Toronto-Dominion Bank

Canadian bank stocks have moved down in recent weeks, mainly due to fears that rising interest rates will hurt demand for mortgages and other loans. While that is a possibility, the banks are in a much better position to handle a drop in loan volumes than they were a few years ago. Tighter credit policies have cut the risk of big loan write-offs. The banks’ entry into new businesses such as insurance and mutual funds has cut their reliance on traditional banking operations. Growing overseas operations also cut their geographic risk. We still like the long-term prospects of all five of Canada’s big banks, and recommend that every Canadian investor aim to own at least two of them....

AIC DIVERSIFIED CANADA FUND $44.29 (CWA Rating: Conservative) mainly holds shares of Canadian companies of average or above-average quality. It also holds stocks of some U.S. firms. The $1.9 billion fund’s 10 largest holdings are Power Financial, Canadian Oil Sands Trust, TD Bank, Shoppers Drug Mart, Loblaw, Thomson Corp., Brookfield Asset Management, Royal Bank, Sun Life Financial and Royal Bank of Scotland. The fund holds just 25 stocks. Its turnover was 9.1% in 2005. Turnover of 24.3% in 2004 was on the high side. The fund holds 46.7% of its assets in Financial services stocks. The rest of the portfolio breaks down as follows: Consumer staples, 19.7%; Energy, 10.2%; Consumer discretionary, 8.5%; Health care, 6.1%; and Information technology, 3.8%. Over the last year, the S&P/TSX Index gained 28.4%, mainly due to strength in Resource sector stocks. The fund made 17.0%. Its MER is 2.42%....

Here are two AIC funds that hold much of their portfolios in financial services stocks. We prefer diversified funds. But if you must focus on something, finance is a relatively stable sector. AIC Diversified Canada has underperformed lately, mainly because it holds fewer stocks that we see as buys. We don’t recommend it for new buying. However, it’s OK to hold, particularly if you’ve built up a big capital gain over the last few years. AIC AMERICAN ADVANTAGE FUND $7.30 (CWA Rating: Aggressive) (AIC Group of Funds, 1375 Kerns Road, Burlington, Ont., L7R 4X8, 1-800-263-2144; Web site: www.aicfunds.com. Buy or sell through brokers) invests mostly in U.S. stocks, with almost 97% of assets in the financial services area. This segment breaks down as follows: Property & casualty insurance companies, 15.2%; Investment banking & brokerage, 14.0%; Multi-line insurance, 12.6%; Life & health insurance, 12.4%; Commercial Banks, 11.8%; Regional Banks, 7.5%; Diversified financials, 7.3%; Insurance brokers, 7.0%; Wealth management, 6.2%; and Consumer finance, 4.1%. AIC American Advantage’s top 10 holdings are Progressive Corp., ING Canada, AFLAC, Morgan Stanley, Hartford Financial Services, Washington Mutual, Northern Trust, Merrill Lynch, JP Morgan Chase and Willis Group Holdings. This fund holds just 17 stocks. Turnover was just 19.1% in 2005, after a high 28.7% in 2004....

RBC DIVIDEND FUND $44.90 (RBC Funds, P.O. Box 7500, Station A, Toronto, Ontario. M5W 1P9. 1-800-463-3863; Web site: www.royalbank.com. No load — deal directly with the bank) has 43.3% of its portfolio in Financial services stocks. It has a further 17.4% in Energy stocks. The $7.3 billion Royal Dividend Fund’s top stock holdings are Royal Bank, Bank of Nova Scotia, TD Bank, Manulife Financial, CIBC, TransCanada Corp., Bank of Montreal, Petro-Canada and Power Corp. Over the last five years, Royal Dividend Fund has posted a 13.2% annual rate of return. That’s better than the S&P/TSX 60’s gain of 11.2% over the same period. The fund gained 24.9% over the last year, compared to the S&P/TSX 60’s gain of 30.2%. Royal Dividend’s MER is 1.74%....

BMO Dividend and Royal Dividend hold mostly high-quality stocks. These stocks sometimes run into deep trouble and go through lengthy struggles, just like lesser investments. Eventually, though, most solve their problems and go on to thrive anew. Both funds hold a high proportion of their assets in financial services stocks. However, if you must focus on something, finance is a relatively stable sector. If you do invest in these funds, be sure to adjust the rest of your portfolio so these funds won’t overly concentrate your holdings in the financial sector. BMO Dividend and Royal Dividend have both outperformed AIC Diversified Canada over the last year, even though it also has a financial focus. That’s because they hold lots of our favourite high-quality stocks. If you’re looking for income and growth, we prefer these two funds for new buying....

ISHARES CDN LARGECAP 60 INDEX FUND $68.83 (Toronto symbol XIU; buy or sell through a broker) (formerly called iUnits S&P/TSX 60 Index Participation Fund) is a good low-fee way to buy the top stocks on the TSE. The units hold a basket of stocks that represent the S&P/TSX 60 Index. The index is made up of the 60 largest and most heavily traded stocks on the TSE. Most of the 60 stocks in the index are good quality companies. However, to meet the requirement that all sectors are represented, the index holds a few firms we wouldn’t include, such as Abitibi-Consolidated, Quebecor World and Rogers Communcations. The index’s top holdings are: Royal Bank, 6.4%; Manulife, 6.1%; EnCana Corporation, 5.2%; Bank of Nova Scotia, 4.8%; TD Bank, 4.8%; Suncor Energy, 4.8%; Canadian Natural Resources, 3.9%; Bank of Montreal, 3.4%; Barrick Gold, 3.2%; Petro-Canada, 3%; CIBC, 3%; Sun Life Financial, 2.9%; and Canadian National Railway, 2.9%....

The best exchange-traded funds (ETFs) offer well-diversified, tax-efficient portfolios with very low management fees. Due to buyback and share issue arrangements, ETFs always trade close to their net asset value. Here are some of the best deals available in ETFs. We’ve also analysed one we don’t like. ISHARES CDN LARGECAP 60 INDEX FUND $68.83 (Toronto symbol XIU; buy or sell through a broker) (formerly called iUnits S&P/TSX 60 Index Participation Fund) is a good low-fee way to buy the top stocks on the TSE. The units hold a basket of stocks that represent the S&P/TSX 60 Index. The index is made up of the 60 largest and most heavily traded stocks on the TSE....

FIDELITY CANADIAN LARGE CAP FUND $26.81 (CWA Rating: Conservative) (Fidelity Investments Canada, 483 Bay St., Suite 200, Toronto, Ont. M5G 2N7. 1-800-263-4077; Web site: www.fidelity.ca. Load fund — available from brokers) invests mostly in large-sized firms like those on the S&P/TSE Index, although it may also invest in small and mid-cap stocks. The top holdings of this $396.2 million fund are Bank of Nova Scotia, Canadian Natural Resources, EnCana Corporation, Cameco Corporation, Suncor Energy, Manulife Financial, Royal Bank of Canada, ING Canada, Bank of Montreal and TD Bank. The fund is diversified by industry sector as follows: 39.5% in Financials, 21.2% in Energy, 11.1% in Materials, 6.4% in Industrials, 4.7% in Consumer discretionary, 3.7% in Health care, and 3.6% in Information technology....

IUNITS DIVIDEND INDEX FUND $20.50 (Toronto symbol XDV; buy or sell through a broker) began trading in December, 2005. The fund currently holds the 30 highest yielding Canadian stocks. These stocks are included in the index based on their proportionate dividend-per-share weight. The weight of any one stock in the fund is limited to 10% of the fund’s assets. The fund’s MER is 0.50%. The fund will have a dividend yield of about 3.3%. The fund’s top holdings are CIBC at 7.3%; Manitoba Telecom, 6.4%; Royal Bank, 7.2%; Bank of Montreal, 5.5%; National Bank, 4.8%; TD Bank, 4.7%; Magna International, 4.2%; IGM Financial, 3.7%; Bank of Nova Scotia, 3.9%; and BCE, 3.4%. iUnits Dividend Index Fund is a buy. If you buy it, however, you should adjust your portfolio to offset its over 50% weighting in the Finance sector.

DOFASCO INC. $71 (Toronto symbol DFS; SI Rating: Average) has accepted a $71.00-a-share takeover offer from Arcelor SA after rival bidder ThyssenKrupp AG decided not to match Arcelor’s offer. However, UK-based Mittal Steel Co. has launched a hostile takeover for Arcelor. Mittal’s bid for Arcelor is unlikely to affect Arcelor’s plan to buy Dofasco. Dofasco shareholders should tender their shares to Arcelor to avoid paying brokerage commissions. FAIRMONT HOTELS & RESORTS, INC. $51 (Toronto symbol FHR; SI Rating: Average) has accepted a $45.00 U.S.-a-share takeover offer from a private investment group. That tops a $41.00 U.S. offer from American investor Carl Icahn for 51% of Fairmont. Icahn has also accepted the new offer....