The exchange-traded fund sector has been criticized for spewing out new products like a fire hose, but there is an upside for investors.
More variety means more tools for precision portfolio building. ETFs used to be a way for investors to buy exposure to major stock and bond indexes through a vehicle that trades like a stock, but they've branched out into every sector imaginable. ETFs also target different financial demographics - value investors, growth investors, income investors, hyper-aggressive traders and socially responsible investors, to name just some.
Roughly 700 ETFs are available to Canadians on the Toronto Stock Exchange and U.S. exchanges. In this edition of the Portfolio Strategy column, we pick out some that can work well for registered retirement savings plans and then look at ways of blending them in a portfolio.
Three model portfolios are presented here as an illustration of how the low fees and flexibility offered by ETFs can work for different types of investors as an alternative to mutual funds and individual stocks. Your personal investing needs will differ, so be sure to do your own research.
Now, let's do some portfolio building.
SOUND AND SIMPLE
Target: Investors who want a basic, low-maintenance portfolio that emphasizes stocks but has a significant component of bonds.
5%: Claymore Premium
Money Market ETF
The assumption in including this new ETF is that you'll hold money in it indefinitely and won't be buying and selling a lot.
25%: iShares Cdn Bond
This ETF gives you exposure to the entire Canadian bond market, and it's vastly cheaper to own than a bond mutual fund.
5%: iShares Cdn Corporate
Bond Index Fund
Corporate bonds offer higher yields, but also more risk.
35%: iShares Cdn Composite
There are several other Canadian market ETFs you could use, but this one does a good job combining the benefits of low fees and broad market exposure.
15%: iShares CDN S&P 500
Here, you get exposure to the biggest U.S. corporations with currency hedging that ensures your returns match those of the S&P 500 without distortions caused by fluctuations in the value of the loonie. If you don't want hedging, try the iShares S&P Index Fund, which is listed on the American Stock Exchange.
15%: iShares MSCI EAFE
Provides "everywhere but North America" stock market exposure. A hedged version of this fund, the iShares Cdn MSCI EAFE Index Fund, is listed on the TSX, but it's more expensive to own and is arguably unnecessary given the large number of currencies you're exposed to with this ETF.
MORE RISK, MORE GAIN
Target: Investors who have a high tolerance for double-digit losses as they strive for higher average annual returns than more conservative portfolios would deliver.
35%: iShares Cdn Composite Index Fund
For a somewhat more aggressive stance, consider the iShares Cdn Growth Index Fund, which focuses on companies showing significant growth.
5%: iShares Cdn SmallCap Index Fund
The small fry on the TSX are covered with this ETF.
20%: Vanguard Total Stock Market ETF
Many investors think of the S&P 500 stock index when looking at the U.S. market, but this index includes only large companies. This Vanguard fund tracks the MSCI U.S. Broad Market Index, which includes large to very small companies.
15%: iShares MSCI EAFE
See "Sound and Simple."
5%: Claymore BRIC ETF
You get more concentration in Brazil, China and India than you do with a more diversified emerging markets fund (there's a little exposure to Russia as well).
10%: Claymore Oil Sands
This ETF targets firms in the all-important Alberta oil sands.
5%: iShares Cdn Gold Sector Index Fund
Covers the shares of global gold-mining companies, including all the major Canadian ones.
5%: Claymore Global Agriculture ETF
Food is hottest thing in commodities and this ETF holds the shares of companies involved in food processing, fertilizer, farm machinery, seed supply and such.
THE GREEN PORTFOLIO
Target: Investors who want an RRSP portfolio that uses socially responsible investments where possible.
35%: iShares Cdn Jantzi Social
Holds the shares of large Canadian stocks that are members of the Jantzi Social Index, which includes only companies meeting requirements for corporate behaviour in areas such as the environment, corporate governance and social issues.
15%: iShares KLD 400 Social
Think of this ETF as being along the lines of a U.S. version of the Jantzi fund.
5%: PowerShares CleanTech Portfolio
A higher-risk sector fund that tracks an index of largely U.S. companies in the business of reducing energy consumption and pollution.
45%: Socially responsible
These will help you fill in the blanks in this portfolio. To date, there hasn't been enough interest in SRI investing for exchange-traded fund companies to broaden their offerings in this niche.
ON THE WEB
Here are some resources that can help you choose exchange-traded funds for your portfolio.
American Stock Exchange (amex.com): Most North American ETFs are listed on this exchange.
Globeinvestor (globeinvestor.com): The stock filters on this site allow you to search for ETFs listed on all major North American exchanges, and it provides quotes, charts and news for each. Check out the ETF Centre (found under Resources).
IndexUniverse (indexuniverse.com): News and views on the global ETF scene.
Morningstar (morningstar.ca): Analyst reports are available for a growing number of TSX-listed ETFs.
TheStreet.com: ETF news and views.
Yahoo Finance Canada (ca.finance.yahoo.com/etf): Screening tools plus educational material.
ETF spec sheet
Here's a list of all the ETFs used mentioned in this Portfolio Strategy column, along with pertinent details. Returns for ETFs listed on Canadian exchanges are reported in domestic currency, while U.S.-listed ETFs returns are reported in U.S. dollars.
|Claymore Premium Money Market||CMR-T||0.25%||n/a|
|iShares Cdn. Bond Index||XBB-T||0.30%||- 1.5%|
|iShares Cdn. Corporate Bond Index||XCB-T||0.40%||- 3.9%|
|iShares Cdn. Composite Index||XIC-T||0.25%||1.9%|
|iShares Cdn. S&P 500 Index||XSP-T||0.24%||- 8.5%|
|iShares S&P 500 Index||IVV-N||0.09%||- 6.8%|
|iShares Cdn. MSCI EAFE Index||XIN-T||0.49%||- 15.8%|
|iShares MSCI EAFE Index||EFA-N||0.35%||- 7.3%|
|iShares Cdn. Growth Index||XCG-T||0.50%||16.7%|
|iShares Cdn. SmallCap Index||XCS-T||0.55%||n/a|
|Vanguard Total Stock Market||VTI-A||0.07%||- 7.1%|
|Claymore Oil Sands Sector||CLO-T||0.60%||18.7%|
|iShares Cdn. Gold Sector Index||XGD-T||0.55%||9.7%|
|Claymore Global Agriculture||COW-T||0.65%||n/a|
|iShares Cdn. Jantzi Social Index||XEN-T||0.50%||n/a|
|iShares KLD 400 Social Index||DSI-A||0.50%||- 9.1%|
|PowerShares CleanTech Portfolio||PZD-A||0.70%||16.6%|
|*to Feb. 20|
SOURCES: GLOBEINVESTOR.COM AND COMPANY WEBSITES