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Why ETFs are “starting to scare” one financial advisor
From network.nationalpost

For our “weekend read” on this blog, I’ve once again handed The Wealthy Boomer over to a guest columnist.David Christianson is a fee-for-service financial planner and portfolio manager at Wellington West Total Wealth Management Inc., based in Winnipeg. He’s also a personal finance columnist for the Winnipeg Free Press.

On Friday in his blog, Christianson published a piece under the title Why ETFs are starting to scare me. The newspaper ran it under the headline ETFs running off in all directions. The theme is similar to what I’ve written before — that ETFs are starting to replicate the sins of the mutual fund industry it seeks to displace. This week’s announcement of four new foreign leveraged ETFs only reinforces this trend. On Twitter, I “tweeted” that there are now four more ways to blow up your portfolio.

But I’m not a fee-only advisor. David’s essay speaks for itself. To make clear his authorship, I’ve put his essay in Italics, beginning with the text across from and below his photo. I’ve added a few subheads in bold. Over to you, David:

Most 20-year olds scare me just a little bit. They are very clever, tech-savvy and often worldly, with opinions on almost everything. They can even be intimidating, in that you think they must know something you don’t.

Many seem to believe they know an awful lot, and we old fuddy-duddies are either scared or lazy in our unwillingness to jump off any metaphorical cliff they think looks attractive.

ETFs just turned twenty. Like many human “youngsters,” they were pretty well behaved till about 16, then seemed to turn a little wild, using their new knowledge and tools to run off in all sorts of untested directions.

Exchange traded funds are a great tool. We use them all the time in our investment management practice, and have for a number of years. For many uses, I prefer them to conventional retail mutual funds.

They became popular for a number of good reasons. An ETF allowed you convenient access to a basket of stocks (or other investments) with one purchase. That single stock or unit could be bought and sold on the stock market at any time during the trading day.

The basket of underlying investments was picked on pre-set and transparent criteria (like the TSX 60 index, for example, which is published daily), so you could always know what you owned. I contrast this with an actively-managed mutual fund, where the manager has to delay release of his exact portfolio, to keep trade secrets and keep competitors from stealing ideas.

Another contrast with mutual funds is the fees. Traditionally, ETFs have charged between .30% and .50% per year for access to a passive index, while the average actively-managed fund costs more like 2% to 2.5% per year, including advisor compensation (or about 1% less without advisor compensation). Some cost more; a few cost less.

Index-based ETFs are also usually low turnover vehicles, and therefore quite tax-efficient.

Flavour-of-the-month ETFs introduced just because they will sell

So, why does this 20-year-old now scare me so much?

My main concerns centre around the explosion of ETF varieties, the use of misunderstood leverage in some ETFs, access to increasingly quirky and risky investments and the rabid introduction of flavour-of-the-month options, with no apparent raison d’Aatre other than being saleable.

This recent movement by innovative product-developers uses the well-earned popularity of ETFs to sell access to things like water and agriculture investments, commodities, two and even three-times leverage returns (which provide unexpected results if not actually sold daily), hedge fund types of active management with performance fees in the fine print, and a batch of modified index ETFs that sell based on selective time-period track records. As well, fees on some of these can approach mutual fund fees, and even exceed those of direct sale manufacturers like Steadyhand, and large account options like Standard Life Legend Series.

Many of these products are poorly understood by both investors and advisors (not to mention personal finance writers, who help hype these new introductions).

An ETF investor now needs to ask a whole bunch of new questions, like:

A* Is this ETF currency hedged?
A* Does it use leverage?
A* Does it own derivatives?
A* Will there be liquidity when I want to sell?
A* Etc., etc.

New ETFs stark contrast to traditional low-cost access to broad indexes

These new products stand in stark contrast to the traditional benefits of ETFs — low cost access to indices in which the risks are clear and understood — into fringe investments of the sort that have traditionally caused surprise and disappointment for investors who knew not what they had purchased. I have seen many a marketer ruin a good basic product over the past three decades. (They will also call me a fuddy-duddy.)

Some of these new ETFs are very innovative, and some are going to be very useful in our practice, if we can truly figure them out, and avoid future surprises. I strongly encourage you to conduct that same research and due diligence, before you invest. Make sure you understand the product and how it will behave in a variety of situations, good and bad.

I sympathize with the marketers, who need new whiz-bang features to differentiate themselves from competitors. My fear is that, like many 20-year olds who are out trying new things for the first time, they will make some mistakes, maybe write off a few cars, maybe worse.

In this case, though, this 20-year old will be using your money.

–62–

Best stock returns for next decade: Would you believe American blue chips?
From network.nationalpost

Over the last ten years, U.S. stocks came dead last compared to stocks in the rest of the world, and against bonds, U.S. REITs and other asset classes. Yet at the turn of the century, Canadian investors were anxious to add American technology stocks and other large U.S. stocks to their portfolios — even though firms like Coca Cola, Wal-Mart and Johnson & Johnson were trading at 40 or 50 times earnings, or twice what would have been considered fair value.

Unfortunately, today many Canadians have a bad taste in their mouth over this experience, since they bought expensive stocks with what was then an undervalued currency.

If you’d listened to GMO’s Jeremy Grantham a decade ago, you would have benefited from his 10-year forecast about the dismal performance of U.S. stocks.

Today, Grantham has a new 7-year forecast and it’s almost the opposite of what he said in 2000. Now he’s predicting U.S. high quality stocks will top the asset charts in the next seven years, with real [nominal minus inflation] returns approaching 7%.

These forecasts are the centerpiece of a recent set of presentations made in British Columbia by Odlum Brown Ltd.’s director of research, Murray Leith [pictured, left]. The above slide shows Leith pointing to the kind of U.S. (and a few foreign and Canadian) quality stocks he’s loading into his model portfolios these days at Odlum Brown.

Leith admits he was a little early on this theme. In an interview today, he says the U.S. large-cap theme was on his mind as long ago as 2006 when it came to the health-care sector. “Before that, the model portfolio was never more than 10% outside the country. As the dollar got to 85 cents and some of these big companies came down to very attractive levels, we picked away at them and have now built the foreign content to 45% of the equity component.”

Most U.S. megacaps are global plays

While many of these household names are ostensibly U.S. companies most are foreign multinationals that do as much or more of their business outside the U.S., including the Emerging Markets. Some Canadian investors may fear these names because of currency risk, assuming a domestic stock like TD Bank has less currency risk than a Coca Cola. In fact, Coke is more than 80% outside the U.S. and TD has a lot more exposure to the U.S. market than investors may think.

Many of the picks above — like 3M, J&J and Wal-mart — are components of the elite 30-stock Dow Jones Industrial Average. Some, like Colgate Palmolive or UPS, are not Dow Stocks per se but are certainly well-known megacap stocks in the S&P500. All are, in Leith’s opinion, trading at a discount to intrinsic value. “My error in my earliness is that they were overvalued a decade ago, then came back to fair value and continued to overshoot on the downside, which often happens. This has gone on longer than I thought but I think it sets the stage for a long period of relatively good performance. The starting value is good, which is what really matters.”

Throw darts at the Dow and you’ll do fine in ten years

In the interview, Leith says only half in jest that “frankly, you can throw darts at these big stocks and you’ll be absolutely okay in five or ten years. Pick any of them.”

Or, I suggest, you could buy all 30 Dow Stocks with a single trade: the Diamonds (DIA/NYSE) or if you want them hedged back to the loonie, through the new BMO ETF, the BMO Dow Jones Industrial Hedged to the CAD Index ETF (ZDJ/TSX).

However, there is a reason to cherry-pick certain names, which is of course what Leith does for his clients at Odlum Brown. Refer to the slide at the bottom of this blog, which shows why Canadians can benefit from exposure to these American multinationals. The domestic market is heavy in financials and resources but has only minimal exposure to consumer stocks, health care and technology. Keep that in mind if you choose to pick some of these large-cap U.S. stocks: you might want to downplay U.S. financials if you have heavy exposure to Canadian banks; and underweight U.S. oil stocks if you already have plenty of exposure to Canadian energy and materials stocks.

Canada a play on China but don’t bet it all on that one story

Not that Leith is down on Canada. He says a “textbook economic recovery is underway” and the “stars are aligned for Canada … the Canadian economy, our stock market and our currency will continue to behave favorably.” Even so, he cautions, “It would be a mistake to bet too heavily on Canada, as we do have some vulnerabilities.” One is high levels of consumer debt and an inflated housing market. Another is an overly strong loonie, which doesn’t help exporters.

The Canadian stock market hangs on China’s fortunes, which makes it both an opportunity and a risk. China is a “great story,” but so was Japan in the 1980s — it turned out to be a horror story. In short, China does have “some risk and I think you should be careful not to have too many eggs in the China basket,” Leith says in the presentation, “That means not having too much exposure to Canadian stocks.”

You can view the entire presentation here, including Hank Cunningham’s on the bond markets.

– 62–

aImpoverished millionairea needs to face the music
From business.financialpost

An asset-rich, semi-retired B.C. music teacher feels trapped, unable to stop teaching and thus unable to retire completely a but there is a solution to her troubles

aImpoverished millionairea needs to face the music
From business.financialpost

An asset-rich, semi-retired B.C. music teacher feels trapped, unable to stop teaching and thus unable to retire completely a but there is a solution to her troubles

Rangers getting some results on power play
From nypost.com

Some say good, some say bad, but thereas very little question that the Rangers power play has scored some big goals in recent games.

As they head into Game 3 of the Eastern Conference finals against the Devils this afternoon at the Prudential Center, the series tied one game apiece, the Rangersa man-advantage is 3-for-8 in this series.

Yet, here is coach John Tortorella:

aI donat know, I think itas been pretty crappy at times,a Tortorella said yesterday. aWeave found a way to score a couple of goals. I think on a couple of them, in front of the net.a

Two of those have come from Chris Kreider, who had one deflect off him while in front of the net in Game 2as 3-2 loss, and one he ripped inside the far post in the third period of Game 1as 3-0 win.

aI think weare shooting the puck more, our entry has been a lot better,a captain Ryan Callahan said. aI think we got it in the zone and set it up more than we did in the regular season. Itas just a matter of getting a bounce here or there and getting the pucks to go in the net.a

The Rangers power play was ranked 23rd in the regular season at a 15.7 percent success rate. With them struggling to score 5-on-5 in the postseason, itas been the power play that has kept them afloat.

aThe power playas a funny thing,a Tortorella said. aSometimes even when there are some struggles, you find a way. Sometimes when you move the puck very well and itas working well, you donat score. So weave scored a couple. Obviously, weave got to come in behind that with some five-on-five [goals].a

* Brandon Dubinsky skated with the team for the first time since he injured his right leg/ankle in Game 7 of the opening-round series against the Senators. He wore a no-contact orange jersey, and by the time the team starting running drills, he was off the ice.

aHeas able to get on the ice,a Tortorella said. aOther than that, thereas no update.a

* Rangers-killer J.P. Parise said he was aextremely disappointed with how my comments were portrayed in Newsday,a where he was quoted as saying son Zach would be a good fit with the Rangers next season.

The elder Parise, who scored that 1975 overtme goal that eliminated the Rangers and launched the Islandersa climb to dynasty, said he does not speak to Zach about his upcoming unrestricted free agency, and does not speak for him, either.

****

After Devils goalie Martin Brodeur took a shot at the playing conditions at the Garden, saying the ice is bad and boards lead to inconsistent bounces, he hedged a bit yesterday.

aYou know, itas tough at this time of the year to get great ice,a Brodeur said. aMy comments were not towards Madison Square Garden, itas more towards I have to pay attention. The question was asked how hard it was to play that game, and for me it was because of all the bad bounces everywhere. And I think it makes it hard to play the game, especially for a goalie.a

* The Rangersa lines were changed a bit, with Mike Rupp getting moved up to skate with Brian Boyle and Artem Anisimov, while the fourth line was Brandon Prust, John Mitchell and Ruslan Fedotenko.

* Devils coach Pete DeBoer said he was optimistic about defenseman Henrik Tallinder (thromboplebitis, a swelling of a vein caused by a blood clot) and Jacob Josefson (collarbone) playing sometime soon. Both practiced with the team yesterday.

aMy gut is I think theyall be available at some point in the series,a DeBoer said.