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Patrick McKeough is one of Canada’s top safe-money advisors. The Wall Street Journal, Forbes and The Hulbert Financial Digest have all recognized his ability to find stocks with hidden value. He is editor and publisher of The Successful Investor, Stock Pickers Digest, Wall Street Stock Forecaster and Canadian Wealth Advisor; inventor of the Quick Profit/Value System and the ValuVesting System™. A best-selling Canadian author, he wrote Riding the Bull, the book that predicted the 1990s stock-market boom.

Low-fee ETFs for major-index investing

November 5, 2010 -  One Comment
Posted by: Pat McKeough Filed in: World Stock Market
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Exchange-traded funds (ETFs) may have a place in your portfolio. That’s because, unlike many other financial innovations, they don’t load you up with heavy management fees, or tie you down with high redemption charges if you decide to get out of them. Instead, they give you a low-cost, flexible, convenient alternative to mutual funds.

ETFs trade on stock exchanges, just like stocks. Prices are quoted in newspaper stock tables and online. You’ll have to pay brokerage commissions to buy and sell ETFs. However, ETFs’ low management fees still give them a cost advantage over most conventional mutual funds.

As well, shares are only added or removed when the underlying index changes. As a result of this low turnover, you won’t incur the regular capital-gains bills generated by the yearly distributions most conventional mutual funds pay out to unitholders.

Below, we update our advice on six ETFs — five buys, and one we don’t recommend.

ISHARES S&P/TSX 60 INDEX FUND $18.24 (Toronto symbol XIU; buy or sell through a broker; ca.ishares.com) (units split 4-for-1 in August 2008) is a good, low-fee way to buy the top stocks and income trusts on the TSX. The units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Expenses are just 0.17% of assets.

Most of the stocks in the index are high-quality companies. However, as it must ensure that all sectors are represented, it holds a few we wouldn’t include, such as Yellow Pages Income Fund.

The index’s top holdings are: Royal Bank, 7.2%; TD Bank, 5.9%; Bank of Nova Scotia, 5.2%; Suncor Energy, 4.7%; Barrick Gold, 4.5%; Potash Corp., 4.0%; Canadian Natural Resources, 3.7%; Bank of Montreal, 3.1%; Goldcorp, 3.1%; CN Railway, 2.8%; CIBC, 2.8%; Research in Motion, 2.5%; and Trans- Canada Corp., 2.4%.

iShares S&P/TSX 60 units are a buy.

ISHARES DOW JONES CANADA SELECT DIVIDEND INDEX FUND $20.26 (Toronto symbol XDV; buy or sell through a broker; ca.ishares.com) holds 30 of the highest-yielding Canadian stocks. Its selections are based on dividend growth, yield and payout ratio. The weight of any one stock is limited to 10% of assets. The fund’s MER is 0.50%. It yields 5.3%.

The fund’s top holdings are CIBC, 8.0%; Bank of Montreal, 6.4%; National Bank, 5.7%; TD Bank, 5.6%; Telus, 5.2%; Bank of Nova Scotia, 4.6%; Manitoba Telecom, 4.5%; IGM Financial, 4.2%; Royal Bank, 4.0%; Enbridge, 3.5%, TMX Group, 3.5%; and TransCanada Corp., 3.3%.

The fund holds 60.1% of its assets in financial stocks. Utilities are next, at 23.0%. The top Canadian finance stocks have sound prospects. However, if you invest in this ETF, be sure to adjust the rest of your portfolio so it won’t be overly concentrated in the financial sector.

iShares Dow Jones Canada Select Dividend Index Fund is a buy.

SPDR S&P 500 ETF $119.95 (New York symbol SPY; buy or sell through brokers; www.spdrs.com) holds the stocks in the S&P 500 Index, which consists of 500 major U.S. stocks that are chosen based on their market cap, liquidity and industry group.

The index’s highest-weighted stocks are Exxon Mobil, Microsoft, Procter & Gamble, Apple, JP Morgan Chase & Co., Johnson & Johnson, IBM, Chevron, General Electric, Coca Cola, Google and AT&T.

The fund’s expenses are just 0.10% of its assets.

If you want exposure to the S&P 500 Index, SPDR S&P 500 ETF is a buy.

SPDR DOW JONES INDUSTRIAL AVERAGE ETF $112.30 (New York Exchange symbol DIA; buy or sell through brokers; www.spdrs.com) holds the 30 stocks that make up the Dow Jones Industrial Average.

The fund’s top holdings are IBM, Exxon Mobil, Chevron Corp., 3M, Procter & Gamble, McDonald’s Corp., Johnson & Johnson, Caterpillar Inc., United Technologies and Boeing Co. The fund’s expenses are about 0.18% of its assets.

SPDR Dow Jones ETF is a buy.

POWERSHARES QQQ ETF $53.02 (Nasdaq symbol QQQQ; buy or sell through brokers; www.invescopowershares. com), formerly called Nasdaq 100 Trust Shares, holds the stocks that represent the Nasdaq 100 Index. That index is made up of the 100 largest shares on the Nasdaq exchange, based on market cap.

The Nasdaq 100 Index contains firms from a number of major industries, including computer hardware and software, telecommunications, retail/ wholesale trade and biotechnology. It does not contain financial companies. The fund’s expenses are about 0.20% of its assets.

The index’s highest-weighted stocks are Apple, Microsoft, Qualcomm, Google, Cisco Systems, Intel, Amazon.com, Oracle Corp., Gilead Sciences and Teva Pharmaceuticals.

PowerShares QQQ ETF is a buy for aggressive investors only.

ISHARES MSCI CANADA INDEX FUND $29.28 (New York symbol EWC; buy or sell through brokers; ca.ishares.com) is like a market-cap-based index fund, but its managers try to improve performance by tinkering with the index-fund formula. They do this through their Morgan Stanley Capital International Canada Index. The fund has an MER of 0.55%.

The index’s top holdings are Royal Bank, 6.5%; TD Bank, 5.5%; Bank of Nova Scotia, 4.8%; Suncor Energy, 4.4%; Barrick Gold, 4.0%; Potash Corp., 3.7%; Canadian Natural Resources, 3.3%; Bank of Montreal, 2.8%; Goldcorp, 2.8%; CN Railway, 2.6%; CIBC, 2.5% and TransCanada Corp., 2.2%.

If you want to own a Canadian index fund, you should buy the iShares S&P/TSX 60 Index Fund (see previous page). You’ll pay about a third of the management fees.

We don’t recommend iShares MSCI Canada.

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One Response to “Low-fee ETFs for major-index investing”

  1. Ivo on November 9th, 2010 at 5:09 pm

    On November 05 2010
    Re XIU, YOU SAID (IN PART) it holds a few we wouldn’t include, such as Yellow Pages Income Fund.

    1. I DO NOT THINK THAT YLO WAS AN INCOME FUND ON NOVEMBER 05 2010
    2. WHY DO YOU NOT LIKE YELLOW PAGES?

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