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Portfolio Strategy

It's time to profit from the loonie's rise Add to ...

Parity is a rarity for the Canadian and U.S. dollars, so be sure you take advantage as an investor.

A Buy American strategy is what's called for here. If you want exposure to the U.S. stock market, buy exchange-traded funds and individual stocks listed on the New York Stock Exchange and Nasdaq.

Most times, buying U.S.-listed stocks puts you at risk of a rising Canadian dollar killing your returns. As our dollar moves higher, it shrinks the value of assets priced in U.S. dollars. It's this phenomenon that explains the proliferation in recent years of ETFs and mutual funds that use hedging to keep currency fluctuations at bay.

Avoid these hedged products today. With our dollar near parity, long-term trends suggest there's more downside for the currency than upside. Just as a rising dollar hurt your returns, so will a falling currency add to your gains.

In this edition of the Portfolio Strategy column, we look at NYSE-listed ETFs that provide broad exposure to the U.S. stock market. Next week, we'll cover U.S. stocks.



Emerson Blackman's U.S. ETF Picks

Mr. Blackman is an adviser with Dundee Securities in Mississauga, Ont., who uses ETFs in client portfolios.



ETF

Ticker

MER %

$ Price

YTD % price chg

Dividend yield %

iShares S&P 500 Index Fund

IVV

0.09

124.23

11.1

2.0

iShares Dow Jones Dividend Select Index Fund

DVY

0.40

49.33

12.3

3.4

PowerShares FTSE RAFI US 1000 Portfolio

PRF

0.39

54.72

15.3

1.5

PowerShares Dividend Achievers Portfolio

PFM

0.50

13.90

11.5

2.2

PowerShares QQQ

QQQQ

0.20

54.14

18.3

0.8

"We're saying to clients that the Canadian dollar is strong right now, so buying U.S. assets is cheaper than it would be if the dollar were weak," Mr. Blackman said. He likes the idea of getting exposure to the U.S. market through dividend-focused ETFs, but he cautions that the dividend tax credit won't apply in non-registered portfolios. Mr. Blackman notes that IVV is a traditional index ETF in that it weights stocks by size, whereas PRF uses a different approach that gives a higher weighting to undervalued stocks. Mr. Blackman said he will combine IVV and PRF in some cases. As for QQQQ, it was wildly popular a decade ago as a way to play the U.S. tech sector. Mr. Blackman said he has a few clients who have asked about it lately. "It's been beaten to death, but when you check out the returns of late they're starting to look OK."



Vikash Jain's U.S. ETF Picks

Mr. Jain is a portfolio manager with archerETF Portfolio Management

ETF

Ticker

MER %

$ Price

YTD % price chg

Dividend yield %

iShares S&P 100 Index Fund

OEF

0.20

55.67

8.2

2.3

iShares S&P 500 Index Fund

IVV

0.09

124.23

11.1

2.0

Vanguard Small-Cap ETF

VB

0.14

71.75

25.1

0.9

iShares Russell 2000 Index Fund

IWM

0.20

76.79

23.0

0.9

You're no doubt familiar with the S&P 500, which is a widely followed benchmark for the U.S. stock market even though it includes only large companies. The S&P 100 index, tracked by OEF, is even more skewed to big companies, and that's why Mr. Jain likes it. "These are companies that derive a large proportion of their earnings internationally," he notes. As such, they'll benefit from the weak U.S, dollar in a couple of ways. One, their goods will be cheaper and thus more competitive in the global marketplace and, second, they will gain when their foreign earnings are converted back into U.S. dollars. For exposure to small-size companies, Mr. Jain likes the low fees and low portfolio turnover of VB. Low portfolio turnover means fewer realized capital gains, which in turn means lower taxable distributions to shareholders.

Adrian Mastracci's U.S. ETF Picks

Mr. Mastracci is a portfolio manager with KCM Wealth Management Inc. in Vancouver

ETF

Ticker

MER %

$ Price

YTD % price chg

Dividend yield %

SPDR S&P 500 ETF

SPY

0.10

123.76

11.1

2.0

Vanguard Total Stock Market ETF

VTI

0.07

63.80

13.2

1.9

iShares S&P 500 Index Fund

IVV

0.09

124.23

11.1

2.0

Mr. Mastracci chose these ETFs on the basis of low fees and good liquidity, which means strong trading volumes that ensure investors get competitive prices when buying and selling. SPY and IVV are competitors in tracking the S&P 500, which is made up of big U.S. companies. VTI provides exposure to 3,000 stocks that represent the entire U.S. market. Its fee of 0.07 per cent is a screaming bargain, but it's not the cheapest U.S. market ETF. The new Schwab U.S. Broad Market ETF (SCHB) has a fee of 0.06 per cent. There's the parity-related argument for buying U.S.-listed ETFs, but Mr. Mastracci believes they're also right for people who are investing for the long term. "If you've got a 10 to 20-year view and you don't need to touch your money, you're just as well to go that route." Note: U.S.-listed ETFs are often cheaper than TSX-listed funds.



Morningstar's U.S. ETF Picks

Chicago-based Morningstar is an independent investment research firm

ETF

Ticker

MER %

$ Price

YTD % price chg

Dividend yield %

Vanguard Total Stock Market ETF

VTI

0.07

63.80

13.2

1.9

iShares S&P 500 Index Fund

IVV

0.09

124.23

11.1

2.0

Vanguard Dividend Appreciation

VIG

0.23

51.96

10.9

2.1

Vanguard Mega Cap 300

MGC

0.13

42.18

9.6

2.1

iShares S&P MidCap 400 Index Fund

IJH

0.20

88.94

22.8

1.1

iShares S&P SmallCap 600 Index Fund

IJR

0.20

67.21

22.8

0.9

These ETFs are on a list of favourite long-term portfolio buillders assembled by Morningstar analysts. The funds on the list are chosen on the basis of fees, index construction, tax efficiency and diversification. Morningstar calls VTI the quintessential core U.S. stock market holding; IVV is said to be the best S&P 500 ETF, VIG is described as holding the highest quality U.S. stock portfolio around, while MGC offers a cheap portfolio of large companies. The iShares mid- and small-cap ETFs have slightly higher fees than their Vanguard counterparts, but offer more precise exposure to mid- and small-size companies. If you're looking for something in health care, a sector where the Canadian market is a desert, then check out this other Morningstar pick, the iShares S&P Global Healthcare Index Fund (IXJ).



The Most Actively Traded U.S. Market ETFs

These ETFs commonly top daily lists of ETFs generating the highest trading volumes.

ETF

Ticker

MER %

$ Price

YTD % price chg

Dividend yield %

SPDR S&P 500 ETF

SPY

0.10

123.76

11.1

2.0

Financial Select Sector SPDR Fund

XLF

0.21

15.62

8.4

0.9

iShares Silver Trust

SLV

0.50

28.03

69.5

n/a

SPDR Gold Shares

GLD

0.40

135.37

26.1

n/a

iShares Russell 2000 Index Fund

IWM

0.20

76.79

23.0

0.9

Most ETF trading in both the Canadian and U.S. markets is carried out by hedge funds, pension funds and other institutional investors. So the ETFs on this list say more about trading opportunities in today's market they they do about sensible long-term investing. One exception is SPY, which is perennially listed among the most actively traded U.S. market ETFs on a daily basis. Another is IWM, a standby for investors who want to buy into riskier but potentially strong-performing small stocks.

Follow on Twitter: @rcarrick

 

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