ETFs
Exchange traded funds trade on stock exchanges, just like stocks. Investors can buy them on margin, or sell them short. The best exchange-traded funds offer well-diversified, tax-efficient portfolios with exceptionally low management ETF fees. They are also very liquid.
Investors use ETFs in a variety of ways, and some investors work only with ETFs and no other type of investment in portfolio creation.
An amazing aspect of ETFs is their diversity. Some investors may create an entire portfolio solely from a few well-diversified ETFs.
ETFs trade on stock exchanges, just like stocks. That’s different from mutual funds, which you can only buy at the end of the day at a price that reflects the fund’s value at the close of trading.
Prices of ETFs are quoted in newspaper stock tables and online. You pay brokerage commissions to buy and sell them, but their low management fees give them a cost advantage over most 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 taxes generated by the yearly distributions most conventional mutual funds pay out to unitholders.
ETFs have a place in every investor’s portfolio, at TSI Network we also recommend using our three-part Successful Investor strategy:
- Invest mainly in well-established companies;
- Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
- Downplay or avoid stocks in the broker/media limelight.
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ETFs Library Archives
BMO S&P/TSX CAPPED COMPOSITE INDEX ETF $41.29 (Toronto symbol ZCN; TSINetwork ETF Rating: Conservative; Market cap: $12.5 billion) tracks the S&P/TSX Capped Composite Index.
The index includes over 200 stocks, which represent more than 90% of the Canadian equity market. Individual stock weights are capped at 10% of the index’s market capitalization.
The ETF started up in May 2009 and charges a very low MER of 0.06%. The fund yields 2.3%.
We like most of the stocks this ETF holds. However, we see the “capped” aspect of its mandate as a negative, since it introduces a filtering mechanism that will hurt your returns.
The index includes over 200 stocks, which represent more than 90% of the Canadian equity market. Individual stock weights are capped at 10% of the index’s market capitalization.
The ETF started up in May 2009 and charges a very low MER of 0.06%. The fund yields 2.3%.
We like most of the stocks this ETF holds. However, we see the “capped” aspect of its mandate as a negative, since it introduces a filtering mechanism that will hurt your returns.
Closed-end funds work with a fixed asset base invested in a portfolio of securities. The value of their assets rises and falls depending on how they invest. Their units trade like stocks, and most often on a stock exchange. They may trade above the per-unit value of the investments they hold—what brokers call “at a premium” to their net asset value. However, for the most part, they trade at a discount.
If the manager of a closed-end fund does a bad job, unit owners pay a double penalty: the value of the fund’s assets falls, and the discount on that value also widens. So it’s a mistake to invest in a closed-end fund simply because you like the area it focuses on, or because it’s available at a discount to asset value. You need to look at how wisely it picks stocks to invests in.
If the manager of a closed-end fund does a bad job, unit owners pay a double penalty: the value of the fund’s assets falls, and the discount on that value also widens. So it’s a mistake to invest in a closed-end fund simply because you like the area it focuses on, or because it’s available at a discount to asset value. You need to look at how wisely it picks stocks to invests in.
Over the long term, most stock markets move up. But there are times when sharp declines inflict heavy losses on any investor’s portfolio holdings. For example, in 2008 to 2009, U.S. stock markets declined by 51%; in 2020, they dropped by 34%; and in 2022, they fell 25%. Other markets had similar declines. What’s more, these sharp losses often persist for long periods of time.
Meanwhile, there are a range of ETFs that aim to help investors buffer their portfolios against significant losses. Here are two of those options.
As well, in the Supplement on page 119, we discuss the extent and frequency of major declines and the time needed to recover those losses.
Meanwhile, there are a range of ETFs that aim to help investors buffer their portfolios against significant losses. Here are two of those options.
As well, in the Supplement on page 119, we discuss the extent and frequency of major declines and the time needed to recover those losses.
ISHARES MSCI JAPAN INDEX FUND, $82.80, is a buy. The ETF (New York symbol EWJ; buy or sell through brokers; us.ishares.com) aims to mirror the return of the Morgan Stanley Capital International Japan Index.
We think foreign stocks can safely make up 10% of a conservative investor’s portfolio. One way is through exchange-traded funds (ETFs) with an overseas focus. The best of those ETFs charge you very low management fees yet offer you well-diversified, tax-efficient portfolios of high-quality stocks.
Here’s a look at four international ETFs we see as suitable for new buying and two others we feel you should continue to hold.
Here’s a look at four international ETFs we see as suitable for new buying and two others we feel you should continue to hold.
GLOBAL X COPPER MINERS ETF, $59.30, is a buy. The ETF (New York symbol COPX; buy or sell through brokers; www.globalxfunds.com) lets you track the Solactive Global Copper Miners Index, with 41 global mining and exploration firms. The fund launched in April 2010.
Most precious metal stocks dropped along with the market in March 2020. They then quickly reversed that trend to soar for investors, in part because of gold’s appeal as a “safe harbour” in times of economic uncertainty. In fact, in August 2020, gold jumped to over $2,000 U.S. an ounce for the first time ever. Gold stocks also jumped.
Exchange-traded funds are set up to mirror the performance of a stock-market index or sub-index. They hold a more or less fixed selection of securities that represent the holdings of that index or sub-index and will allow the fund to “track” its performance.
The MER (Management Expense Ratio) is generally much lower on traditional ETFs than on conventional mutual funds. That’s because most traditional ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.
The MER (Management Expense Ratio) is generally much lower on traditional ETFs than on conventional mutual funds. That’s because most traditional ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.
Market data and academic studies have consistently shown that high-quality companies tend to outperform the overall market over extended periods. The risk involved in these investments is also lower than the broad market.
Investors have different descriptions of high-quality companies. For some, it is the quality of management, products, and customer service; for others, it is high levels of profitability or financial strength. Still, there are overlaps in these definitions, including characteristics such as consistent profitability, high returns on capital, strong cash flows, and pristine balance sheets.
MSCI is one of the main providers of indexes that track the performance of high-quality companies. MSCI identifies three characteristics of these companie
Defining quality has common threads
Investors have different descriptions of high-quality companies. For some, it is the quality of management, products, and customer service; for others, it is high levels of profitability or financial strength. Still, there are overlaps in these definitions, including characteristics such as consistent profitability, high returns on capital, strong cash flows, and pristine balance sheets.
MSCI is one of the main providers of indexes that track the performance of high-quality companies. MSCI identifies three characteristics of these companie
Medium-sized companies are often overlooked as investors tend to focus their attention on large, stable companies or high-growth smaller companies. However, market research suggests that mid-cap stocks offer an attractive combination of stability and growth, providing interesting opportunities for investors who are prepared to do their homework.
Mid-cap stocks fall between large-cap stocks and small-cap stocks, but the size of mid-cap companies varies from country to country.
The index provider, S&P, ranks all U.S. listed stocks by market capitalization and then considers the top 500 to be large-cap, the next 400 as mid-cap, and the rest as small-cap. In the U.S., mid-cap stocks generally have market capitalizations between $2 billion and $20 billion. In the smaller Canadian market, mid-cap stocks mostly have market values between $1 billion U.S. and $6 billion U.S.
What are mid-cap stocks?
Mid-cap stocks fall between large-cap stocks and small-cap stocks, but the size of mid-cap companies varies from country to country.
The index provider, S&P, ranks all U.S. listed stocks by market capitalization and then considers the top 500 to be large-cap, the next 400 as mid-cap, and the rest as small-cap. In the U.S., mid-cap stocks generally have market capitalizations between $2 billion and $20 billion. In the smaller Canadian market, mid-cap stocks mostly have market values between $1 billion U.S. and $6 billion U.S.