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People walk by a sign displaying TSX information in Toronto, Sept. 15, 2008. (MARK BLINCH/REUTERS)
People walk by a sign displaying TSX information in Toronto, Sept. 15, 2008. (MARK BLINCH/REUTERS)

STRATEGY LAB

My wish list for new indexing products Add to ...

Andrew Hallam is the index investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

I recently received an e-mail from Magnus Boecker, CEO of the Singapore Stock Exchange. The former president of the Nasdaq OMX Group had seen me speaking on CNBC Asia, and wondered whether I was interested in getting together for coffee.

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I accepted the invitation and settled into one of his poolside lounge chairs a week later with a huge cup of tea. He explained how he amalgamated a group of Scandinavian stock exchanges and became president of Nasdaq OMX, the world’s largest exchange company, before moving to Singapore. Then he asked a surprising question, assuring me it wasn’t hypothetical: “If we could offer anything on the Singapore stock market, what kinds of products would you want?”

The trouble is, while he was talking about Singapore’s exchange, I started thinking about a Canadian indexing wish list. I may be living in Asia right now, but I’m still a Canadian at heart.

While the grand poobahs of Canada’s indexing community – Vanguard Canada, iShares Canada and Horizon – have yet to invite me over for tea and biscuits, I know what I would ask for if they did.

Start with Vanguard Canada: I’m generally happy with its lineup of ETFs, but if the company offered indexed mutual funds (as it does in the United States) index investing would become a lot easier, especially for people who like to make regular, small deposits.

The problem with ETFs is that you need to open a brokerage account, look up the price of the ETF, figure out how many shares you can buy with the money you have on hand, submit a purchase order – and pay commission fees. It can be a chore, especially if you’re not investing a lot of money each time.

With indexed mutual funds, the process is far simpler: You simply decide how much money to put in the fund and do the transfer. Most fund companies allow you to set up pre-determined purchases, so that you can whisk a given number of dollars from each paycheque into your chosen fund.

This means people can’t forget to invest. They can schedule regular biweekly or monthly purchases, invest automatically without paying commissions, and invest dividends for free.

Currently, the closest we have to such products are TD bank’s e-Series index funds. But setting up an account to purchase e-Series funds isn’t easy.

In contrast, opening a U.S. Vanguard account is a breeze for Americans. I’ve helped numerous friends do it and the entire process requires no more than five minutes to open an account, enter banking information and place the first order. It would be great if Canadians could do the same.

Next on my wish list would be a couple of new ETFs from Horizon: a total U.S. stock market index and a total international index.

Horizon’s ETFs are based on swaps, a type of financial derivative. Investors don’t own stocks or the index directly, but still earn the total return of the index, backed (in this case) by National Bank of Canada. Dividends get reinvested automatically, increasing the share price of the ETF.

What’s the advantage of this approach? Realized profits (including the dividends) are treated as capital gains when the investor sells. Because dividends are often taxed at a higher rate than capital gains, some people may find these products more efficient than standard ETFs, when held in a taxable account.

Finally, my iShares wish list includes a completely passive portfolio, rolled into a single ETF.

I’ve written before about the iShares Portfolio Builder Series, a combination of equity and fixed-income index funds. My beef lies in the way these products are actively rebalanced. I would prefer a similar product that hews to a pre-determined asset mix and rebalances once a year, rather than having a portfolio manager make active decisions about the asset blend.

Without having to pay the services of a strategic fund manager, iShares could charge 0.3 per cent or less, attracting a flood of couch potato investors in the process.

What indexed products would you want? I’d love to hear from other investors – just leave your thoughts in the comments section of this column. Together, we can try to make our voices heard in Canada.

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