Tag: equity

Categories
Investing

Questrade Mutual Fund Fee Rebate And Free Transfer Offer

Questrade discount brokerage has just come out with a great way for retail mutual  fund owners to save on high management fees by offering to rebate up to 1% of those  fees.

What’s the deal with the Questrade mutual fund rebate?

Questrade will rebate up to 1% of the management fee for any mutual funds  held at Questrade.  This amount has to exceed $29.95 per month for the  investor to get any rebate.  This means that you need to have more than $36,000 in mutual funds before the rebate kicks in.

How is this possible?

When an investor buys a mutual fund from an advisor then the advisor is paid  a “trailer” each year which is based on the amount of the investment.   Typical trailers for equity mutual funds are 1%.  Bond and money market funds  will be lower.  The amount Questrade will rebate will be equal to the trailer  paid on the funds you owned.

The problem is for a do-it-yourself investor who wants to buy retail mutual  funds is that they can only buy them through an advisor or a discount  brokerage and they are charged for the trailer even if they don’t have an  advisor.  With this new program the investor will be able to save most of the trailer amount.

How much will it cost to transfer my mutual funds to Questrade?

If you transfer before March 2, 2009 from a different financial institution and transfer at least $25,000 then it will be  free of charge.

How much are mutual fund trading fees?

Questrade charges $9.95 per mutual fund trade.

I don’t have $36,000 – is it still worthwhile?

Depends on the situation – if you are close enough to $36k (ie $30k or more)  and will be buying more mutual funds then it might be worth doing even though  you won’t get the rebate for a while.  At the very least it won’t cost you  anything.

Another situation might be if you have some back-end funds that you don’t want to pay commissions on.  If you are planning to just buy low cost ETFs then you might consider moving the mutual funds to the same institution.

Where do I sign up?

Click on the banner below or on any of the links you see in the article.

I demand more information!

Check out my Questrade discount brokerage review and my Questrade referral promotion articles for more information.

Is it really cheaper to pay $10 per trade rather than get my advisor to do it for me?

Let’s look at an example – say you have $100k in mutual funds with an average mer of 2.5% and the only service you get from your “advisor” is he completes 12 trades per year for you “free of charge”.

With the advisor you will pay a total of $2,500 per year for the fund management, the advisor’s services and the 12 trades.

With Questrade you will get a rebate of $1,000 (approx) and you will pay $120 for the trading fees for a grand total of $1620 for the fund management and the 12 trades.

$2,500 (current fees) – $1620 (Questrade fees) = a savings of $880 per year.

Personally, I’d rather invest in passive index funds and ETFs which are way cheaper (also available at Questrade) but for anyone who wants to own retail mutual funds – this is a great deal.

Categories
Announcements

Are You Changing Your Asset Allocation? Contest for $$!

Glenn Cooke, President of InsureCan, is sponsoring a contest on this blog (and a few others listed below) where you can win one of two $50 Chapters gift cards. Here’s how to enter the contest:

In the comments – please answer the following question

“Have you changed (or are you going to change) your asset allocation as a result of the awful equity returns in the past year?   Please indicate any change ie “used to be 100% equities – now I’m zero percent equities”.

Answering this question will give you 1 chance at a gift certificate.  Subscribing to the blog if you don’t already do so, might also help your odds (but not likely) 🙂

Contest will be closed at 8 pm on Thursday, January 22.

Contest is open to Canadian residents only.

Check out similar contests at the Canadian Capitalist and the Financial Blogger.

Categories
Investing

Comparing Market Cap ETF vs Dividend ETF – How Much Duplication?

I had a reader question the other day where they mentioned buying both XIU (iShares Cdn Large Cap 60 ETF) and XDV (iShares Cdn Dividend Index Fund ETF) for their portfolio.  I had responded that although I wasn’t sure, I suspected that might be a lot of duplication in the two funds since XIU has all the biggest public Canadian companies – a lot of which are good dividend stocks and would probably also be in XDV.

Duplicate holdings is a common problem in mutual funds – especially in a market like Canada where there are not a lot of different companies to buy for the larger funds.

I decided to do a bit research and find out if there was as much duplication as I suspected in the two funds.  The question I want to answer is if it is worthwhile to own both funds for diversification purposes or will just one do.

Number of companies in common

The first and simplest criteria was how many companies are in both ETFs.  This isn’t necessarily all that meaningful since one ETF might have a lot of XYZ company whereas the other might only have a small holding.

XIU 60 has 61 holdings (can’t they count?), XDV dividend has 31 holdings, there are 15 companies that they have in common.  This seems like quite a bit since it means that half of the companies in the dividend ETF are also in the XIU ETF.

Amount of market cap in common

What I did here is take the companies that are in both ETFs and compare the percentage holdings and add up the smaller number.  For example if CIBC was 9% of the dividend fund and 5% of the XIU then I counted that as 5% in common (by market cap).   This totalled up to 31%.  This was a smaller number than I expected which means that a good portion of the dividend ETF is not represented in the XIU 60.

Measuring correlation between the ETFs

The next test I did, which should have been the first and only test since it is the only one that has any real meaning is to measure the amount of correlation between the two ETFs.   Correlation is a measure of the relationship between the prices of the two ETFs.

A measure of 1 means that they always move in price exactly the same way, a measure of 0 means they are completely uncorrelated and a measure of -1 means they always move in price in exactly the opposite direction.  One of the main concepts behind building a portfolio is to try to find different assets that are not correlated with each other.

To accomplish this I needed some historical price data which I managed to find at Yahoo Finance.  To figure out the correlation I used the Excel correl function (is there anything Excel can’t do?).  XDV dividend has only been around since the end of 2005 so the data is only for a bit less than 4 years.  Not being a stats guy I’m not sure if this is a long enough period to be meaningful but it’s all I’ve got.  Regardless, the correlation “r” number was 0.72 which implies some benefit for diversification but not a whole lot.

Performance

The last thing I looked at was performance.  Since the time period is fairly short I’m not looking to see which ETF did better but rather to look at the difference in performance.  Ishares.ca website has a handy calculator just for this purpose.  I choose the last 3 years since the next category was 5 years which wouldn’t work for XDV dividend.

3 year total return

  • XIU Large Cap 60 = -12.98%
  • XDV Dividend = -18.19%

From what I’ve read the XDV dividend has a higher ratio of financials than the XIU 60 which is probably one of the reasons for the big performance difference.  The XDV dividend has a higher mer (0.5%) than XIU 60 (0.17%) which would account for about 1% of the 5% difference.

Conclusion

I looked at 4 categories to see how different XIU and XDV are:

  • Similar companies – half of the XDV dividend companies are in XIU.
  • Similar companies by stock market capitalization – 31% of the companies market cap are in both ETFs.
  • Correlation – over the last 4 years the correlation is 0.72.
  • Performance – the two ETFs were about 5% off in terms of total performance over 3 years.

What does it all mean?   Hard to say – there are much better ways to diversify your portfolio – REITs, small cap, foreign holdings would likely all have correlations that are less than 0.72.  I’m also not crazy about the higher mer of the dividend ETF.

I think if you want to have most of your equity in Canada then buying partially overlapping ETFs might be the only way to diversify without getting into individual stocks.  Personally I like to be diversified over the whole world so for me, the XIU Large Cap 60 by itself is good enough – in my case adding XDV would not increase my diversification enough to make the higher mer worthwhile.  XIC (TSX 300) is also a good choice.

Categories
Investing

The Death Of Index Investing And Other Silly Stats

I recently came across yet another post on investing which goes something along the lines of “If you invested 10 years ago in the Dow then you would have earned exactly nothing in that time”.  I hate to pick on any one blogger since I’ve read these articles all across the blogosphere but this one is the latest and he also had the temerity to tie in poor index performance with the death of index investing.  Of course all the stock pickers out there ALWAYS beat the index so poor market are no concern to them…!  I want to emphasise that Jacob at Extreme Early Retirement does a great job with his blog and I don’t want to sound like I don’t like the blog – just that one post!  🙂

What about the dividends?

Usually these posts look at the point value of an index at a previous time, say 10 years ago and compare it to the present index point value.  This is incorrect because they are missing dividends.  Published index returns always included reinvested dividends and any type of analysis on index performance should always include the same.  Admittedly, if you are looking at a 10 year period where the index point value hasn’t changed, the addition of dividends isn’t going to change the argument very much but it should be there.

Selectivity of stats

Why is it that all the articles always pick the worst peak to trough period to illustrate their rather suspect point that maybe equity investing or even index investing is evil?  Have you ever heard of such a person who invests all their money on the same day the markets peak and then doesn’t invest any more?  Doesn’t seem all that likely to me.  Most people invest their money over time because that’s how they earn it, then save it, then invest it.  Picking one particular time period to prove or disprove a theory is like measuring your gas mileage one mile at a time and then using the best or worst mile to prove your point.

Investment performance

And what about active stock pickers – did they all do better than the indexers over that period?  Or did some of them do better, some of them the same, and some of them didn’t do as well?  I’ve asked many bloggers and non-bloggers who claim they can beat the index by picking their own stocks to prove it – measure their performance and let me know if they did better than the market or not.  You know what?  Not one of them has ever shown that they can beat the market – oddly enough, most of them don’t even bother to measure their performance.  How can someone who doesn’t even know how their own investment method measures up criticize someone else’s?

What is average?

One of the criticisms of indexing is that you will only achieve “average” results – again – will I do better by randomly picking stocks or paying someone lots of money to pick them for me?  One thing about indexing is that you will get the index return minus a very small fee – you will never beat the index but more importantly you won’t underperform the index (except for the small fee) either.  Active pickers can certainly outperform the market but they can also underperform as well – sometimes by a huge margin.  I like making money – if I thought it was possible for me to beat the market then you can rest assured that I would give it my best effort.

Dividends, smividends

Ok – one more rant… I like getting dividends just as much as the next investor but I really think there is an over-weighting on the importance of dividends in the blogosphere.  Yes, the idea of living off your dividends is nice but investment performance measures total return which is capital gains plus any reinvested dividends and interest payments.  That’s it.  I don’t care in what form the company pays out in the end – if the total return is higher, then its a better investment.  If that includes dividends, fine – if not, that’s fine too.

Categories
Investing

Will A Big Canadian Bank Fail?

I have to admit that while I haven’t been bothered by the falling markets, today I found it a bit tough for some reason.  It seems like every day the market falls and if it’s only 1 or 2% then that is ok.  Well today the Canadian market fell 9%.  9%!!! That would be a bad year by itself and it was only one crappy trading day of many crappy trading days.  The worst part was the banks – they have been pummelled this year and today the big 5 went down by an average of almost 13%.  13%!!! Very depressing I thinks.

Now, I haven’t gone all anti-Bernstein or anything – I have no plans to sell any equities under any circumstance.  What my concern is now is will one of the big Canadian banks fail? Here are some things I’m worried about:

Canadian banks own bad US mortgages as well

Our banking system was recently named as the best in the world.  Our lending standards were much stricter than the US banks so everything should be ok?  The only problem is that from what I understand, the US banks got in trouble buying investments containing bad mortgages – it wasn’t necessarily all just from writing bad mortgages themselves.

The problem is that the Canadian banks also bought these same investments and have been slowly taking related writedowns all the while not talking about what their real exposure is.  These investments were enough to bring down some big US banks so why can’t they bring down a Canadian bank?  Yes, the Canadian banks have good business models so did Washington Mutual and Wachovia.  They had customers, lots of assets – a normal bank in other words – but they lost it all on the investment side.

A bad dividend trend

The thing that concerns me is that the US banks I mentioned all paid a dividend at one time.  When the stock went down the dividend yield went up…and up and up and up.  First there was a dividend cut and then the bank went out of business.

The dividend yields for the Canadian banks in order are:

  • BMO 8.4%
  • CIBC 7.3%
  • BNS 5.9%
  • Royal 5.6%
  • TD 5.4%

The ones that really stand out for me are BMO and CIBC – 7 or 8% dividends that don’t pay return of capital are too high.  Either they are mispriced or investors are expecting a dividend cut.  Now we haven’t seen the double digit dividend yields enjoyed by the US banks before they went belly up but the yield on BMO and CIBC has roughly doubled over the last year or so.

Summary

I really hope that none of the banks go under but I am concerned about it.  Can anyone please tell me that I’m wrong??

Categories
RESP

RESP – Asset Allocations

This post is part of the Big RESP Series. See the entire series here.

See the previous post on resp withdrawals here.

When setting up a resp account it’s important to determine and monitor the asset allocation of the account. Typically the asset allocation is determined by the risk profile of the investor and the amount of time remaining until the money is required. Equities are considered risky assets but over a longer term they are fairly reliable. If you are making an investment and you need the money in two years then equities are not advisable because there is too much risk that their value will go down over those two years. Short term bonds or a high interest savings account is a better investment for money that is required in the short term. The idea is not get superior returns but to ensure that the money is there when needed.

So if equities are a good investment over the long term but not the short term, the question has to be asked – how long is the “long” term and how short is the “short” term. I would say that short term is anything less than five years and the long term is 15 years or more. Please note that this is strictly my opinion so don’t write it in stone!

Unlike retirement planning where you don’t know how long the portfolio will be in use for, RESP planning is a bit easier since you can make a pretty good estimate of the start date of withdrawals and the end date of withdrawals.

For this example I’ll assume that the student goes to school starting the year they turn 17 and finish up four years later.
I’ll go through different stages of the resp in terms of how old the student is:

Age range

Equity %

Bonds %

0-5

100

0

6-11

60

40

12-17

40

60

In school

0

100

Once they are starting school all the money will be withdrawn within five years so it should be in very safe securities such as high interest savings accounts, short term bonds or money market funds.

If you are a more conservative investor then you might want to do the following:

Age range

Equity %

Bonds %

0-5

60

40

6-11

50

50

12-17

25

75

In school

0

100

I would invest equally in Canadian, US and EAFE for the equity portion and in short term bonds ETF or a bond index fund for the bond portion. You can add other asset classes to the mix as well. This example is intended to show a simple asset allocation.

I’ve indicated the allocations at five or six year terms. If you are really keen and plan to rebalance every year then you can also adjust the allocation every year.

Obviously none of the above allocations are perfect for every investor so try to keep in mind the idea that money which is required in the short term should be invested in safe investments and try to adapt the above suggestions to your situation.

See the next post on RESP Individual and Family Plans.