Blog: Cutting Through the Noise
The ETF Diaries - Part 2Print
Posted on January 22, 2007
Jonathan Chevreau's column in today's Financial Post provides more data on the Claymore ETFs of which I spoke in a recent posting (ETFs' I've Seen This Movie Before).
The column reinforced some of the views I put forward:
- ETFs are moving away from what they do best - provide broad market exposure at rock bottom prices.
- ETFs are rapidly becoming marketing vehicles. Trailer fees are pushing MERs up towards 1.5% in some cases (for funds that are still just index products).
- There are new flavours coming at us regularly. As Chevreau points out, Claymore has a knack for picking trendy markets.
As I pointed out a couple of weeks ago, I still think the low-cost, broad market ETFs are excellent products, in particular, the iShares XICs, which track the S&P/TSX 60 Index and have an MER of 17 basis points.
As investors move away from the simple ETFs, however, they'd better know what they're doing.
Permalink: http://tom.steadyhand.com/default.asp?item=479100
TrackBack URL: http://tom.steadyhand.com/utility/tb/?id=479100
Comments | Add Comment
Posted By: Larry MacDonald (13/02/2007 2:19:17 PM)
Comment: Tom - a few questions/points:
The iShares ETF that tracks the S&P/TSX 60 Index and has a MER of 0.17 is actually the XIU, not the XIC (which tracks the S&P/TSX Capped Composite Index and has a MER of 0.25%).
Many say they like the XIU because of its lower cost. But I understand that its dividend yield is about 0.5 percentage points less than the dividend yield on the Claymore Canadian Fundamental ETF -- which would seem to effectively offset the difference in MERs (comparing the XIU to the Claymore bought through brokers since Claymore's advisor-class version is not selling and thus wouldn't be a valid basis for comparison).
The XIU tracks an index where the resource (energy and mining) sector has, I believe, nearly a 50% weighting whereas the Claymore tracks an index where the resource sector weighting is about 28%. As long-term investors aware of the risks of concentrating a portfolio, is the XIU still the better way for us to go when there appears to be no real cost advantage and back-testing shows that the Claymore outperforms by 200 to 300 basis points annually over the long term?
Response: Larry,
Thanks for the correction on the XIUs versus the XICs. You're absolutely correct. I've got them mixed up before.
As per your other ETF comments, I have a few additional thoughts:
- I agree that the S&P/TSX represents a very distorted portfolio at the present time. I'm not interested in owning it myself, and indeed, as part of adjustments I've made to my asset mix, I have been shorting it (using ETFs) against my active Canadian equity portfolio and my foreign holdings.
- I'm not as familiar with the Claymore products, but I agree that their methodology gives the unitholder a more balanced portfolio. You have to be careful, however, when you use the higher dividend to justify a higher MER. As you know, dividends are part of the total return of a stock (or portfolio), but aren’t an additional source of return. If a company is paying out a higher dividend, it means they are investing less back in their business.
- I'm also leery about putting too much faith in back testing. We can all look backwards and find a strategy that worked better for a portfolio or index. Quantitative-oriented managers have good and bad periods, just as fundamental managers do. Also, to your point, at times like this when the markets are so distorted, back testing can be dangerous.
Thx again for your corrections and comments.
Tom Bradley
