ETF Investing YOUR GUIDE TO Fall 2014 © Regulatory Landscape ETF Strategies Smart Beta 9J['6(UCTGCP GZEGNNGPVVQQNHQT VCEVKECNN[KPXGUVKPI KPƂZGFKPEQOG Smart Beta ETFs CTGDTKPIKPICEVKXG management to ETF investors. Asia & #UKC2CEKƂE 9JCVEJCPIGUECP DGGZRGEVGFYKVJ VJGKPVTQFWEVKQP QH%4/ Portfolio Management #PGYIGPGTCVKQP QH'6(UVTCVGIKUVUCTG GORNQ[KPIUQRJKUVKECVGF KPXGUVOGPVRTQEGUUGUVQ FGXGNQRNQYGTEQUV'6( RQTVHQNKQU Consider international FKXGTUKƂECVKQPYKVJ ETFs. +PFWUVT[ 0GYU Investing Tips 0GY 2TQFWEVU 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 firm in the world. iShares® 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. © 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 VJG YQTNFoU ƂTUV GZEJCPIG 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 TGRWVCVKQP CU C ƂTUVENCUU OCTMGVRNCEG VQ CEEGUU VJGUGV[RGUQHƂPCPEKCNRTQFWEVU The Canadian ETF market has experienced steady growth so far in 2014, with $5.5 billion in net KPƃQYUCPFTGCEJKPIOQTGVJCPDKNNKQPKPCUUGVU WPFGT OCPCIGOGPV ;GCTVQFCVG FQWDNGFKIKV 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:JCUDGPGƂVGFHTQOVJGEQPVKPWGF 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 ƂPCPEKCN 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 ;QWECPƂPFOQTGKPHQTOCVKQPQP'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 ƂPCPEKCN RTQHGUUKQPCN RTKQT VQ CP[ KPXGUVOGPV FGEKUKQP 6JKU CTVKENG is provided for information purposes only. Neither TMX Group Limited nor CP[QHKVUCHƂNKCVGFEQORCPKGUIWCTCPVGGUVJGEQORNGVGPGUUQHVJGKPHQTOC tion contained in this article and we are not responsible for any errors or omissions in your use of, or reliance on, the information. ©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(UCTGƂPCNN[ 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 $GPGƂVUQH'6(U 11 May You Live in Interesting Times! 12 Chronicling the ETF Story: Entering Act II 13 Clearing the Air: Explosion of ETFs Clouds Investors’ Decisions 17 The advantages of low-volatility global strategies 21 How would Thomas Edison Design an ETF Portfolio? 23 Canadian ETF Industry – Growing, but not Thriving … 24 Directory of ETF Providers and Related Professionals 25 by Kevin Rusli & Jennifer Woo by Drew Millard by Tyler Mordy & Robyn Graham by Karl Cheong by Michael Cooke by Tim, Daniel & James Morton by Yves Rebetez YOUR GUIDE TO ETF INVESTING 3 CONTRIBUTORS Pat Chiefalo, CFA Pat Chiefalo, CFA, Managing Director, BlackRock Canada, is the head of Product for VJGKPFWUVT[NGCFKPIK5JCTGU%CPCFCDWUKPGUU9KVJQXGT[GCTUQHKPFWUVT[ GZRGTKGPEGJGJCUGUVCDNKUJGFJKOUGNHCUQPGQH%CPCFCoURTGGOKPGPVGZRGTVUQP'6(U YYYKUJCTGUEC Mark Raes The knowledge source for everything ETF in Canada © (7)$©LV©WKH©½©UVW©QDWLRQDO©DVVRFLDWLRQ & RI©LWV©NLQG©LQ©WKH©ZRUOG©SURYLGLQJ©IRFXVHG© (7)©HGXFDWLRQ©DQG©DGYRFDF\©IRU© &DQDGLDQ©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. YYYDOQEQOGVHU Atul Tiwari Atul Tiwari is managing director of Vanguard Investments Canada Inc. YYYXCPIWCTFECPCFCEC Kevin Rusli and Jennifer Woo Kevin and Jennifer are lawyers in the Investment Products & Asset Management Group at Blake, Cassels & Graydon LLP. YYYDNCMGUEQO 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. «ZZZ&(7)$FD YYYƂTUVVTWUVEC For more information contact Pat Dunwoody, Executive Director Tyler Mordy and Robyn Graham 6[NGT/QTF[KU2TGUKFGPVCPFEQ%+1CPF4QD[P)TCJCOKU8KEG President, Institutional Services for HAHN Investment Stewards. YYYJCJPKPXGUVEQO «÷««‡««SDWGXQZRRG\#FHWIDFD Michael Cooke +PJKUTQNGCV2QYGT5JCTGU%CPCFC/KEJCGNKPVGITCVGU2QYGT5JCTGUGZEJCPIGVTCFGF products into the Canadian retail and institutional markets to bring the best of Invesco PowerShares’ global expertise to Canadian investment professionals and their clients. «&(7)$«0HPEHUV YYYRQYGTUJCTGUEC 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. YYYVJGOQTVQPITQWREC $IILOLDWH«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. YYY'6(KPUKIJVEC 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 Investing© © 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 financial 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: YJ[DQPF'6(UCTGƂPCNN[VCMKPI centre stage As an analyst, I was a very strong advocate that one of the best ways for in vestors to gain exposure to ƂZGF KPEQOG UGEWTKVKGU KU 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 GXGP VJQWIJ ƂZGF KPEQOG 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 '6(U CTG TGNCVKXGN[ NQYEQUV and are easy to buy and # DQPF '6( V[RKECNN[ VTCEMUCPKPFGZ. While there are a few actively managed ƂZGF KPEQOG '6(U HQT QWT purposes we’ll focus on KPFGZDCUGFRTQFWEVUYJKEJ 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 C URGEKƂE RCTV QH VJG market, such as a sector (e.g. government, corporate investment grade, corpo TCVGPQPKPXGUVOGPVITCFG a region (e.g. Canada, US, International, etc.), or maturity range (e.g. short: typically YKVJ QPGVQƂXG[GCT OCVW TKV[DQPFUOKFYKVJUGXGP VQ[GCT OCVWTKV[ DQPFU NQPI YKVJ [GCTRNWU OC 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 KOOGFKCVG FKXGTUKƂECVKQP 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 HWNN[CRRTGEKCVGVJGDGPGƂVU 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+PƃCVKQP.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 CTGƂPCNN[VCMKPIEGPVTGUVCIG Continued from page 5 Universe Index ETF (XBB), focus further and gain expo UWTG VQ JKIJSWCNKV[ UJQTV 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 UJQTVGTOCVWTKV[ EQTRQTCVG bonds with a fund like the K5JCTGU ;GCT .CFFGTGF 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 GZEJCPIGKUUVKNNCDGPGƂVHQT VJGUG DW[CPFJQNF KPXGU tors. The reason: they pro vide price transparency in an otherwise opaque market. Individual bonds trade QXGTVJGEQWPVGT 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 INQDCNƂPCPEKCNETKUKUQH 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[CƃCV 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 QPGQH%CPCFCoURTGGOKPGPVGZRGTVUQP ETFs. www.ishares.ca iShares®'6(UCTGOCPCIGFD[$NCEM4QEM#UUGV/CPCIGOGPV%CPCFC.KOKVGF%QOOKUUKQPUVTCKNKPIEQOOKUUKQPUOCPCIGOGPV HGGUCPFGZRGPUGUCNNOC[DGCUUQEKCVGFYKVJKPXGUVKPIKPK5JCTGU'6(U2NGCUGTGCFVJGTGNGXCPVRTQURGEVWUDGHQTGKPXGUVKPI6JG HWPFUCTGPQVIWCTCPVGGFVJGKTXCNWGUEJCPIGHTGSWGPVN[CPFRCUVRGTHQTOCPEGOC[PQVDGTGRGCVGF6CZKPXGUVOGPVCPFCNNQVJGT FGEKUKQPUUJQWNFDGOCFGCUCRRTQRTKCVGQPN[YKVJIWKFCPEGHTQOCSWCNKƂGFRTQHGUUKQPCN :$$:53CPF%$1CTGPQVKPCP[YC[URQPUQTGFGPFQTUGFUQNFQTRTQOQVGFD[(65'6/:(65'VJG.QPFQP5VQEM'ZEJCPIG)TQWREQORCPKGU VJGp'ZEJCPIGqQT65:+0% p65:qCPFVQIGVJGTYKVJ(65'6/:(65'CPFVJG'ZEJCPIGVJGp.KEGPUQT2CTVKGUq6JG.KEGPUQT2CTVKGUOCMGPQ YCTTCPV[QTTGRTGUGPVCVKQPYJCVUQGXGTGZRTGUUN[QTKORNKGFN[GKVJGTCUVQVJGTGUWNVUVQDGQDVCKPGFHTQOVJGWUGQHVJG+PFGZCPFQTVJGƂIWTGCV YJKEJVJGUCKF+PFGZUVCPFUCVCP[RCTVKEWNCTVKOGQPCP[RCTVKEWNCTFC[QTQVJGTYKUG6JG+PFGZKUEQORKNGFCPFECNEWNCVGFD[(65'6/:CPFCNN EQR[TKIJVKPVJG+PFGZXCNWGUCPFEQPUVKVWGPVNKUVUXGUVUKP(65'6/:6JG.KEGPUQT2CTVKGUUJCNNPQVDGNKCDNG YJGVJGTKPPGINKIGPEGQTQVJGTYKUGVQ CP[RGTUQPHQTCP[GTTQTKPVJG+PFGZCPFVJG.KEGPUQT2CTVKGUUJCNNPQVDGWPFGTCP[QDNKICVKQPVQCFXKUGCP[RGTUQPQHCP[GTTQTVJGTGKPp6/:qKU CVTCFGOCTMQH65:+PECPFKUWUGFWPFGTNKEGPEGp(65'®qKUCVTCFGOCTMQHVJG(65'+PVGTPCVKQPCN.KOKVGFKP%CPCFCCPFKUWUGFD[(65'6/: WPFGTNKEGPEG K5*#4'5CPF$.#%-41%-CTGTGIKUVGTGFVTCFGOCTMUQH$NCEM4QEM+PEQTKVUUWDUKFKCTKGUKPVJG7PKVGF5VCVGUCPFGNUGYJGTG7UGFYKVJRGTOKUUKQP 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 ©. 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. © 2014 Vanguard Investments Canada Inc. All rights reserved. The Importance of Hedging International Bonds 1È�}…i`}ˆ�}̜Ài`ÕVi«œÀÌvœˆœÛœ>̈ˆÌÞ>�`ˆ�VÀi>Ãi`ˆÛiÀÈwV>̈œ� 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 CYGNNFKXGTUKƂGFRQTVHQNKQ 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 EKGU FGXKCVG UKIPKƂECPVN[ 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 %CPCFKCP ƂZGF KPEQOG 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, NQPIVGTO TGVWTPU QH KPVGT national bonds, when accounting for currency hedging, become more local in character. Some may argue that since currency hedging DTKPIU NQPIVGTO KPVGTPC tional bond returns in line with local bond returns, then why bother with international bond diversi ƂECVKQP! Although this has been true over a very long horizon, over shorter and intermediate horizons, the differences between bond OCTMGVUECPDGUKIPKƂECPV 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 QPFCVCHTQO%KVKITQWR 0QVGUp&QOGUVKEOCTMGVTGVWTPqKUFGƂPGFJGTGCUGCEJEQWPVT[oUTGURGEVKXGEQORQPGPVQHVJG%KVKITQWR9QTNF)QXGTPOGPV$QPF +PFGZYKVJTGVWTPUOGCUWTGFKPVJCVEQWPVT[oUEWTTGPE[p+PVGTPCVKQPCNOCTMGVTGVWTPKPNQECNVGTOU CDUGPVEWTTGPE[OQXGOGPVq KU FGƂPGF CU VJG %KVKITQWR 9QTNF )QXGTPOGPV $QPF +PFGZ GZENWFKPI VJG UVCVGF EQWPVT[ OGCUWTGF KP NQECN VGTOUp4GVWTP 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%#&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 NGCFKPIVQCFKXGTUKƂECVKQP DGPGƂV C UOQQVJGT CPF more preferable return RTQƂNG 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 GZEJCPIGTCVGCVCURGEKƂE date in the future. Because currencies appreciate or depreciate against one another every day, the contract may result in the KPXGUVOGPV DGKPI QXGT QT 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 $GPGƂVUQH'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 DGPGƂVUQHKPXGUVKPIKP'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 VJGƂTO Enhanced disclosure on periodic account statements (at least once every 3 months), such as: VJGOCTMGVXCNWGQHGCEJ security; Annual Performance Reporting/Annual Charges Reporting/ Enhanced Trade %QPƂTOCVKQPU 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[VJGƂTO GIVJG dollar amount in trailing commis UKQPUTGEGKXGFD[VJGƂTO 6TCFGEQPƂTOCVKQPUVQFKUENQUG 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 KPFGZRGTHQTOCPEGFKXGTUKƂ ECVKQPCPFVCZGHƂEKGPE[ 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#UKC2CEKƂEHQTUGTKQWUKPVGTPCVKQPCNFKXGTUKƂECVKQP Drew Millard These are interesting times for Asia, to be sure, with both China and India – the world’s two most popu NQWU EQWPVTKGU CV ETQUU roads. China, on the one hand, is looking to boost liquidity – to wit an injec VKQP QH UQOG $KNNKQP D[ 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 UKIPKƂECPV 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 UGPVKPICUKIPKƂECPVN[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 ƃQYKPI KPVQ +PFKCP UVQEMU [GCTVQFCVG YKVJ OKNNKQPKPVJGƂTUVYGGM of September alone. Against this backdrop of US markets facing the prospect of rising rates in 2015 while Europe remains RNCIWGF D[ FGƃCVKQP TKUM investors could be looking VQYCTF#UKCCPF#UKC2CEKƂE as more serious international FKXGTUKƂECVKQPFGUVKPCVKQPUs 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 2CEKƂE 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 DG COQPIUV DGPGƂEKCTKGU QH 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 pEQPVGPVqKUUKIPKƂECPVN[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 pre-made but instead are customized for each individual. 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 $15,000.2 1 SPIVA Canada Scorecard Year-End 2013, S&P Dow Jones Indices. 2 The graph and amounts displayed are obtained by assuming a gross portfolio return of 6% and then deducting costs of the underlying assets. The grey line deducts the average 2.15% MER of a balanced fund according to Morningstar’s 2013 Global Fund Investor Experience Report. The green line deducts the fees paid in a typical Nest Wealth account. This tool is not intended to predict portfolio earnings or performance, nor is it a guarantee of future performance. Actual investors will experience different results from the results shown. “Nest Wealth” is the trade name of Nest Wealth Asset Management Inc. The products and services advertised are specifically for investors in the Province of Ontario and may not be available to all investors. Products and services are only offered in accordance with applicable laws and regulations. This advertorial is neither an offer to sell nor a solicitation of an offer to sell securities in any jurisdiction. There are lots of ways for a typical investor to invest. Too bad there’s no such thing as a typical investor. Canada’s long-term investors have always been stuck between a rock and a hard place. Personal investment advisors will only work with the richest clients, but if you choose a mutual fund instead, you end up paying the ,-+,'9;(''9-2;,'>38£&(38!32'f9-A'f);9f!££93£<ধ32W -;,'9;'!£;,T-2='9;389)2!££@,!='!$,3-$'W Nest Wealth helps your money grow the way it’s supposed to with three combined advantages that ;8!&-ধ32!£(<2&$316!2-'9,!='2'='8#'(38'3ø'8'&V '8932!£-A'&99';££3$!ধ32W Using the same 1!;,'1!ধ$!£!2&9$-'2ধ)$(3<2&!ধ329!9;,' 91!8;'9;-29ধ;<ধ32!£-2='9;389T'9;'!£;,#<-£&9 @3<!&-='89-)'&638Ĥ3£-3;,!;1!;$,'9@3<86'8932!£ 3#/'$ধ='9!2&8-90;3£'8!2$'W'!$'3(1-2&$31'9 from the security of having your assets held at a large Canadian bank while Nest Wealth constantly 132-;389!2&8'#!£!2$'9@3<8$<9;31-A'&93£<ধ32 so you stay on plan. 8!296!8'2;'638ধ2+!2&3>T -?'& ''9W Instead of +-=-2+<6!6'8$'2;!+'3(@3<8'2ধ8'638Ĥ3£-3;3!2 asset manager every single year, you’ll pay one low, *!;132;,£@(''(38@3<8'9;'!£;,!$$3<2;T231!ħ'8 >,!;9-A'-;-9W,-99-2+£'&-ø'8'2$'$!2!13<2;;3 ,<2&8'&93(;,3<9!2&93(&3££!89-2!&&-ধ32!£>'!£;, !$$<1<£!;'&3='8@3<8-2='9ধ2+£-('W'!£93683=-&' @3<>-;,$£'!8T!$$<8!;'32£-2'8'638ধ2+>,'2'='8@3< want it so you always understand exactly how your investments are performing. ;Z9ধ1'(38!638Ĥ3£-3;,!;);9W -9-;<9!;2'9;>'!£;,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!&£@-='89-)'&3£&-2+9W With Nest Wealth, you’re never at the mercy of a fund manager’s stock #';938#'9;+<'99'9W'9;'!£;,#<-£&9@3<8638Ĥ3£-3 using high-quality, low-cost exchange traded funds. 3<Z££#'&-='89-)'&>-;,-2!2&!132+9;1<£ধ6£' asset classes. Research has demonstrated this type 3(638Ĥ3£-3$329;8<$ধ32$!2#3;,8'&<$'@3<8 638Ĥ3£-3Z9=3£!ধ£-;@!2&-1683='8-90f!&/<9;'&8';<829W nestwealth.com ³1HVW:HDOWK´LVWKHWUDGHQDPHRI1HVW:HDOWK$VVHW0DQDJHPHQW,QF7KHSURGXFWVDQGVHUYLFHVDGYHUWLVHGDUHVSHFL¿FDOO\IRULQYHVWRUVLQWKH3URYLQFHRI2QWDULRDQGPD\QRWEH DYDLODEOHWRDOOLQYHVWRUV3URGXFWVDQGVHUYLFHVDUHRQO\RIIHUHGLQDFFRUGDQFHZLWKDSSOLFDEOHODZVDQGUHJXODWLRQV7KLVDGYHUWLVHPHQWLVQHLWKHUDQRIIHUWRVHOOQRUDVROLFLWDWLRQ RIDQRIIHUWRVHOOVHFXULWLHVLQDQ\MXULVGLFWLRQ Income investing. Simplified. ETP:TSXFirst Trust Global Risk Managed Income Index ETF “™—”‰šˆŽ“ŒETP:TSX. “Ž“ˆ”’Š�”‘š™Ž”“ ‰Š�ŽŒ“Š‰‹”—†‘‘’†—Š™�ǀ Pursuing Income with disciplined risk management ŠFirst Trust Global Risk Managed Income Index ETFˆ†“Ž“›Š�™Ž“ȜȤ�”š—ˆŠ� ”‹Ž“ˆ”’Š™†™’†žŽ“ˆ‘š‰Šƿ Ǧ Single ticket solution™”‡Š�™ǂŽ“ǂˆ‘†�� Ž“ˆ”’Š”•™Ž”“�‘Ž�™Š‰”“™Š Ǧ†“†‰Ž†“ŽŠ‰“ˆ”’ŠǦ†“†‰Ž†“—Š‹Š——Š‰� Ǧ†“†‰Ž†“”“›Š—™Ž‡‘Š”“‰�Ǧ”“‰� ǦŽŒŽŠ‘‰”“‰�Ǧ“™Š—“†™Ž”“†‘� ǦŽ›Ž‰Š“‰�Ǧ“™Š—“†™Ž”“†‘Ž›Ž‰Š“‰� Ǧ ˆˆŠ��™”† proprietary tactical asset allocation model‰Š›Š‘”•Š‰‡ž® Ǧ†“”†“�Ǧ†“‰ more. Ǧ ”œ’†“†ŒŠ’Š“™‹ŠŠ”‹țǀȟȡʏǻ Ǧ š——Š“™distribution yield over 4% Ž“‰”š™œžETPŽ�™Š”“Šǂ™ŽˆŠ™Ž“ˆ”’Š ‹”—ž”š—•”—™‹”‘Ž”ǀ ”™”www.firsttrust.ca ”—ˆ†‘‘1-877-622-5552ǀ First Trust Portfolios Canada ® 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. NASDAQ®, OMX®, NASDAQ OMX®, 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 use by FT Portfolios Canada Co. The Units of ETP have not been passed on by the Corporations as to their legality or suitability. The Units of ETP are not issued, endorsed, 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 ƂPFKPIKVKPETGCUKPIN[FKHƂEWNV to cut through the clutter of CP GXGTITQYKPI WPKXGTUG of ETFs for their clients. In particular, these choices are clouded by an emerg KPI IGPTG QH PQPVTCFKVKQP 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 YKVJOQTGQHVJGUGPQPDGVC 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 VJG CFFKVKQPCN DGPGƂVU RTQ vided by ETFs such as low EQUVU GZEJCPIGVTCFGF NK quidity, and transparency, the ETF industry has evolved to KPENWFGCNRJCRWTUWKPIKPFGZ 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 WUGF VQ GXCNWCVG VJG TKUM TGYCTF RTQƂNG 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 WPKSWG TKUMTGYCTF EJCTCE teristics. Traditional beta strategies mitigate a degree of individual security risk VJTQWIJ FKXGTUKƂECVKQP DWV because they are market ECRKVCNK\CVKQPYGKIJVGF 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 UKIPKƂECPV YGKIJVKPI CPF create unwanted risk. The PQPVTCFKVKQPCN DGVC CPF CN 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 DGVYGGP VJG PQPVTCFKVKQPCN 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 VJCV XCT[ UNKIJVN[ HTQO ECR 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: YJCV CTG HWPFCOGPVCNU! &Q book value, total sales, and total dividends really provide informational value of the future stock price of a com RCP[! 1T KU KV LWUV CPQVJGT 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. 6JG QVJGT UWDECVGIQT[ of the ETF market that focus GU QP PQPVTCFKVKQPCN CNRJC 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 VQ UGGM TKUMCFLWUVGF GZEGUU 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 GTU UWEJ CU RTKEGVQDQQM 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 VQ ECUJ ƃQY 6JG HQNNQY 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 ƃQY XCNWCVKQP JKUVQTKECNN[ outperformed those with a YQTUGRTKEGVQECUJƃQYXCNW ation. The fact is, fundamen tal valuation matters. While many single valua tion factors can be useful in stock selection, we believe OWNVKHCEVQT OQFGNU CTG C 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 NQYU C PQPVTCFKVKQPCN CNRJC approach – the (KTUV 6TWUV #NRJC&': 75 &KXKFGPF 2NWU '6( 65:(7& This fund is based on First Trust’s proprietary AlphaDEX™ 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 UKIPKƂECPEG 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, TCVJGTVJCPƂTOUK\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 QPG QH VJG HQWT UWDITQWRU can go a long way toward ƂPFKPIVJGTKIJV'6(VQJGNR ENKGPVU TGCEJ VJGKT ƂPCPEKCN 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. YYYƂTUVVTWUVEC (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[RGTUQP5RGEKƂEKPXGUVOGPVUCPFQTKPXGUVOGPVUVTCVGIKGUUJQWNFDGGXCNWCVGFKPVJGEQPVGZVQH 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 RQD RQC RQE RBO RID RUD.u RQI RID.u RUD RCD RQH RQD RQG RQE RQC RQF RBO RUD RCD RBC RID.u RUD.u RID Exchange Traded Funds DON’T JUST FOLLOW THE LEADER. Invest with one. RBC Global Asset Management is Canada’s leading provider of income solutions. And RBC ETFs offer another way to tap into that income investment expertise. Our lineup includes the innovative RBC Target Maturity Corporate Bond ETFs, a 1–5 year bond ladder and the new rules-based RBC Quant Dividend Leaders ETFs, featuring Canada’s only international dividend ETF solution. Choose ETFs backed by the strength and experience of an investment leader. Visit rbcgam.com/etfs, or contact us at 1-888-770-2586 or [email protected]. Partner with Experience.™ RBC Funds | PH&N Funds | BlueBay Funds | RBC ETFs 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. ® / TM Trademark(s) of Royal Bank of Canada. Used under licence. © 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. Invesco® and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence. PowerShares®, Leading the Intelligent ETF Revolution® and all associated trademarks are trademarks of Invesco PowerShares Capital Management LLC (Invesco PowerShares), used under licence. © Invesco Canada Ltd., 2014 The advantages of low-volatility global strategies to an index and reduce port folio risk in a liquid, transpar GPVCPFNQYEQUVYC[ 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 VKXG YGKIJVKPI CPF HCEVQT driven strategies since the U CNDGKV PQV NCDGNNGF “smart beta.” Smart beta seeks to offer investors an alternative to VJGDNCEMCPFYJKVGYQTNFQH active versus passive port folio construction. Unlike actively managed approaches, smart beta ETF strategies provide investors passive TWNGUDCUGF GZRQUWTG YJKNG retaining the possibility of generating excess returns YJGP EQORCTGF VQ C ECR weighted benchmark index. #PF WPNKMG VTCFKVKQPCN ECR weighted indices, smart beta may provide better TKUMCFLWUVGF TGVWTPU D[ CN lowing investors to capture risk premiums from various factors. Through smart beta ETF strategies, investors have the opportunity to retain broad market exposure, potentially CEJKGXG NQPIVGTO QWVRGT formance when compared The low-volatility anomaly One increasingly pop ular form of smart beta KU NQYXQNCVKNKV[ KPXGUVKPI 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 NQYXQNCVKNKV[ KPXGUVKPI UKPEG 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 5GRVGODGT 2QYGT5JCTGU Canada enhanced its com mitment to smart beta in vesting with the launch of VYQPGYINQDCNNQYXQNCVKNKV[ 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 INQDCN GSWKVKGU NQYXQNCVKNKV[ 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. r %CRKVCN CRRTGEKCVKQP potential*KUVQTKECNN[NQY volatility stocks tend to out perform their market bench marks over the long term. Michael Cooke Head of Distribution, PowerShares Canada YYYRQYGTUJCTGUEC 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[VQDGPGƂVFWTKPIOCTMGVUKPETGCUGU †%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(YKNNEQPVKPWGVQRTQXKFGGZRQUWTGVQGCEJQHVJGUGEWTKVKGUKPVJGKPFGZTGICTFNGUUQHYJGVJGTVJGƂPCPEKCNEQPFKVKQPQHQPGQTOQTGKUUWGTUQHUGEWTKVKGUKPVJGKPFGZFGVGTKQTCVGU+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..%KVUCHƂNKCVGU.56#QT65:CPFPQPGQHUWEJRCTVKGUOCMGCP[TGRTGUGPVCVKQPTGICTFKPI the advisability of investing in such product. This piece was produced by Invesco Canada Ltd. Invesco® and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence. PowerShares®, Leading the Intelligent ETF Revolution® and all associated trademarks are trademarks of Invesco PowerShares Capital Management LLC (Invesco PowerShares), used under licence. © Invesco Canada Ltd., 2014 YOUR GUIDE TO ETF INVESTING 21 May You Live in Interesting Times! Continued from page 12 FGGO UWHƂEKGPV KV FQGUPoV give equal consideration to each of its country constitu ents by any stretch (China $TC\KN+PFKC CPF4WUUKC &GXGNQRGF#UKC2CEKƂE A third alternative is the 8CPIWCTF (65' &GXGNQRGF #UKC2CEKƂE+PFGZ'6( 8# launched this past June. This ETF tracks the FTSE &GXGNQRGF #UKC 2CEKƂE +P dex, comprised of around 54% exposure to Japan, 24% to Korea, Hong Kong, and Singapore collectively, and ƂPCNN[ #WUVTCNKC CV CTQWPF 20%. With VA providing Developed Asian exposure, an investor could add either or both a China or India spe EKƂE'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 speEKƂE #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 UKIPKƂECPV [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[URGEKƂE '6(U ECP easily be combined with an ETF providing Asian ex posure in a more broadly FKXGTUKƂGF 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[URGEKƂE 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[ KPƃWGPVKCN economies continue to grow KP UKIPKƂECPEG CPF KPVGTEQP nectedness with the rest of the world, so too should the companies comprising their equity markets. And if KVKUOQTGURGEKƂEHCEVQTU[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#UKC2CEKƂE'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#UKC2CEKƂE+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 YCUVCUMGFVQƂPFCYC[ “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 KFGPVKƂGF 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 GHƂEKGPV 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 KFGPVKƂGF 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 EQWNFKPƃWGPEGVJG 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 EQPƃWGPEG 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 ƂPCPEKCNUGTXKEGUUGEVQT r CPF ƂPCNN[ 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 VKQPVJCVƂPCPEKCNCFXKEGCPF 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 firsts. 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] iShares® 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, iShares® (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, fixed 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 revolution® 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 first 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.firsttrust.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: bobbyeng@firsttrust.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 firms 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 financial 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 first 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: r &KUVTKDWVKQP 6JG FKU VTKDWVKQP RNC[KPI ƂGNF OWUV be levelled. Access is para mount, and barriers should be removed r +PEGPVKXGU #U TKIJVN[ PQVGF D[ QVJGTU pVTCKNGT fees” have got to go. The EQPƃKEVU QH KPVGTGUV VJG[ KP troduce are too great to dis count, and their contribution to various barriers too high to overcome r +PXGUVQTU JCXG VQ pIGV 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 ƂPCNN[UGGKPIGSWKVKGUEQPVTKD uting a much greater share (close to 2/3) to that growth. Market performance has CNUQEQPVTKDWVGFUKIPKƂECPVN[ 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. +P ƂZGF KPEQOG VJG PGIC tive effect of last year’s initial FED taper scare has faded. 26 YOUR GUIDE TO ETF INVESTING (KZGF KPEQOG '6(U KPƃQYU shouldn’t dominate indus VT[ ƃQYU IQKPI HQTYCTF DWV 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, OCTMGVRCTVKEKRCPVUƂXG[GCTU ago looked to have been principally using ETFs to ac cess Canadian equities. This picture was dramatically al VGTGF D[ VJG ƂPCPEKCN ETKUKU QH VKNVKPI ƃQYU VQYCTFU ƂZGF KPEQOG CPF preferred shares principally. While some of the distortion GHHGEV CRRGCTU VQ ƂPCNN[ DG fading, equities themselves saw growth in the Canadian '6( URCEG KPƃWGPEGF KP PQ small part by yield consider ations. The view from 20,000 feet &GURKVGRTQXKPI 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 QTCEEGUUGUQTTGCNKIPKPXGU 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 DGPGƂEKCN CV VKOGU UVKEMKPI 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% $KNNKQP 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 UKIPKƂECPVN[ QWVRGTHQTOGF Additionally, not all markets are created equal in terms of concentration and thus risks. Canada stands out as far as TGNCVKXG FKXGTUKƂECVKQP XGTUWU the US, both sectorally, and in terms of absolute number of companies comprising our market. Factors-based ETFsQHVGP referred to as “Smart Beta” EQPVKPWG VQ ICTPGT UKI PKƂECPV CVVGPVKQP 6JG[ PQY represent close to ¼ 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 DGGP KPƃWGPEGF D[ $/1 ETFs making a strong con tribution to it with its broad WUG QH VJG 'SWCN9GKIJV methodology. In the aggre ICVG (CEVQTDCUGF GSWKV[ '6(UPQYJCXGQH#UUGVU 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:$1 (for equity ETFs QXGTCNNYGUKVCV EWTTGPVN[TGNCVKXGVQ Yves Rebetez Yves Rebetez is the Founder of the website '6(+PUKIJVYJKEJKUCPCNNGPEQORCUUKPI resource dedicated to Canadian Exchange Traded Funds. Prior to launching ETF insight , Yves was Vice President, ETFs and Structured 2TQFWEVUCV4$%&QOKPKQP5GEWTKVKGUHQT years. Yves is a CFA Charterholder. YYY'6(KPUKIJVEC Never settle for kind of a good fit. Invest for growth and income sustainability, even when rates are moving, with our cost-effective equity ETF strategies. 4 BMO Canadian Dividend ETF (ZDV) 4 BMO MSCI Europe High Quality Hedged to CAD Index ETF (ZEQ) 4 BMO US High Dividend Covered Call ETF (ZWH) Find your fit. Visit bmo.com/EquityIncome 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. BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp. and BMO’s specialized investment management firms. The funds or securities referred to herein are not sponsored, endorsed or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities or any index on which such funds or securities are based. The prospectus contains a more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related funds. ®”BMO (M-bar roundel symbol)” is a registered trade-mark of Bank of Montreal, used under licence.
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