Taming the ETF Jungle

Are You ETF'd out?

There are so many ETF's out there that I've become dizzy reading prospectuses and delirious trying to design a mix. My initial wish-list consisted of 20 ETF's from various sources, including iShares, Claymore, and BMO with a few cool Horizon's beta choices for playing volatility and shorting downtrends. I realized that from a personal perspective this would be impossible to execute consistently and take far too much time. I wanted to design a core portfolio of ETF's some of which will be dividend producers, others which will be fixed income, and all that consist of good choices when balancing value, quality and health of companies held.

I decided to stray from the usual guru data on iShares ETF's which seem to be the most touted and focus on BMO. In comparing MER's across many of similar iShares and BMO offerings, BMO seemed to beat iShares on most equivalent funds.

Planning to Retire with Titans and Dogs!

The overall goal of this retirement portfolio is to have exposure to quality Canadian, US equity, and International equity from diverse sectors in addition to diverse fixed income sources, dividend sources and some emerging market exposure that would allow easy rebalancing and fit the retirement investment needs of a 40 something with about 20 years left to retirement.

Titans Meet Dogs Meet Income

Here is the gist of the portfolio:
ZCN: BMO Dow Jones Canada Titans 60 Index ETF 25%
ZDJ: BMO Dow Jones Industrial Average Hedged to CAD Index ETF 25%
ZGI: BMO Global Infrastructure Index ETF 25%
ZMI: BMO Monthly Income ETF 25%

ZCN: BMO Dow Jones Canada Titans 60 Index ETF: Portfolio Strategy: BMO Dow Jones Canada Titans 60 Index ETF has been designed to replicate, to the extent possible, the performance of the Dow Jones Canada Titans 60 Index, net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index.

Top Holdings:
Royal Bank of Canada    
Toronto-Dominion Bank              
Suncor Energy Inc.          
Bank of Nova Scotia       
Cdn Natural Resources Ltd          
Barrick Gold Corp.           
Potash Corp of Saskatchewan
Goldcorp Inc.    
Bank of Montreal            
Canadian National Railway          

Performance: One year:  MV/NAV   21.71%/22.18%    MER   0.15%

Sector exposure:  financials, energy, materials, industrials, telecommunications, consumer discretionary, information technology, consumer staples, utilities

Geographic: Canada

ZDJ: BMO Dow Jones Industrial Average Hedged to CAD Index ETF: Portfolio Strategy: The BMO Dow Jones Industrial Average Hedged to CAD Index ETF has been designed to replicate, to the extent possible, the performance of the Dow Jones Industrial Average (CAD hedged), net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index. The U.S. dollar currency exposure is hedged back to the Canadian dollar.

Top Holdings

IBM Corp.
Chevron Corporation
Caterpillar Inc
3M Company
Exxon Mobil Corp
United Technologies Corp

McDonald's Corp
Boeing Company
Coca-Cola Company
Procter & Gamble Company

Performance: MV/NAV 1 year 18.55%/19.33% MER 0.23%

Sector Exposure:  industrials, information technology, consumer staples, energy, financials, consumer discretionary, health care, materials, telecommunications

Geographic: US

ZGI: BMO Global Infrastructure Index ETF:Portfolio Strategy: BMO Global Infrastructure Index ETF has been designed to replicate, to the extent possible, the performance of the Dow Jones Brookfield Global Infrastructure Index, net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index. The Manager may also use a sampling methodology in selecting investments for the Fund.

Top Holdings:

Hutchison Whampoa Usp ADR
National Grid plc ADR
TransCanada Corp
American Tower Corp
Enbridge Inc
Gpo Aeroportr Pafco ADR
Spectra Energy Corp
Keppel Corp Ltd, ADR
Consolidated Edison Inc
Sempra Energy

Performance: One year MV/NAV 18.66%/18.68% MER 0.55%

Sector exposure: utilities, industrials, energy, telecommunications

Geographic: US, Canada, Hong Kong, Brazil, Mexico, Singapore, UK, Netherlands, Greece

ZMI: BMO Monthly Income ETF: Portfolio Strategy: BMO Monthly Income ETF has been designed to deliver the performance of the underlying basket of higher yielding BMO ETFs. ETFs are selected by having a higher yield than either the equity market represented by the BMO Dow Jones Canada Titans 60 Index ETF (ZCN) or the fixed income market represented by the BMO Aggregate Bond Index ETF (ZAG). The holdings are weighted by yield, with 50 percent investment in each of equity and fixed income and a cap of 20 percent for each security with a range of 6 to 10 ETFs. The ETF is rebalanced quarterly and reconstituted semi-annually in June and December. In addition, as ZMI is a fund of fund, the management fees charged are reduced by those accrued in the underlying funds.

Holdings:
BMO Eq Wgt REITS ETF
BMO High Yield US ETF
BMO Eq Wgt Utilities ETF
BMO Emerg Mkt Bond ETF
BMO Cvd Call Cdn Bank ETF
BMO Mid Corp Bond ETF
BMO Long Corp Bond ETF
BMO Equal Wgt Banks ETF
BMO Short Corp Bond ETF
BMO Eq Wgt Oil & Gas ETF

Sector exposure: financials, corporate bonds, high yield bonds, utilities, emerging market bonds, energy

Geographic: Canada, US, emerging markets

No performance data available yet. MER: 0.55%

ZCM       25%
ZDJ         25%
ZGI         25%
ZMI        25%

Disclosure. I don't yet own these ETF's. Fifty percent of my savings is directed towards a sleepy portfolio such as this. Currently I have investments in TD-e series funds including the Canadian Index, US Dow Jones Industrial Index, International Index and Canadian Bond Index. Yawn!

Happy Investing!

One side of Couch Potatoe and A Barrel of Crude to Go Please!

I have a connundrum. I am perplexed at what style of trader I should be. Although I enjoy the thrill of the daily chase in the markets and individual stocks, I am not sure my personality can handle the ups and downs, anxiety and panic, and momentary thrills cut short by the sudden gap downs in stocks I was certain would be winners (ie. RGEN).

Too Much Noise!

I have been listening to too much noise. "I have an awesome mutual fund, check it out." "My ETF investments weathered through 2009." "My grandfather made his fortune in penny stocks." "Diversify, don't put your eggs in one basket." What does all of this mean? Do I diversify and invest in everything?

Then I'll just order one couch potatoe portfolio to go please, with a side of gold bars and a barrel of crude!

I have some money. I want to invest it. It is currently burning a hole in my trading account. I bought some stuff. The stuff hasn't moved. I made some profits on a couple of small tech plays and one mining venture. Then I bought some ING mutual funds, some index ETF's and although I have green on my screen, there are small bits of red that bug me and plague my mind with fear of failure.

I want to automate my investing to a comfortable level of regular contributions to some basic things like mutual funds and broad market ETF's. But I also want to enjoy the ride of trends, the thrill of the venture pops and the occasional volatile day trade. Am I crazy?

Is this bipolar psychotic trading?

What I've decided to do is hedge my bets. I picked some funds with 4 to 5 star performance over three years to focus one half of my investments on a regular basis with a 33% bonds, 33% Canadian Equities, and 33% Other (mostly US Equities) split. Of the remaining 50% of my savings, I decided to allow the market and a couple of my favorite gurus drive these decisions. So half of my investing is a no-brainer process that I will try to rebalance semi annually and use cost averaging to help weather any falls in the market.

The other 50% is the fun part. I can't seem to decide if the penny stock world, the sector trend investing, or value investing is the way for me to go. I have a moderate to high risk tolerance for this 50% that I would otherwise probably spend on stupidities anyhow. So I am going to create a program for myself. Not a computer program, but a set of regular activities, analysis and predefined reactions to execute my plan.

Pick Some Pros to Do The Work

I've nailed my Gurus to 3: Tony Turner, whose club I have decided to join; Ron of the Doityourselfinvesting.com duo, whose newsletter/club I recently subscribed to; and The Motley Fools who are just plain cool and whom I want to invite to dinner!

I'd love to get in on all those penny stock millions, but honestly, I don't have time to sit and watch my screen on intraday charts, sweat bullets or cry in my soup. Kudos to those warriors with the constitution for that, but I will pass.

So, feeling confident with my decisions and plan, ING will run my RRSP and TFSA with their Streetwise Funds; I have some small bits of this and that over at TD in the e-series funds for my youngest daughter's college days which are still a far way off; and as for the rest--it's time to get cracking and figure out what to buy and when.

The Fun Part: shopping!

Stop Jumping In and Out of Success!

Why jump in and out of stocks at the wrong time and lose money? Whether you are making investment decisions based on your own analysis or using the expertise of others to guide and direct your investments, it's important to examine your past performance to see if your style and plan are actually working. Many financial "advisors" suggest buying and selling various managed funds, while other "experts" tout the snatch and sell on the run method. A common complaint in messages boards and blogs across the net is that of "missing out" on a trend, catching it on the wrong side of a peak or valley, or simply always being one step behind the action--playing the bench instead of enjoying the profits of a trend. Do it yourself investing can be a frustrating path to financial gain if your purchases are disjointed, incoherent or irrational.

Consider An Automated Plan

You've heard this before: set your goals, make a plan, stick to the plan, reassess the plan, rebalance. That's all fine--but it still requires you to do the research, analysis, make the selections and execute them. Financial advisors can do this for you. Fund managers are supposed to this for investors. And there are several online services that provide similar input into your investing activities to take the guesswork out of what to buy, sell, and when.

Single Instrument Investing

There are thousands of mutual funds--either passively managed using indexes, or more actively managed with specific equity allocations--which allow you to invest in a diverse collection of stocks and/or bonds and let your money sit and grow. The problem with many mutual funds is that over 80% of them don't tend to beat the various indexes in which they invest, and often come with significant management fees (MERs) that can chew up 2 to 3% or more of your annual profits. Other companies have designed pure index funds requiring low maintenance and thus lower MERs. ING Direct Canada, for example, offers a selection of Streetwise Funds which aim to replicate Canadian indexes in various proportions of bonds and stocks depending on your investment needs. The company suggests we "invest early, invest often and stay invested", using cost averaging to spread out the cost per unit of the fund and spread the risk of investing over the entire market with low management fees of around 1%.

A variety of exchange traded funds are also available with broad market diversity which serve to expose investors to various markets, various sectors and with optional amounts of bonds and equities, all which can be traded directly on the market like a stock. Some examples of these ETF's which can be purchased individually to replace a diversified mutual fund include these two iShares funds:
XCR: Conservative Core Portfolio Builder seeks to provide a combination of income with the potential for long-term capital growth.
XGR: Growth Core Portfolio Builder seeks to provide long-term capital growth by investing primarily in equity securities and to one or more alternative asset classes, with the balance invested in those that provide exposure to fixed income securities.
Claymore, Horizons and BMO offer similarly diversified ETF's.

Sleepy Portfolio Options

The original Couch Potato Portfolio was designed for investors who want to expend the least amount of energy into their investments by choosing a collection of index mutual or exchange traded funds and rebalancing them from time to time, but at least annually. Find the couch potato portfolio options here.

Memberships in Managed Automated Portfolios

Folio Investing is an American company that offers a portfolio of stocks, ETF's and mutual funds which can be traded in a single transaction. They offer multiple investment strategies based on collections of instruments and even allow you to customize within an strategy if you chose to exclude certain sectors or companies for personal or political reasons. For example, you can elect to delete any companies from a certain group of equities that might be involved in alcohol, tobacco, gambling, weapons, genocide or nuclear power. I really dig their website for its simplicity and attractiveness and functionality. They have a cool questionnaire tool that helps you determine what portfolio to buy based on risk, investment objective, time to retirement and sector interests. Check it out here.

Membership in Self-Directed Do It Yourself Investing Groups

One of my absolute favorite finds of the last few weeks has been doityourselfinvesting.com. The monthly membership service costs $10 at the writing of this blog which gives you a newsletter, regular portfolio updates and any alert notices that you'll need to take action on should urgent buy or sell signals present for equities or ETF's in the core portfolios suggested. They offer 4 portfolios currently: an equities portfolio for the US and one for Canada, and 2 similar ETF portfolios for the Canada and US. They publish their stats, previous holdings, performance and some back issues of newletters which are quite interesting and educational. I was most impressed with their performance during the last flash-crash which far outweighed that of any index fund, most mutual funds and the majority of single ETF's or equities. I highly recommend taking a look here.

Happy Investing!

Disclosure: the author owns shares in ING Streetwise Mutual Funds, is a new member of Do It Yourself Investing, invests in a couch potato portfolio using TD e-series funds, owns shares in XCS - S&P/TSX SmallCap Index Fund and does not own shares of XCR or XGR.

Hooray! for Financial Bloggers!

Search Google for financial advice and you'll navigate through hundreds of sites proclaiming the gospel solution to your investment needs. If you can manage to get to the bottom of this information without having to sign up for endless spam mail or pay through the nose for bulletins and reports, you might come out with a few disjointed tidbits and a whole lot of noise.

Filtering Through The Noise

After spending weeks and weeks bouncing from the large general bodies of information such as the Toronto Stock Market website, TD Canada Trust Investing, The Financial Post and Globe and Mail, I discovered the Financial Blogger.

Financial Bloggers range from the self-taught do-it-yourself-investor to the financial advice professional and everything inbetween: retired CEO's, economics students, stay-at-home mommies and active daytrading techy gurus. And like many internet-based personalities, you might not even know who these people really are huddled behind their computer screens late at night pecking out anals of wisdom and uploading them to cyberworld.

Testing Success

I love to read a Blogger who submits regularly and shows transparency. "Here is what I do. Here is my portfolio. This is what I made. This is what I lost. This is what I did right. See how I screwed up over here."

I want to see the wisdom behind their investments, the reasons for their choices, the analysis they performed, the gut-feeling that moved them, the psychology behind their choices and the results.

Blogs I Like to Read

The Canadian Capitalist Ram Balakrishnan is an Ottawa based software developer with a gradiate degree in Electrical Engineering with over 1000 posts and 1 million subscribers.

The Globe's Market Blog David Berman has been writing about business and investing since 1995. He began his career at Canadian Business magazine, where he wrote full-length features on a range of topics, from goose slaughterers to broadcasters. Later, he moved to MoneySense magazine, where his emphasis turned to investing. More recently, he worked at the Financial Post as an investing writer and daily columnist. He has a bachelor of arts degree from the University of Toronto and studied journalism at Ryerson University.

The Post's Wealthy Boomer Jonathan Chevreau joined the Financial Post in 1993 and has been the personal finance columnist since 1996. He has authored or coauthored eight financial books, including The Wealthy Boomer and a financial novel, Findependence Day. His column runs in the Post on Saturdays and Wednesdays and he blogs most days at wealthyboomer.ca.

Canadian Business' Larry MacDonald Larry MacDonald is a former economist who now manages his own portfolio and writes on investment topics. He is the author of several business books, including corporate biographies of Nortel and Bombardier.

The Canadian Couch Potatoe Dan Bortolotti is a journalist who has written about personal finance for many Canadian magazines, including MoneySense, Financial Post, More, Chatelaine and Today’s Parent.

Invest in the Markets "I work full time, provide for my family, and don’t have a lot of spare time… I was taught at an early age to invest in mutual funds, GICs, Government Savings Bonds, and other forms of “safe” investments. 20 years later, my interest in the markets has developed through education, trial and error, reading and research, and even a couple years as an investment advisor for one of Canada’s major banks."

Money Smarts Blog Mike Holman has worked in the Canadian financial industry for almost two decades.

Million Dollar Journey "Clearly written, accurate, informative, not over-selling an idea, just telling you what you need to know. You shouldn’t take this as comprehensive advice, just as information on high interest rate accounts...this is one personal finance blog that is worthwhile for the average person…"

Beating the Index Mich, the author, works in software, lives in Montreal, has a young family, and is a do-it-yourself-investor with the goal to retire by 64.

Canadian Financial DIY The author describes himself as a late-50s Canadian who has been managing own investments for about fifteen years in taxable accounts. RRSPs, RESPs, LIRAs, trust accounts. Personal finance blogger since early 2007. Former career in government and corporations with a long-ago MBA.

The Earning Curve "Sharing the experiences, knowledge, and challenges of a beginning Canadian investor. My goal is to become educated and effective at maintaining healthy personal finance habits, with a focus on eventual wealth building. The goal of this page is to offer up my investing ideas, issues, and my portfolio, and allow the reader to learn from them, evaluate them, and hopefully discuss them."


Other Investor Resources Online

Business Week   The online version of the magazine, provides a porwerful stock screener.

Globeinvestor   Stocks, investing and financial news from a Canadian perspective.

MoneySense   Canadian all-around personal finance web site.

Ratio Capital   Professional Portfolio Management for Individual and Institutional Investors.

StockCharts   Charts, tools and technical analysis education.

Happy Investing!

Playing The Volatility Game

Investing strategies are as diverse as the people who use them. From the long-term investors who annually buy a handful of sleepy blue chip stocks, bonds or managed funds to the adrenaline junky active day trader who plays the minute swings in market volatility, there is something for just about anyone with a few bucks to throw at the market.

My perception of a typical daytrader comes from movies like Wall Street and news clips from 1999 where images of high rolling super-traders driving Ferrari's, flying in private jets and living the American Dream ran rampant. In reality, most day or "active" traders sit buried at their desk in front of 2 or more screens running chart analyses, checking intraday technical events and watching the news all while managing their tweets, facebook entries and video games for the entire trading day pre- to post-market.

Swing traders are defined as semi-active traders who hold positions from a few days to a few weeks and ride a trend. This, to me, is the kinder, gentler form of active trading as it allows people like me who work day jobs to participate in the market in the evenings and weekends using predetermined limits and stops to buy and sell short term positions. A friend of mine refers to this kind of trading as "stealth" trading, since we seem to be invisible during market hours with our presence only felt in the automatic stops and starts we factor into our trades.

Stocks Defined as Instruments

I find it funny that certain technical programs refer to stocks as instruments. But I get the analogy. A stock is an instrument we use to gain exposure to (or play) world financial markets and hopefully reap some rewards in the process. But as with any instrument, the output is only as good as the input. A violin sounds unrecognizable in the hands of a hack. But a highly trained musician makes beautiful music.

Matching the instrument to the player is key. A well trained guitarist does not automatically excel at playing the saxophone. A sleepy portfolio annual investor does not necessarily make a successful swing trader.

Pick Your Poison

So what instrument do you choose? Ah, the one big question. We can't really expect to day-trade sideways trading sleeping giants like Coca Cola or the current version of Microsoft with any big gains over the short term unless you have thousands of dollars to invest in order to see a portion of a percentage point in profit. And we can't be purchasing options and futures and sit on them expecting any kinds of long term gain by ignoring the market and expecting growth. That would be like buying a treadmill and hoping you get fit by simply owning it.

If you have time to sit in front of multiple computer screens, study and analyze charts, read news feeds and trade on a moment's notice, perhaps active trading is for you. However, if you don't have access to this kind of study time, or the psychological constitution that goes along with this riskier kind of style, swing trading or longer term investing is more likely the way to go.

I've heard some day traders boast about not caring what the company does, how good the product is or what the industry of that company is up to. They don't scan the news since they are only interested in the technicals and charts. They trade the probability of rises and falls in instrument prices based on purely the personality of a stock, future, option or index and specific indicators that signal a buy or sell. Other traders factor in wider market trends and probabilities based on world events, financial milestones, company characteristics and the environmental impact on the market. Still others choose to incorporate a combination of multiple factors to determine their buy and sell signals for a certain type of investment and narrow their collection of instruments down from the entire orchestra of market offerings to a smaller ensemble of selections.

Volatility is the key to active trading. Enter, rise, exit....and fast--over several days, hours, or even minutes. Some stocks bounce up and down with great swings each day--highly volatile. Others trek along at a barely audible pace pulling in or letting go mere fractions of a percentage point in any given day.

Cashing in on Volatility

So if you don't want to spend weeks and months studying individual stock charts for consistent patterns of volatility, how about trading trend volatility--like the cost of gold, oil, natural gas, silver, and even the VIX (Chicago Board of Exchange Volatility Index) itself. Having chosen to add a bit of spice and adrenaline to your investing style, there are a few ways to play some of these bouncy market favorites without the confusion or chaos of entering into options and futures and all the rather complicated instruments available in that particular concert hall.

ETF's are now offered by various companies that allow you to win when the market falls, or invest in futures and even the VIX quite easily. An ETF is a basket of stocks, futures, covered calls, or whatever an ETF company can imagine to include. Learn more about ETF's here. Exchange-traded fund companies listing ETF's on the Canadian market include Horizons, Claymore, iShares and BMO.

For example, Horizons offers some ETF's that offer a bull and bear version for various things like gold, oil, natural gas and even the VIX. You can purchase a bear ETF and invest in dropping gold prices, or the bull counter part if you feel gold is on the rise. If you want to invest in crude oil futures--such as during the current oil unrest in the middle east, Horizons has a crude oil bull and the inverse bear ETF in their repetoire.

I find it somewhat less confusing to peruse the various ETF's available than to navigate through loads of managed mutual funds or try to enter into the options, futures and stock-shorting game. The advantages to ETF's are many but for me, the fact that I can trade them like stocks and the MER's are typical much lower than mutual funds, makes them attractive. Add to the mix these inverse ETF's and new plays on volatility, and you don't have to go very far to find your little band of players.

Personally, I have been enjoying my plays with HOU and am no longer scared of an advancing bear market with all of the inverse and bull ETF's available for me to play with.

Happy Trading!