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
When selecting ETFs, investors should look not just at the stocks they hold, but also at the methodologies each uses. These are strategies aimed at boosting returns and cutting risk. The two ETFs below employ unique strategies to achieve those goals.
Meanwhile, the supplement starting on page 9 provides more information on how the most popular ETFs are constructed and how the different methods play into the performance of those ETFs.
Meanwhile, the supplement starting on page 9 provides more information on how the most popular ETFs are constructed and how the different methods play into the performance of those ETFs.
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.
ETFs practice this “passive” fund management style, in contrast to the “active” management that conventional mutual funds traditionally provide at much higher costs.
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.
ETFs practice this “passive” fund management style, in contrast to the “active” management that conventional mutual funds traditionally provide at much higher costs.
Canadian banks and insurance companies have delivered strong performances over the past year, beating the main stock market indexes and their U.S. peers by a considerable margin. Over the longer term, U.S. Financial Services (banks, insurers, and financial services combined) have also performed better than the S&P 500 index.
Great performance by Canadian banks and insurers
The graph below highlights the strong share price performance of the Canadian banks and insurers over the past one and five years. The last year has been particularly good for Canadian financials, with their 34% return easily beating their U.S. counterparts.
Great performance by Canadian banks and insurers
The graph below highlights the strong share price performance of the Canadian banks and insurers over the past one and five years. The last year has been particularly good for Canadian financials, with their 34% return easily beating their U.S. counterparts.
To succeed as an investor, you need to overcome the temptation to think that you can succeed as a fair-weather investor—one who is in the market when prices are going up, and out of the market during the inevitable downturns.
If you try to do that, you will wind up selling when much of the damage is done, and buying your way back in when much of the recovery has already taken place. Worse, you may wind up buying back in at higher prices than you got when you sold.
If you try to do that, you will wind up selling when much of the damage is done, and buying your way back in when much of the recovery has already taken place. Worse, you may wind up buying back in at higher prices than you got when you sold.
his month, we highlight a new ETF from BMO that invests in physical commodities, as well as a leveraged single-stock ETF from one of Canada’s smaller ETF managers.
BMO Broad Commodity ETF $30.58 (CBOE symbol ZCOM) invests in a range of physical commodities.
The ETF tracks the Bloomberg Commodity Index. The current segment split of the ETF is Agriculture (28%), Energy (26%), Precious Metals (25%), Industrial Metals (15%), and Livestock (6%). The commodities are not held in a physical form, but rather through the use of derivative instruments.
BMO Broad Commodity ETF $30.58 (CBOE symbol ZCOM) invests in a range of physical commodities.
The ETF tracks the Bloomberg Commodity Index. The current segment split of the ETF is Agriculture (28%), Energy (26%), Precious Metals (25%), Industrial Metals (15%), and Livestock (6%). The commodities are not held in a physical form, but rather through the use of derivative instruments.
After a dismal period between 2021 and 2023, major Chinese companies have performed very well since the start of 2024—top holdings in the iShares China Large-Cap ETF (FXI) such as Xiaomi, Tencent, Trip.aom and Alibaba all doubled over that time period.
Notably, however, the top performer among the ETF holdings over the past two years was the designer toy company Pop Mart International, with a 10-fold rise in its stock price.
Pop Mart was founded as a retail store in 2010 by Wang Ning in Beijing, China. Pop Mart became a cultural phenomenon by focusing on youth trends and the growing appetite for collectible art toys.
Notably, however, the top performer among the ETF holdings over the past two years was the designer toy company Pop Mart International, with a 10-fold rise in its stock price.
Pop Mart was founded as a retail store in 2010 by Wang Ning in Beijing, China. Pop Mart became a cultural phenomenon by focusing on youth trends and the growing appetite for collectible art toys.
The Chinese economy expanded rapidly between 2000 and 2019, when annual growth averaged a high 9%. It has recovered from the pandemic, but its growth trajectory going forward is uncertain. That’s because of factors like the trade war with the U.S. and other Western countries (including a ban on AI chip exports to China), as well as a major property sector downturn. Longer term, the country’s aging population is another major concern.
Meantime, here’s a look at an ETF that provides exposure to the top Chinese publicly listed companies.
Meantime, here’s a look at an ETF that provides exposure to the top Chinese publicly listed companies.
Banks and insurance companies have performed strongly over the past year, easily beating the main market indices. However, banks, in particular, use a lot of debt to boost returns, and are prone to volatility when they encounter problems.
We’ve always said most investors should diversify within the finance sector by holding not just banks, but also insurers, fund managers and so on. Notably, a blend of banks and insurance companies produces a better risk and return profile than a portfolio of just banks.
We provide more detail about the risks and returns of the main financial groups in the Supplement on page 120.
We’ve always said most investors should diversify within the finance sector by holding not just banks, but also insurers, fund managers and so on. Notably, a blend of banks and insurance companies produces a better risk and return profile than a portfolio of just banks.
We provide more detail about the risks and returns of the main financial groups in the Supplement on page 120.
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.