance
to grow for you and your family.
So, why have mutual funds been so popular in Canada?
The truth is there haven’t been many alternatives.
Full-service financial advisors generally want accounts
that already have lots of money. In many cases,
to become a client, you need at least $500,000 in
assets and in some cases you need more than $1 million.
Alternatively, very few people want the responsibility
of picking their own investments and managing their
portfolios by themselves. So, for many people, while
mutual funds have always been expensive, they’ve also
been the only game in town.
That is, until now.
2014 marks the start of a new era in the Canadian
investment landscape. A perfect combination of better
technology, index investing through low-cost exchange
traded funds (ETFs), and innovation by experienced
financial professionals is finally creating new choices
for investors.
Most investors, both institutional and individual, will find
that the best way to own common stocks (“shares”) is through
an index fund that charges minimal fees. Those following this
path are sure to beat the net results (after fees and expenses)
of the great majority of investment professionals.
-WARREN BUFFETT
Most studies demonstrate that over the long term, passive
investing — building a portfolio to perform like the market instead
of trying to beat it — does better than active management.
Over the last 5 years in Canada, nearly 80% of actively managed
Canadian Equity Funds failed to perform as well as the S&P/TSX
Composite.1 Compelling data like this makes Nest Wealth’s decision
to �Be the market’ instead of �Beat the market’ a smart choice for
their account holders.
A final important distinction is that Nest Wealth charges a flat
monthly fee that doesn’t increase as your account size grows.
Paying low fees over a long period of time lets you hold on to
much more of your potential wealth.
If you’re interested in learning more, visit us at www.nestwealth.com.
The site features a tool that can calculate the true impact fees are
having on your personal portfolio along with more information
about the new choices Canadian investors finally have.
$396,400
Investors like you.
New companies, like Nest Wealth, combine the security
of having your money held at a big Canadian bank
with the best industry practices expected of smart,
large institutional investors. The portfolios aren’t
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They’re transparent, diversified, re-balanced, and are
built exclusively with index-tracking exchange
traded funds. And best of all, they charge low, flat fees.
Based on an individual with an initial investment of $125,000 at age 40
with a continued annual contribution of $15,000.2
1
SPIVA Canada Scorecard Year-End 2013, S&P Dow Jones Indices.
2
The graph and amounts displayed are obtained by assuming a gross portfolio return of 6% and then deducting costs of the underlying assets. The grey line deducts the average 2.15% MER
of a balanced fund according to Morningstar’s 2013 Global Fund Investor Experience Report. The green line deducts the fees paid in a typical Nest Wealth account. This tool is not intended
to predict portfolio earnings or performance, nor is it a guarantee of future performance. Actual investors will experience different results from the results shown.
“Nest Wealth” is the trade name of Nest Wealth Asset Management Inc. The products and services advertised are specifically for investors in the Province of Ontario and may not be available to all
investors. Products and services are only offered in accordance with applicable laws and regulations. This advertorial is neither an offer to sell nor a solicitation of an offer to sell securities in any jurisdiction.
There are lots of ways
for a typical investor to invest.
Too bad there’s no such thing
as a typical investor.
Canada’s long-term investors have always been stuck
between a rock and a hard place. Personal investment
advisors will only work with the richest clients, but if you
choose a mutual fund instead, you end up paying the
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Nest Wealth helps your money grow the way it’s
supposed to with three combined advantages that
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from the security of having your assets held at a
large Canadian bank while Nest Wealth constantly
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@3<>-;,$ВЈ'!8T!$$<8!;'32ВЈ-2'8'638ধ2+>,[email protected]<
want it so you always understand exactly how your
investments are performing.
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-9-;<9!;2'9;>'!ВЈ;,W$31;3)2&3<;138'!#3<;,3>
you can pay less, keep more and rest easy knowing the
only person your investments are working for is you.
83!&ВЈ@-='89-)'&3ВЈ&-2+9W With Nest Wealth,
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using high-quality, low-cost exchange traded funds.
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asset classes. Research has demonstrated this type
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nestwealth.com
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ǻ†Ž’š’†““š†‘’†“†ŒŠ’Š“™‹ŠŠ”‹țǀȡțʏ
Commissions, trailing commissions, management fees and expenses all may be associated with ETF investments. ETFs are not guaranteed, their values change
frequently and past performance may not be repeated. Please read the prospectus before investing. NASDAQВ®, OMXВ®, NASDAQ OMXВ®, NASDAQ Canadian Risk
Managed Income IndexSM are registered trademarks of The NASDAQ OMX Group, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for
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sold, or promoted by the Corporations. The Corporations make no warranties and bear no liability with respect to the Units of ETP.
Clearing the Air: Explosion of
ETFs Clouds Investors’ Decisions
Karl Cheong, CFA
Morningstar currently tracks
some 316 exchange traded
funds in Canada. While just
a fraction of the 3010 mutual
funds it tracks, advisors are
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to cut through the clutter of
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of ETFs for their clients.
In particular, these choices
are clouded by an emerg
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al ETFs. These ETFs were
created for the purpose
of attempting to deliver
“better beta” or alpha and
many are branded as being
“fundamentally” based. So
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ETFs expected to hit the
market, advisors will likely
need help identifying and
differentiating the host of
investment solutions.
Having so many choices
is a good problem to have
but it is important to un
derstand the differences
between them in order to
properly construct an invest
ment portfolio that suits its
intended purpose. It may
be helpful to begin by put
ting all ETFs into two broad
categories: Beta and Alpha.
ETFs designed to seek mar
ket risk and return fall under
the beta umbrella. They typi
cally track “market” indexes
where all of the stocks in a
relevant market are included
and they are weighted based
on market capitalization. The
ETF market has long served
advisors looking to simply
replicate the returns of the
market and delivering beta
was preferred. Because of
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vided by ETFs such as low
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quidity, and transparency, the
ETF industry has evolved to
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funds for investors and their
advisors looking to achieve
potentially better invest
ment results. These funds
don’t own all of the stocks in
a respective market and of
ten use alternative methods
to weight them rather than
market capitalization. Of
note, these ETFs may track
a dynamic index or they may
be actively managed.
These two broad catego
ries, beta and alpha, could
be further grouped as traditional or non-traditional.
Beta and alpha are both
statistical
measurements
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TGYCTF RTQЖ‚NG QH CP KPXGUV
ment. The four investment
strategies we listed in the
table are all subject to mar
ket risk – that is the risk that
the underlying securities will
lose value – however, each
approach presents some
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teristics. Traditional beta
strategies mitigate a degree
of individual security risk
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because they are market
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the largest companies in
Table 1: ETF Categories
Beta
Category
Alpha
Sub-Group
Traditional
Non-Traditional
Non-Traditional
Traditional
Description
A passive index
approach of owning
all stocks in a
respective market
and weighting
by market
capitalization.
An alternative beta
approach of owing
most or all stocks in
a respective market
but using alternative
metrics to weight
the stocks such as
total sales, total
dividends, book
value, etc.
ETF tracking an index
designed to seek
alpha by owning a
select basket of stocks
from a market or
index and weighting
based on investment
merit. Different from
traditional alpha to the
extent index changes
are generally made
less frequently.
Actively managed,
ability to modify
portfolio on a regular
basis.
S&P/TSX Index
S&P/TSX Equal
Weight Index
S&P/TSX
Fundamentally
Weighted Index
Actively managed
large cap blend ETF
benchmarked against
the S&P/TSX Index
Example
Source: First Trust Portfolios Co.
the index can represent a
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create unwanted risk. The
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pha approaches attempt to
limit exposure to the largest
stocks and increase expo
sure to others in an attempt
to provide better returns.
There are, however, times
when alternative weighting
approaches and stock level
factors, such as valuation
may become less meaningful
and their effectiveness may
diminish.
The area of the ETF mar
ket where we have found
causes the most confusion is
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DGVC CPF PQPVTCFKVKQPCN
CNRJC 0QPVTCFKVKQPCN DGVC
generally tries to provide
returns slightly different but
better than the market. That
is, an alternative passive
strategy. More often than
not, these ETFs track indexes
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weighted indexes. In most
cases they own the same
stocks as the index but the
constituents are either equal
weighted or use alternative
measures of size to weight.
Many of these ETFs are
marketed as tracking “funda
mental” indexes because the
constituents are weighted
based on total book value,
total sales, total dividends or
other factors.
It begs the question:
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book value, total sales, and
total dividends really provide
informational value of the
future stock price of a com
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Continued on page 18
YOUR GUIDE TO ETF INVESTING
17
Clearing the Air: Explosion of ETFs Clouds Investors’
Decisions
Continued from page 17
Price to Cash Flow: 1952 - 2012
20%
7
6
5
4
Decile
3
2
19.84%
8
18.26%
16.43%
9
15.15%
10
Worst
14.48%
2%
0%
13.29%
6%
4%
12.75%
10%
8%
11.00%
14%
12%
16.73%
18%
16%
8.58%
Average Annual Return
way of measuring how big
the company is. After all, the
largest US companies tend
to have greater book value,
sales, and dividends. We
don’t believe these measures
are “fundamental” factors.
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of the ETF market that focus
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seems to be getting a majori
ty of the attention among ad
visors looking for more than
better beta. These ETFs typi
cally track indexes designed
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returns. Because stock prices
are subject to market factors
that can make them deviate
from a company’s true value,
these indexes use fundamen
tal evaluation measures to
select and weight constitu
ents commonly used by most
professional money manag
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return on assets, price mo
mentum, sales growth etc.
These indexes mimic in many
ways the approach and be
havior of active managers by
applying certain rules relat
ing to when to buy, when to
sell, and from what universe
of stocks to select from while
attempting to limit exposure
VQ QXGTRTKEGF UVQEMU CPF
increase exposure to those
which are trading at more at
tractive valuations.
Academic literature sup
ports the possibility of gen
erating
outperformance
through the use of purely
quantitative
fundamental
measures. To illustrate this
point, we started with a
large universe of stocks and
divided them into deciles
based on their ranking on a
1
Best
Source: Kenneth R. French data library using the CRSP database. The universe includes all NYSE, AMEX & NASDAQ stocks. Stocks are equally
weighted. Past performance is no guarantee of future results. This example is for illustrative purposes and does not represent any actual investment.
single valuation factor – price
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ing chart shows the average
annual performance of the
stocks in each decile held for
one year with the process re
peated each year. Although
past performance is no guar
antee of future results, this
example shows that stocks
with a better price to cash
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outperformed those with a
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ation. The fact is, fundamen
tal valuation matters.
While many single valua
tion factors can be useful in
stock selection, we believe
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more prudent approach and
generally more consistent
over time. The stability of a
quantitative selection model
over time is an important
consideration when choos
ing the proper mix of valua
tion factors.
Consider the example
of one such fund that fol
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approach – the (KTUV 6TWUV
#NRJC&': 75 &KXKFGPF
2NWU '6( 65:(7& This
fund is based on First Trust’s
proprietary AlphaDEXв„ў stock
selection methodology. This
methodology is designed to
use fundamental valuation
factors to select and weight
stocks based on their invest
ment merit. Over the last
year and since inception of
the ETF, FUD has outper
formed its primary bench
mark, the S&P 500 CAD
Hedged Index by 2.19%
and 4.16% respectively. We
believe this is a remarkable
GZCORNG QH VJG UKIPKЖ‚ECPEG
of fundamental security se
lection and weighting when
seeking alpha. It is important
to note that there can be no
assurance that the fund will
continue to achieve or main
tain its investment objective.
While different methods
of indexing will have inherent
limitations at different times,
we believe that a weighting
methodology based on fun
damental investment merit,
TCVJGTVJCPЖ‚TOUK\GKUCOQTG
TCVKQPCN NQPIVGTO CRRTQCEJ
to investing. Cutting through
the clutter of new ETFs and
in particular those in the bet
ter/alternative beta vs. the
HWPFCOGPVCNN[DCUGF CNRJC
ETFs may still be a challenge
for many investors and advi
sors. But putting them into
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can go a long way toward
Ж‚PFKPIVJGTKIJV'6(VQJGNR
ENKGPVU TGCEJ VJGKT Ж‚PCPEKCN
goals.
Karl Cheong, CFA
Karl Cheong is Senior Vice President, Head of
ETF Product and Capital Markets at First Trust
Portfolios Canada. He has over 12 years of
experience in product structuring, asset allocation
and sales. He was previously Vice President, Head
of Product for Claymore Investments Inc. where he
played an integral role in developing and bringing
to market some of the most innovative Exchange
Traded Funds in the Canadian marketplace.
YYYЖ‚TUVVTWUVEC
(KTUV6TWUV#NRJC&':75&KXKFGPF2NWU'6(2GTHQTOCPEG
CUCV
1 Mos
FUD Performance
NAV
Index Performance
S&P 500 Hedged Canadian Dollar
3 Mos
6 Mos
YTD
1 Year
S.I.*
4
5KPEG+PEGRVKQP&CVG
The indicated rate(s) of return are the historical annual compounded total returns including changes in
unit value and reinvestment of all distributions and do not take into account sales or distribution charges
or income taxes payable by any security holder that would have reduced returns. Returns are average
annualized total returns, except those for periods of less than one year, which are cumulative.
6JKUCTVKENGKUHQTKPHQTOCVKQPCNRWTRQUGUQPN[CPFKUPQVCPFUJQWNFPQVDGVCMGPQTEQPUVTWGFCUKPXGUVOGPVCFXKEGVQCP[RGTUQP5RGEKЖ‚EKPXGUVOGPVUCPFQTKPXGUVOGPVUVTCVGIKGUUJQWNFDGGXCNWCVGFKPVJGEQPVGZVQH
an investor’s entire circumstances. Investors should consult their own advisors as to the merits of a particular Mutual Fund or ETF. Commissions, trailing commissions, management fees and expenses all may be associated
with mutual fund/ETF investments. Please read the prospectus before investing. Mutual funds/ETFs are not guaranteed, their values change frequently and past performance may not be repeated
18
YOUR GUIDE TO ETF INVESTING
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Exchange
Traded Funds
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RBC ETFs do not seek to return any predetermined amount at maturity. Index returns do not represent RBC ETF returns. RBC ETFs are managed by
RBC Global Asset Management Inc., an indirect wholly owned subsidiary of Royal Bank of Canada.
В® / TM Trademark(s) of Royal Bank of Canada. Used under licence. В© RBC Global Asset Management Inc. 2014.
The intelligent choice for
your portfolio
PowerShares Canada offers you a broad suite of ETFs and mutual funds that delivers access to
specialized asset classes, intelligent indices and innovative strategies.
Join the intelligent investing revolution.
Visit www.powershares.ca.
Commissions, management fees and expenses may all be associated with investments in mutual funds and exchange-traded funds (ETFs).
Trailing commissions may be associated with investments in mutual funds. Mutual funds and ETFs are not guaranteed, their values change
frequently and past performance may not be repeated. There are risks involved with investing in ETFs and mutual funds. Please read the
prospectus for a complete description of risks. Copies are available from Invesco Canada Ltd. at www.powershares.ca. Ordinary brokerage
commissions apply to purchases and sales of ETF units. PowerShares Canada is a registered business name of Invesco Canada Ltd. This piece
was produced by Invesco Canada Ltd. InvescoВ® and all associated trademarks are trademarks of Invesco Holding Company Limited, used under
licence. PowerSharesВ®, Leading the Intelligent ETF RevolutionВ® and all associated trademarks are trademarks of Invesco PowerShares Capital
Management LLC (Invesco PowerShares), used under licence. В© Invesco Canada Ltd., 2014
The advantages of low-volatility
global strategies
to an index and reduce port
folio risk in a liquid, transpar
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Michael Cooke
While smart beta has
become a buzz word in the
ETF industry, the concept is
far from new. Institutional
investors have used alterna
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driven strategies since the
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“smart beta.”
Smart beta seeks to offer
investors an alternative to
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active versus passive port
folio construction. Unlike
actively managed approaches,
smart beta ETF strategies
provide investors passive
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retaining the possibility of
generating excess returns
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weighted benchmark index.
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weighted indices, smart
beta may provide better
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lowing investors to capture
risk premiums from various
factors.
Through smart beta ETF
strategies, investors have the
opportunity to retain broad
market exposure, potentially
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formance when compared
The low-volatility
anomaly
One increasingly pop
ular form of smart beta
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Conventional wisdom dic
tates that investing in riskier
stocks should provide higher
potential returns over time
than investing in less risky
stocks. However, the data tells
a different story: Investors
who took on less risk tended
to outperform those who
assumed more. This contra
diction between theory and
data is often referred to as
VJGpNQYXQNCVKNKV[CPQOCN[q
With the recent increase
in market volatility, demand
for investment products
designed to minimize vola
tility is seemingly growing.
Focusing on that concern,
PowerShares Canada has
provided investors access to
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the launch of PowerShares
S&P 500 Low Volatility
(CAD Hedged) Index ETF
(ULV) in January 2012, fol
lowed soon after by PowGT5JCTGU 5265: %QOposite Low Volatility Index
ETF (TLV) in April 2012. On
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Canada enhanced its com
mitment to smart beta in
vesting with the launch of
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ETFs: PowerShares S&P
International
Developed
Low Volatility Index ETF
(ILV) and PowerShares S&P
Emerging Markets Low
Volatility Index ETF (ELV).
Now investors are able to
CEEGUUNQYXQNCVKNKV[UVTCVGIKGU
in equity markets beyond
North America.
For investors concerned
about volatility but seek
ing to maintain exposure to
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strategies deliver:
r 2QVGPVKCNFQYPUKFGRTQtection +P FQYP OCTMGVU
NQYXQNCVKNKV[ UVQEMU JCXG
historically captured a smaller
portion of the downside
movements relative to the
broader market.
r *KIJGT [KGNF RQVGPVKCN
*KUVQTKECNN[ NQYXQNCVKNKV[
UVQEMU JCXG JCF JKIJGT FKX
idend yields relative to secu
rities in the broader market.
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potential*KUVQTKECNN[NQY
volatility stocks tend to out
perform their market bench
marks over the long term.
Michael Cooke
Head of Distribution, PowerShares Canada
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Seeking to mitigate risk
Potential downside protection with upside participation†5KPEGVJGKTKPEGRVKQPVJG52NQYXQNCVKNKV[KPFKEGUJCXGGZJKDKVGFFQYPUKFGRTQVGEVKQPTGNCVKXG
VQVJGKTDGPEJOCTMKPFKEGUYJKNGRCTVKEKRCVKPIKPWRYCTFVTGPFKPIOCTMGVU
upside
63.6%
70.4%
69.0%
76.4%
-46.4%
-59.1%
-58.1%
-62.4%
0%
downside
S&P TSX Composite
Low Volatility Index vs.
S&P/TSX Composite
Index (C$)
S&P 500 Low Volatility
Index vs. S&P 500 Index
(US$)
S&P BMI Emerging
Markets Low Volatility
Index vs. MSCI EM Index
(US$)
S&P BMI International
Developed Low Volatility
Index vs. MSCI EAFE
Index (US$)
4GHGTUVQVJGTGFWEGFRQVGPVKCNHQTNQUUFWTKPIOCTMGVFGENKPGUYKVJVJGECRCEKV[VQDGPGЖ‚VFWTKPIOCTMGVUKPETGCUGU
†%QOOKUUKQPUOCPCIGOGPVHGGUCPFGZRGPUGUOC[CNNDGCUUQEKCVGFYKVJKPXGUVOGPVUKPGZEJCPIGVTCFGFHWPFU
'6(U'6(UCTGPQVIWCTCPVGGFVJGKTXCNWGUEJCPIGHTGSWGPVN[CPFRCUVRGTHQTOCPEGOC[PQVDGTGRGCVGF
Please read the prospectus before investing. Copies are available from Invesco Canada Ltd. at www.powershares.ca.
There are risks involved with investing in ETFs. Please read the prospectus for a complete description of risks relevant to the ETF. Ordinary brokerage commissions apply to purchases and sales of ETF units. Most
2QYGT5JCTGU'6(UUGGMVQTGRNKECVGDGHQTGHGGUCPFGZRGPUGUVJGRGTHQTOCPEGQHCPCRRNKECDNGKPFGZCPFCTGPQVCEVKXGN[OCPCIGF6JKUOGCPUVJCVVJGUWDCFXKUQTYKNNPQVCVVGORVVQVCMGFGHGPUKXGRQUKVKQPUKP
FGENKPKPIOCTMGVUCPFVJG'6(YKNNEQPVKPWGVQRTQXKFGGZRQUWTGVQGCEJQHVJGUGEWTKVKGUKPVJGKPFGZTGICTFNGUUQHYJGVJGTVJGЖ‚PCPEKCNEQPFKVKQPQHQPGQTOQTGKUUWGTUQHUGEWTKVKGUKPVJGKPFGZFGVGTKQTCVGU+PEQPVTCUV
KHC2QYGT5JCTGU'6(KUCEVKXGN[OCPCIGFVJGPVJGUWDCFXKUQTJCUFKUETGVKQPVQCFLWUVVJCV2QYGT5JCTGU'6(oUJQNFKPIUKPCEEQTFCPEGYKVJVJG'6(oUKPXGUVOGPVQDLGEVKXGUCPFUVTCVGIKGU
S&P®, S&P 500®, S&P 500 Low Volatility Index®, and S&P 500 High Beta Index™ are a registered trademark of Standard & Poor’s Financial Services LLC and has been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes
by Invesco Canada Ltd. LSTA® is a registered trademark of Loan Syndications and Trading Association and has been licensed for use by S&P Dow Jones Indices LLC and Invesco Canada Ltd. TSX is a trademark of TSX Inc. (“TSX”) and has been
licensed for use by S&P Dow Jones Indices LLC and Invesco Canada Ltd. The S&P/TSX Composite Low Volatility Index, S&P/TSX Composite High Beta Index, S&P 500 Low Volatility Index (CAD Hedged), S&P 500 High Beta Index (CAD Hedged),
S&P BMI International Developed Low Volatility Index, S&P BMI Emerging Markets Low Volatility Index and S&P/LSTA U.S. Leverage Loan 100 Index (CAD Hedged) (the “Indices”) are products of S&P Dow Jones Indices LLC, and has been licensed
HQTWUGD[+PXGUEQ%CPCFC.VF+PXGUEQ%CPCFC.VFoU2QYGT5JCTGU+PFGZ'6(UCTGPQVURQPUQTGFGPFQTUGFUQNFQTRTQOQVGFD[52&QY,QPGU+PFKEGU..%KVUCHЖ‚NKCVGU.56#QT65:CPFPQPGQHUWEJRCTVKGUOCMGCP[TGRTGUGPVCVKQPTGICTFKPI
the advisability of investing in such product.
This piece was produced by Invesco Canada Ltd. InvescoВ® and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence. PowerSharesВ®, Leading the Intelligent ETF RevolutionВ® and all associated trademarks
are trademarks of Invesco PowerShares Capital Management LLC (Invesco PowerShares), used under licence. В© Invesco Canada Ltd., 2014
YOUR GUIDE TO ETF INVESTING
21
May You Live in Interesting Times!
Continued from page 12
FGGO UWHЖ‚EKGPV KV FQGUPoV
give equal consideration to
each of its country constitu
ents by any stretch (China
$TC\KN+PFKC
CPF4WUUKC
&GXGNQRGF#UKC2CEKЖ‚E
A third alternative is the
8CPIWCTF (65' &GXGNQRGF
#UKC2CEKЖ‚E+PFGZ'6(
8#
launched this past June.
This ETF tracks the FTSE
&GXGNQRGF #UKC 2CEKЖ‚E +P
dex, comprised of around
54% exposure to Japan, 24%
to Korea, Hong Kong, and
Singapore collectively, and
Ж‚PCNN[ #WUVTCNKC CV CTQWPF
20%. With VA providing
Developed Asian exposure,
an investor could add either
or both a China or India spe
EKЖ‚E'6(VQCFF&GXGNQRKPI
to their exposure to the re
gion, apart from the China
exposure one gets via the
Hong Kong position.
What about country speEKЖ‚E #UKC '6(U! There are
three options for China and
two for India, available from
iShares and BMO ETFs. Both
the K5JCTGU+PFKC+PFGZ'6(
:+& and the $/1 +PFKC
'SWKV[+PFGZ'6(
<+& have
GPLQ[GF UKIPKЖ‚ECPV [GCTVQ
date performance, on ac
count of the anticipation of
the reforms to be brought by
/QFKoUIQXGTPOGPVWRQXGT
30% each. The $/1 %JKPC
'SWKV[ +PFGZ '6( <%* for
its part, has produced gains
nearing 35% in the past year.
Whether or not this strong
performance run is sustain
able remains to be seen.
China’s performance in par
ticular is likely a case of eq
uity prices being generally
depressed, with international
capital ultimately recogniz
ing this and investing heav
ily in response, driving up
stocks prices in the process.
One or more of these
EQWPVT[URGEKЖ‚E '6(U ECP
easily be combined with
an ETF providing Asian ex
posure in a more broadly
FKXGTUKЖ‚GF HCUJKQP +P RCUU
ing, note that each country
ETF tends to be pricier than
broader alternatives. Further
worth noting, is the fact that
the K5JCTGU%JKPC+PFGZ'6(
:%* will be expanding its
holdings from 25 to 50, as the
index it tracks (the FTSE Xin
hua 25) does the same. This
will widen its scope while re
FWEKPI KVU EQORCP[URGEKЖ‚E
investment risk. It will also
get it to a position where it
will be more comparable to
ZCH, which is comprised of
EQORCPKGU 6JG K5JCTGU
%JKPC #NN%CR +PFGZ (WPF
%*+, with 249 holdings, will
still lead the pack in terms of
breadth. As far as India, XID
with 53 gets the nod as far
as breadth, since ZID is more
EQPEGPVTCVGF CV (KPCNN[
on the sector front, note that
XCH is heavily tilted toward
Financials (53.92%), while
%*+ OQTG DCNCPEGF KP KVU
sector allocation (Financials
30.19%; Info Tech 19.26%;
Energy 13.12%) could be
seen as capturing a broader
spectrum of future perfor
mance inputs.
A good look at ETFs
providing access to Asian
exposure should help you
\GTQKPQPYJCV[QWTRQTVHQ
lio might need to participate
in the favorable longer term
prospects of the region. As
VJGUG INQDCNN[ KPЖѓWGPVKCN
economies continue to grow
KP UKIPKЖ‚ECPEG CPF KPVGTEQP
nectedness with the rest of
the world, so too should
the companies comprising
their equity markets. And if
KVKUOQTGURGEKЖ‚EHCEVQTU[QW
are after for your exposure,
consider the dividend, re
spectively minimum volatility
alternatives.
Drew Millard
Drew Millard has an MBA from Dalhousie
University and is currently a CFA Level III
Candidate. He has worked as an investment risk
analyst for Cougar Global Investments, where
he built portfolio optimizing models using
ETFs to minimize downside risk and maximize
investment returns, and as ETF product analyst
for iShares Canada.
YYY'6(KPUKIJVEQO
6QR#UKCCPF#UKC2CEKЖ‚E'6(UD[#7/
At August 31, 2014
MER%
AUM
1M
3M
6M
YTD
1Y
2Y
:'/ K5JCTGU/5%+'OGTIKPI/CTMGVU+PFGZ'6(
VEE
ZEM $/1/5%+'OGTIKPI/CTMGVU'SWKV[+PFGZ'6(
8CPIWCTF(65''OGTIKPI/CTMGVU+PFGZ'6(
CWO K5JCTGU$TQCF'OGTIKPI/CTMGVU+PFGZ(WPF
:'%
:// K5JCTGU/5%+'OGTIKPI/CTMGVU/KPKOWO8QNCVKNKV[+PFGZ'6(
FDE
(KTUV6TWUV#NRJC&':'OGTIKPI/CTMGV&KXKFGPF'6(
%#&*GFIGF
HAJ
*QTK\QPU#EVKXG'OGTIKPI/CTMGVU&KXKFGPF'6(
K5JCTGU%QTG/5%+'OGTIKPI/CTMGVU+/+'6(
CBQ K5JCTGU$4+%+PFGZ(WPF
VA
8CPIWCTF(65'&GXGNQRGF#UKC2CEKЖ‚E+PFGZ'6(
:+&
K5JCTGU+PFKC+PFGZ'6(
:%* K5JCTGU%JKPC+PFGZ'6(
ZID
$/1+PFKC'SWKV[+PFGZ'6(
ZCH
$/1%JKPC'SWKV[+PFGZ'6(
CHI
K5JCTGU%JKPC#NN%CR+PFGZ(WPF
Source: ETF Insight
22
YOUR GUIDE TO ETF INVESTING
How would Thomas Edison
Design an ETF Portfolio?
Tim Morton, CFA
Daniel Morton
James Morton
There are a number of
ways to manage an ETF
portfolio. Two key questions
can assist in discovery:
r 9KNN VJG UVTCVGI[ DG
based on valuation or will it
be based on momentum!
r *QYOCP[QHVJGKPXGUV
OGPVFGEKUKQPUYKNNDGTWNGU
based and how many will be
left to the judgement of the
OCPCIGT!
Thomas Edison was a
master problem solver. Once
faced with a problem he
would use relentless empiri
cal analysis to uncover the
optimal solution. If we were
lucky enough to have him
around today, what would
be his process in designing
CP KPXGUVOGPV RQTVHQNKQ!
And would he use ETFs to
FQUQ!
We search for the answer
by examining one famous
example of Edison’s ana
lytical skills, his investigation
into rubber production.
In the late 1920’s, at the
request of Henry Ford and
Charlie Firestone, Edison
YCUVCUMGFVQЖ‚PFCYC[
“to produce enough rubber
to supply America during
an emergency”. His form of
analysis was referred to as
organized research. This in
volved a group working to
gether, doing different tasks
to produce one solution.
The logic of his research
approach to rubber plants
allowed us to brainstorm as
to how he might approach
ETF investing using a simi
lar organized research ap
proach.
Edison would read all
existing research on the
subject. At the time, books
were the main source of
background research. We
are fortunate today that in
dependent and ETF spon
sored research is a click
away. Informal networks ex
isted then between profes
sional / amateur botanists
and from admirers of Edison.
Today, research networks
are more readily available
and truly global in scope.
Edison would have
KFGPVKЖ‚GF VJG NKUV QH GNKgible securites. There are
now thousands of ETFs trad
ing on public markets (he
narrowed his focus to 350
plant specimens in the Fort
Myers area). One can reduce
the possible entrants to the
ETF portfolio by eliminating
overlap in ETF design, poor
sponsorship,
inadequate
volume, excessive MER, in
GHЖ‚EKGPV DKF CUM URTGCFU
Without segmenting down
to niche ETFs, the investable
universe could be pared
FQYP VQ RTGOKGT
securities.
Edison would have
analysed each security
quantitatively. He quickly
KFGPVKЖ‚GF VJG pYJ[q KP JKU
plant selection, desiring
fast growth, tall plants and
plants doing well in differ
ent weather patterns. For his
ETF portfolio the “why” do I
want to own this ETF could
be made up of:
r Does the current yield
meet my income needs?
r *QYOWEJTKUMECP+ identify with each ETF?
r 9JCVCTGVJGDTQCF economic factors that
EQWNFKPЖѓWGPEGVJG
performance of an ETF?
r 9KNNVJGEJQUGP'6(
add to my return
expectation without
unnecessarily
endangering my capital?
Edison likely would
have considered how to
manage these ETFs as a
portfolio. In his rubber ex
periments he analyzed more
than 6,000 plants. One can
only imagine the amount
of time required to make
CP CPCN[UKU RTGEQORWVGT
ization. In the case of ETFs,
one could refer to the many
online publications and run
numerous stress tests on the
proposed portfolio. Quickly
one would spot excessive
drawdowns, undesired vol
atility and unattractive re
turns.
Rubber Results. Did the
TWDDGT JKV VJG TQCF! 9JKNG
the Edison project did not
result in large scale U.S.
rubber production it was
deemed positive. Edison
made two new friends,
Henry Ford and Harvey Fire
stone, established four com
panies and four patents.
The Morton Group of CIBC Wood Gundy
has been managing the wealth of a select
group of Canadian families, trusts, and
foundations for the past 35 years. Tim
Morton, CFA is the senior advisor/portfolio
manager in the management of The Morton
Group’s ETF strategies. Client portfolios
are managed by James Morton, CIM and
Daniel Morton.
YYYVJGOQTVQPITQWREC
CIBC Wood Gundy is a division of CIBC World
Markets Inc., a subsidiary of CIBC and a Member
of the Canadian Investor Protection Fund and
Investment Industry Regulatory Organization
of Canada. Tim Morton and James Morton are
Investment Advisors and Portfolio Managers with
CIBC Wood Gundy in Toronto. The views of the
authors do not necessarily reflect those of CIBC
World Markets Inc.
YOUR GUIDE TO ETF INVESTING
23
Canadian ETF Industry –
Growing, but not Thriving …
“growing”, while it ought to
be thriving.
Yves Rebetez
Canadian ETF Providers –
Month after Month, the
%CPCFKCP '6( URCEG TCEMU
up new records, in terms of
Assets under Management.
This is accomplished with
additional unit creations
– demonstrating both in
creased ETF adoption cou
pled with further product
KPPQXCVKQP CPF C TQDWUV
contribution from market
performance in the face
of meaningful geopolitical
headwinds.
Overall industry Assets
are up 24.5% from a year ago,
TGCEJKPI %#& $KNNKQP
in August 2014, vs CAD 59.3
Billion 12 months earlier.
Assets have grown at a
EQORQWPFGF TCVG QH KPVJGNCUV[GCTUCPF
in the past decade. These
are strong growth numbers,
to be sure. That said, in our
view the space is merely
24
YOUR GUIDE TO ETF INVESTING
In previous updates on
the evolution of the ETF
space, we’ve touched on sec
ular growth for the category,
the rise in exposures and
methodologies accessible,
the upcoming convergence
of Mutual Funds and ETFs,
CU YGNN CU C EQPЖѓWGPEG QH
factors poised to speed up
their adoption:
r%QUVEQPUKFGTCVKQPU
r %4/ YKVJ KVU HWNN FKUENQ
sure of fees (alongside per
formance) on the part of the
Ж‚PCPEKCNUGTXKEGUUGEVQT
r CPF Ж‚PCNN[ IGPGTCVKQPCN
wealth transfer with atten
dant technology shift as far
as the manner in which ad
vice is dispensed, and asset
management delivered
So with a couple of new
entrants rumoured to arrive
within the next few months,
the arrival of ROBO advisors
on the Canadian scene and
favourable developments on
the horizon, why isn’t the in
dustry the perfect picture of
health and what will it take to
IGVKVVQVTWN[VJTKXG!
Backdrop:
r Overall adoption rate of
ETFs understated%CPCFKCP
ETFs growth understates
overall adoption here. This is
because Canadians can access
75NKUVGF '6(U CU CNVGTPC
tives, or for access to an even
broader array of ETF solu
tions. On the cost advantage
front, it has in several instanc
es been removed, particu
larly when taking additional
elements into account – such
as withholding tax. In terms
of overall adoption in Canada
VJQWIJVJGKUUWGQHFQWDNG
counting (an ETF gets its
exposure through its holding
of one or several others), re
spectively distribution (ETFs
packaged for distributions
through mutual funds) need
to be properly appreciated,
particularly when it comes to
the paramount importance of
access to distribution.
r Well over 100 ETFs with
>$100MM each /CP[
investors and advisors re
main hung up on the liquid
ity of ETFs. To this day, they
wrongly assume that greater
volumes = superior liquidity,
and executions. Due to their
unique creation/redemption
feature, for ETFs, this isn’t
the case, as they can draw
on the often vastly higher
liquidity of their respective
underlying securities. With
now well over 100 ETFs with
more than $100 Million of as
sets each, investors’ comfort
in knowing their relevance
has been established should
contribute to further uptake.
In terms of quality of execu
tion, this is where proper col
laboration between advisors
CPFOCTMGVOCMGTUEQOGUKP
whenever there is a sense it
could be improved upon.
r 2TKEG EQORGVKVKQP – As
previously noted, has ren
dered ETF solutions more
compelling, and is bringing
down portfolio construction
costs. With new services, the
UQECNNGF41$1CFXKUQTUCPF
the promise of ease of imple
mentation they bring, the no
VKQPVJCVЖ‚PCPEKCNCFXKEGCPF
access will be impacted neg
atively IF the shortcomings
of the current compensation
structure are dealt with will
Continued on page 26
ETF Providers
BMO Asset
Management Inc.
100 King Street West, 43rd floor
Toronto, ON M5X 1A1
Contact: Kevin Prins,
Vice-President, BMO ETFs
Email: [email protected]
BMO Exchange Traded Funds (ETFs)
Established in June 2009, BMO Financial
Group’s ETF business is a leading ETF
provider in Canada. Since its inception,
BMO ETFs has grown to over 50 funds, and
includes several industry п¬Ѓrsts. The ETFs
provide Canadian investors with broader
choices and greater access to an innovative
portfolio of investment products. BMO
ETFs have over $16 billion in assets under
management.
Website: bmo.com/etfs
BMO ETFs are managed and administered by BMO
Asset Management Inc., an investment fund manager
and portfolio manager and separate legal entity from
the Bank of Montreal. Commissions, management fees
and expenses all may be associated with investments in
exchange traded funds. Please read the prospectus before
investing. Exchange traded funds are not guaranteed, their
values change frequently and past performance may not
be repeated.
iShares by BlackRock
161 Bay Street, Suite 2500
Toronto, ON M5J 2S1
Phone: 1-866- iShares (1-866-474-2737)
Fax: 1-416-643-4001
Email: [email protected]
iSharesВ® Funds are managed by BlackRock
Asset Management Canada Limited
(BlackRock). BlackRock is a leader in
investment management, risk management
and advisory services for institutional and
retail clients worldwide. At June 30, 2014,
BlackRock’s AUM was US$4.594 trillion.
BlackRock offers products that span the risk
spectrum to meet clients’ needs, including
active, enhanced and index strategies across
markets and asset classes. Products are
offered in a variety of structures including
separate accounts, mutual funds, iSharesВ®
(exchange traded funds), and other pooled
investment vehicles. The iShares business is
the global product leader in exchange traded
funds with over 600 funds globally across
equities, п¬Ѓxed income and commodities,
which trade on 20 exchanges worldwide.
Horizons ETFs
26 Wellington St. East, Suite 920
Toronto Ontario M5E 1S2
Phone: 1-866-641-5739
Horizons ETFs Management (Canada)
Inc., formerly BetaPro Management Inc.,
together with its subsidiaries AlphaPro
Management Inc. and Horizons Investment Management Inc, manage the Horizons Exchange Traded Funds Inc. family
of ETFs. The Horizons ETFs family of
ETFs includes a broadly diversified range
of investment tools with solutions for
investors of all experience levels to meet
their investment objectives in a variety of
market conditions.
www.HorizonsETFs.com
PowerShares Canada
120 Bloor Street East
Toronto, ON M4W 1B7
Phone: 1-800-874-6275
In a market dominated by cap-weighted
index ETFs, PowerShares Canada is leading the intelligent ETF revolutionВ® and
is now the nation’s fourth-largest ETF
provider.
For more information on PowerShares
Canada’s innovative lineup of TSX-listed
ETFs and mutual funds, please visit our
website at www.powershares.ca.
RBC Global Asset
Management
155 Wellington Street West, Suite 2200
Toronto, ON M5V 3K7
Phone: 1-855-722-3837
Email: [email protected]
RBC Global Asset Management is a
provider of global investment
management services and solutions
to individual, high net worth and
institutional investors through ETFs,
mutual funds, pooled funds, hedge funds,
separate accounts and specialty
investment strategies.
Website: rbcgam.com/etfs
Vanguard
155 Wellington St. West, Suite 3720
Toronto, ON M5V 3H1
Phone: 1-888-293-6728
Email: [email protected]
The First Trust family of companies are
a well-respected global enterprise with a
history in the U.S. market since 1991 and
in Canada since 1996. First Trust Advisors
L.P. the portfolio manager for the First
Trust AlphaDEXTM ETFs, has over
US$100 billion in assets under
supervision or management.
What sets Vanguard apart—and lets
Vanguard put investors п¬Ѓrst around the
world—is the ownership structure of The
Vanguard Group, Inc., in the United States.
Rather than being publicly traded or owned
by a small group of individuals, The
Vanguard Group is owned by Vanguard’s
U.S.-domiciled funds and ETFs. Those
funds, in turn, are owned by their investors.
This unique mutual structure aligns our
interests with those of our investors and
drives the culture, philosophy and policies
throughout the Vanguard organization
worldwide.
Investors can’t control the markets, but
they can control the costs of investing.
Providing low-cost investments isn’t a
pricing strategy for us. It’s how we do
business.
Vanguard manages more than $3.16
trillion, including more than $396 billion
in low-cost ETFs. Vanguard Canada has 21
ETFs and $2.29 billion in assets.
Website: www.п¬Ѓrsttrust.ca
Website: www.vanguardcanada.ca
Website: www.iShares.ca
First Trust Portfolios
Canada
330 Bay Street, Suite 1300
Toronto, ON M5H 2S8
Contact: Bobby Eng, CIMA
Senior Vice President, Head of Sales
Phone: 416-865-8079
Email: [email protected]¬Ѓrsttrust.ca
Lawyers
HAHN Investment
Stewards
Blake, Cassels &
Graydon LLP
26 Wellington St. E., Suite 920
Toronto, ON M5E 1S2
Phone: 888-419-6715
Email: [email protected]
199 Bay Street, Suite 4000
Toronto, ON M5L 1A9
Phone: 416-863-4020
Contact: Kevin Rusli
Blakes is one of Canada’s leading law
п¬Ѓrms and among the most experienced
in advising the investment products and
asset management sector on ETFs, mutual
funds, and closed end funds.
Website: www.blakes.com
Affleck Greene
McMurtry LLP
365 Bay Street, Suite 200
Toronto, ON M5H 2V1
Phone: 416-360-2800
Fax: 416-360-5960
Email: [email protected]
Contact: Peter R. Greene
AGM is recognized for its expertise in
complex litigation for all manner of
commercial disputes, including
prosecuting and defending actions and
administrative proceedings relating to
handling of client investment accounts.
Websites:
agmlawyers.com / thelitigator.ca
ETF Portfolio
Management
ArcherETF Portfolio
Management
1267 Cornwall Road, Suite 202
Oakville, ON L6J 7T5
Tollfree: 1-866-469-7990
Fax: 905-337-3552
Email: [email protected]
archerETF provides affluent clients
with income-enhanced, individualized
portfolios that are globally diversified
across countries, sectors, stocks and bonds
to reduce risk and improve returns.
Website: www.archerETF.com
Contact: Wayne Wiggins, CFA
Phone: 905-337-2227 ext.207
Email: [email protected]
Contact: Craig Ellis, CFA
Phone: 905-337-2227 ext.209
Email: craig.ellis @bellvest.ca
Cougar Global
Investments
357 Bay Street, Suite 1001
Toronto, ON M5H 2T7
Contact: Susanne Alexandor,
Head, Wealth Management
Phone: 416-840-8571
Fax: 416-368-7138
Email: [email protected]
DIREC TOR Y
ETF Providers and
Related Professionals
SPONSORED BY
HAHN Investment Stewards was founded
in 2001 with the express purpose of providing institutional quality active global
asset allocation strategies to investors.
Since our inception we have demonstrated an ability to manage our client’s
assets through challenging markets and
economic environments while building a
premier asset management team focused
exclusively on ETF portfolios for all types
of investors.
Website: www.hahninvest.com
ETF Educator
The Smarten Up Institute, in partnership
with the Canadian ETF Association offers
the best and most varied ETF education
programs with real world examples and
relevant case studies.
Courses are offered online and in a classroom
setting for п¬Ѓnancial professionals looking
to understand the different ETF products
and portfolio strategies; and to increase
their knowledge and proficiency with this
popular investment product. All courses
are accredited by IIROC and FSPC for CE
credits.
Contact us at [email protected]
for more information on ETFs or any of
our other education programs.
www.smartenupinstitute.com
Resources
Canadian ETF
Association
36 Toronto Street, Suite #850
Toronto, Ontario
M5C 2R1
Contact: Pat Dunwoody,
Executive Director
Phone: 416-603-7837
Email: [email protected]
CETFA is the п¬Ѓrst ETF national
association and it promotes the
Canadian ETF industry through
education and advocacy.
Website: www.cetfa.ca
ETF Insight
ETFinsight is a Canadian-based
website providing investors and their
advisors with an all encompassing
resource dedicated to Canadian
A global tactical ETF portfolio manager
with a 20 year history of successfully
managing downside market risk.
Exchange Traded Funds (ETFs).
Website: www.cougarglobal.com
www.ETFinsight.ca
YOUR GUIDE TO ETF INVESTING
25
Canadian ETF Industry – Growing, but not Thriving
Continued from page 24
hopefully be cast aside.
The “thriving”stage – It
shouldn’t be that complicat
ed. Here are 3 key ingredi
ents that must be present:
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be levelled. Access is para
mount, and barriers should
be removed
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fees” have got to go. The
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troduce are too great to dis
count, and their contribution
to various barriers too high to
overcome
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it” ;GVOQUVUVKNNGKVJGTFQPoV
care, don’t want to listen, or
can’t be bothered. If you like
the status quo, make sure it
serves you well – a bull mar
ket can cover a multitude of
sins in terms of active man
agement. You are paying,
make certain you like what
you get for your money! A
good Advisor will help you.
ETFs as at August 31,
2014: Relative to 2013, AUM
growth in the ETF space is
Ж‚PCNN[UGGKPIGSWKVKGUEQPVTKD
uting a much greater share
(close to 2/3) to that growth.
Market performance has
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More ought to come from
new issuance, particularly if
the fact that Canadian eq
uities narrowed their prior
underperformance gap in
2014 proves transitory. Ac
cess to International markets
continues to be opened up
with additional ETF launch
es, and higher growth from
that segment should follow.
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tive effect of last year’s initial
FED taper scare has faded.
26
YOUR GUIDE TO ETF INVESTING
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shouldn’t dominate indus
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ETFs provide excellent means
of repositioning, both on
the credit, and interest rates
spectrum, which should sup
port continued asset growth.
As the asset allocation
chart to the right shows,
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ago looked to have been
principally using ETFs to ac
cess Canadian equities. This
picture was dramatically al
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preferred shares principally.
While some of the distortion
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fading, equities themselves
saw growth in the Canadian
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small part by yield consider
ations.
The view from 20,000
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rich in concerns and catalysts
to challenge an aging bull
market, to this point, if any
thing, it is stability that has
prevailed. This isn’t to say
complacency should set in,
and with ETFs, many oppor
tunities present themselves
to pursue new opportunities
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tors’ portfolios when seeking
to better align exposures and
outcomes.
Shake that home bias
– Individual investors natu
rally suffer from a home bias.
Familiarity with domestic
companies breeds comfort
in investing in them. For Ca
nadians, this bias has been
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to domestic banks versus
buying US banks prior to
the Global Financial crisis) …
but at others has been det
rimental – in the aftermath
How are ETF assets broken down across
asset classes as at August 31, 2014?
ETFs by Asset Category: August 2014
1.5% 1.6% 0.3%
1.5%
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7.4%
12.7%
34.4%
40.4%
Bonds + Prefs
Can. Equity
US Equity
Int’l Equity
Emerging
Commodities
Portfolios
Cash
$25,449MM 34.4%
// // // $1,110MM 1.5%
$1,110MM 1.5%
// $222MM 0.3%
(ETFinsight, August 31, 2014)
This is in sharp contrast with the breakdown
of these assets 5 years ago.
ETFs by Asset Category: August 2009
5.3%1.1% 0.4%
1.2%
10.1%
19.0%
5.0%
57.4%
$KNNKQP
Bonds + Prefs
Can. Equity
US Equity
Int’l Equity
Emerging
Commodities
Portfolios
Cash
$5,069MM 19.0%
// $1,334MM 5.0%
$2,695MM 10.1%
$320MM 1.2%
$1,414MM 5.3%
$293MM 1.1%
// (ETFinsight, August 31, 2014)
of the crisis, US markets
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Additionally, not all markets
are created equal in terms of
concentration and thus risks.
Canada stands out as far as
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the US, both sectorally, and
in terms of absolute number
of companies comprising our
market.
Factors-based ETFsQHVGP
referred to as “Smart Beta”
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represent close to Вј of AUM
for equity ETFs. As noted
earlier, investors appetite
for yield has played out in
that factor, with dividend
ETFs experiencing spectacu
lar growth. The size factor
– in Canada – has primarily
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ETFs making a strong con
tribution to it with its broad
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methodology. In the aggre
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for each $1 held in August
$[ EQORCTKUQP 5OCNN
Cap and Equal Weight ETFs
have $23.9 for each $1 of
GZRQUWTG TGNCVKXG VQ Yield $16.6:$1, Value$15:$1,
Quality $11.2:$1 and Growth
$6.9:$1 (for equity ETFs
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Yves Rebetez
Yves Rebetez is the Founder of the website
'6(+PUKIJVYJKEJKUCPCNNGPEQORCUUKPI
resource dedicated to Canadian Exchange
Traded Funds. Prior to launching ETF insight ,
Yves was Vice President, ETFs and Structured
2TQFWEVUCV4$%&QOKPKQP5GEWTKVKGUHQT
years. Yves is a CFA Charterholder.
YYY'6(KPUKIJVEC
Never settle for kind of
a good п¬Ѓt.
Invest for growth and income sustainability, even when rates are moving,
with our cost-effective equity ETF strategies.
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