My Own Advisor

 

A few years ago, for the most part, I cemented my financial plan.  Part of that plan includes investing in established companies that have a history of paying dividends and investing in broad market Exchange Traded Funds (ETFs).  I didn’t create my financial plan on any whim.  It was founded on years of built-up frustration not know how my portfolio was performing, based on years of making too many investment mistakes and maybe worst of all, thinking others would care just as much as I do about my financial future.

In my early 30s, I started to get my financial act together and since that time I think I’ve been much healthier financially for it.  This blog was created to help others do the same so I hope you continue to follow along.  I just wish I started this financial journey in my 20s…

Luckily for many Canadians, whether you are 20-something or 50-something, there is more help than ever before for your financial journey – and one such tool can be this free ebook ETF Investing – Low Maintenance & Stellar Returns.

I frequently write about dividend investing and related matters on this site because it’s my passion but ETFs deserve some attention as well.  Investing in stocks takes some work but for the most part investing in broad market ETFs does not and for the majority of investors, that’s probably what they should invest in anyhow.  Why?  Using the Couch Potato strategy or index investing is probably one of the best things you can do to guarantee financial success.  I found this out a few years back and kudos to my blogging mate Teacher Man who blogs at My University Money who figured this out much earlier than I did.

This is why the free ebook ETF Investing – Low Maintenance & Stellar Returns is so helpful.  For the majority of investors, this book explains why investing using ETFs will work for you, it is one of the most efficient (low costs) and most effective (solid returns) ways to manage your money.  This book includes some research to support this but it will not bury you with lots of complex academia about indexing that most folks don’t have the time or the inclination to read about.  This ebook is only 45 pages long.  If you still don’t want to take my word for it or Teacher Man’s that indexing using ETFs is a great thing to do watch this 2-minute clip with Warren Buffett.

Back to the ETF Investing – Low Maintenance & Stellar Returns, here is what you are going to read about in this cool ebook for free:

Chapter 1: How Can I Make You $248,484.92, While You Chill On Your Couch?

Chapter 2: My Story

Chapter 3: What the Heck is ETF?

Chapter 4: Why Most People Can’t Beat The Average and Why You Shouldn’t Try

Chapter 5: Why ETFs Kick Mutual Funds’ Butt!

Chapter 6: What ETFs Belong In My Portfolio

Chapter 7: Exotic ETFs

Chapter 8: Potential Drawbacks of ETF Investing and How To Minimize Them

Chapter 9: Getting Started With ETFs In 99 Minutes or Less…

This ebook is a good guide for any investor who:

• Doesn’t want to bother with the world of stock picking
• Is curious about Couch Potato investing
• Has heard about Exchange Traded Funds (ETFs) but doesn’t know much about them
• Wants to lower their investment costs
• Wants an investment portfolio that is easy to maintain

If you see yourself in any of these bullets above download a copy of this ebook here and start reading.  I hope you enjoy it and learn from it.

Have you read the ETF Investing – Low Maintenance & Stellar Returns ebook?

What did you think?

Thanks for reading and sharing this article.

Every week, I receive many requests and questions from readers in my inbox.

Thanks for those by the way and keep those questions coming folks.

One of the more frequent questions to My Own Advisor is:

Why don’t you just buy and hold a dividend ETF instead of individual stocks?

Good question.

Before I provide you with my answer, a bit about dividend ETFs and why I do like them.

Why dividend ETFs are great

First of all, like many other ETFs, I like the transparency dividend ETFs provide.  Within a few clicks of a mouse, I can see what every single holding is in each of these popular products:

iShares Dow Jones Canada Select Dividend ETF (XDV)

iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ)

BMO Canadian Dividend ETF (ZDV)

Horizons Dividend ETF (HAL)

The high transparency of dividend ETFs certainly trumps the “black box” approach to many other investment products.

Secondly, I like dividend ETFs because of their moderate management fees.  The fact is, dividend ETFs are cheaper than most if not all, actively managed dividend mutual funds, at least the ones I can find.  Many mutual funds buy and sell stocks frequently in an attempt to beat the market. Buying and selling frequently incurs costs, and those portfolio costs are passed on to you. Instead of all this trading, investors can simply focus on buying and holding an ETF to follow a dividend index or a benchmark index like the S&P/TSX Composite Total Return Index.  Many dividend ETFs have management fees in the neighbourhood of 0.60%.  Compare that to TD Dividend Growth Fund (at just over 2% as of December 2011) and RBC Canadian Dividend Fund (at about 1.8% management expense ratio (MER)), and you’re saving a bunch of money in management fees.  Good on you to do so.

Thirdly, dividend ETFs are low effort.  If you’re going to invest in individual stocks, you need to spend some time understanding these companies.  I read annual reports and follow metrics like yield, payout ratio, earnings per share, cash flow and company debt to name a few.  Buying stocks means another investor is selling this company so you need to make time to understand what you are buying and when.  Dividend ETFs don’t have this complexity.

Why I prefer individual dividend paying stocks

All this said, dividend ETFs are great products but there are a few reasons why I prefer to own stocks directly where I can, and I intend to buy and hold many more of them in my investing future.

First of all, some dividend ETFs have specific criteria and measure some constructed indexes I don’t fully agree with.  For example, the iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ) “has been designed to replicate the performance of the S&P/TSX Canadian Dividend Aristocrats Index®”.   For a company to qualify as a holding in this product, the company must have increased their ordinary cash dividend every year for at least five consecutive years, among other criteria as well.  This is sound criteria but it also means some stellar Canadian companies that have great histories of paying dividends are not included in this product.  Bank of Montreal is just one example that comes to mind.  BMO has been paying dividends every year, uninterrupted, since 1829.  Therefore, while CDZ has some great companies in it, it does tend to leave a few solid companies out.

Secondly, as a consequence of the management criteria; these products are designed and marketed to investors after all, so not all dividend ETFs are created equal.  To meet my investment objectives I would need to own a couple dividend ETFs to get what I want.  For example, XDV is particularly weighted in Canadian financials; to the tune of almost 55% of its holdings. That’s a bit too much bias in this sector for me.  It might be wise to offset this ETF with another, like CDZ or HAL to balance things out.  Given this, I might as well own XIU for the diversification and the ultra low management fee, 0.18% MER.  Actually, I do own it.

Thirdly, on the topic of fees, I save money. By owning individual dividend paying stocks instead of just dividend ETFs, I don’t pay management fees.  Yes, I miss the low-cost, built-in diversification with ETFs but if you get the point of owning 25+ dividend paying companies in Canada, maybe some of the same ones listed in the popular dividend ETFs like XDV and CDZ, you’re indexing by proxy at this point and you can forget the 0.60% or more MER.  Within the next 5 years, I hope to have my own dividend index of over 30 Canadian companies.  I’m over halfway there.

Fourth and finally, I control the portfolio and the portfolio turnover.  My long term goal is to grow my dividend stock portfolio to the point where I can live off part of the income in retirement, with many investments across many industries.  I’ve been on this journey for a few years now and the progress is starting to show.  By owning individual stocks, I’m in control of the portfolio.  I can weight the companies however I wish.  By choosing a dividend ETF, I would not have as much control because these products often weight their holdings by market capitalization and have predefined turnover periods; the reconstitution is done for me so I wouldn’t know how many companies I will indirectly own until the ETF is rebalanced.  Another benefit, I can take advantage of the discounts these companies provide for dividend reinvestments (DRIPs).  Believe it or not, many established Canadian dividend paying companies provide you with a discount for DRIPping shares, some up to 5%.  Check this out for proof.

In closing, dividend ETFs are great but they are not perfect, they are financial products and all products have flaws.  I’ll never be able to replicate the indexes, which is why I will always have a two-pronged approach to manage my portfolio, owning some broad market, low-cost ETFs and some dividend paying stocks.  This way, I feel I’m getting the best of both worlds.

Thanks to all the readers who have emailed me this question…I hope I have provided you with an answer.

Comments on my reasoning?  Comments on comments?  Have a question for My Own Advisor?  Fire away and maybe, your question will be part of a future blogpost!

Thanks for reading and sharing this article.

 

For folks who have followed My Own Advisor for some time, you might already know that I employ a two-pronged approach to grow my retirement portfolio across various accounts.

One approach is using dividend paying stocks from both Canada and the U.S.  From the companies I own I get steady income and some capital appreciation.  Some of my holdings include Canadian banks, pipelines, insurance companies and telecommunications companies.  I also own some U.S. dividend aristocrats.

My other approach is using broad market Exchange Traded Funds (ETFs) for passive investing.  From these ETFs I receive market returns less miniscle fees.  Some of my holdings include iShares S&P/TSX 60 Index Fund (XIU) and Vanguard MSCI Emerging Markets ETF (VWO).  After reading various articles about index investing over the last few years, I’ve cemented a few top reasons why ETFs work for me beyond market diversification and market returns.   Here are the others…

Low Costs

Fact:  Index ETFs are cheaper than most actively managed mutual funds. Many mutual funds buy and sell stocks frequently in an attempt to beat the market.  Buying and selling frequently incurs costs.  Instead of all this speculation, index investors can simply focus on buying and holding broad market ETFs and leave them alone for months on end.  Many Canadian equity mutual funds have management expense ratios (MERs) over 2%.  Many Canadian equity indexed products charge less than 0.50%.  This means a mutual fund manager has to beat these indexed products by more than 1.5% just to break even.  Good luck to them.

Gotta like inexpensive.

High Transparency

Fact:  Many mutual funds report their top-10 holdings but not much else.  The unfortunate part of this is; you are never entirely sure what you own with many actively managed mutual funds.  Instead of head scratching to figure out what you actually own, many indexed ETFs are built on a model of simplicity and transparency.  Want to know what the holdings of XIU are?  Click here.

Gotta like simple.

Low Effort

Fact:  If you invest in stocks you need to spend some time understanding these companies.  At least you should.  I read annual reports, news briefs and follow metrics like yield, payout ratio, earnings per share, cash flow and company debt to name a few.  The reality is if you’re buying a stock, somebody is selling it.  Buying stocks means I’m competing against other investors.  I will hopefully win at this game by holding the stock longer than most, collecting rising dividend income over time and capturing some capital appreciation in the process.  Indexed ETFs don’t have this effort, not even close.  With broad market indexed ETFs and a combination of them in your portfolio, you’ll get whatever returns the markets provide less miniscule fees.  This will give you more time to do other fun things.

Gotta like easy.

Diversified, market returns and throw in inexpensive, simple and easy for good measure.

You don’t hear those buzzwords when it comes to investing very often do you?

Are you investing with index ETFs?  If so, which ones?  If not, why not and what are you waiting for?

Thanks for reading and sharing this article.

For years, the financial industry has promoted and used mutual funds for personal and institutional portfolios.  Actually, it’s been more than years, centuries in fact.  The advent of mutual funds dates back to the late-1700’s in Europe.

The first Canadian mutual fund, Canadian Investment Fund Ltd. (CIF) was established in 1932.   Since then, the name has changed:  from Spectrum United Canadian Investment Fund to CI Canadian Investment Fund but the premise remains the same:  ordinary investors who have minimal capital can pool their funds into a professionally managed investment product.

The first major sign of growth and popularity of mutual funds in Canada started in the 1960’s when total assets under management (AUM) doubled from $540 million in 1960 to more than $1 billion by the end of 1963.   But the largest influx into mutual funds in Canada came during the 1990’s when double-digit interest rates lured Canadian investors into investment products with the potential for higher returns.

Since the 1990s, mutual funds continued their ascent into the portfolios of Canadian households, with AUM increasing from $25 billion in December 1990 to $426 billion by December 2001, with latest figures close to $800 billion.  No doubt mutual funds remain big business in Canada and likely will for decades to come.  However I have to wonder with so many niche ETF products hitting the market if financial history is repeating itself right before our eyes.

We’re on our way to having a diverse menu of 300 Exchange Traded Funds (ETFs) to select from in Canada after having just a handful or so 10 years ago.  More ETF products are on the way.

Since those ETFs were available a decade ago, I’ve read about a host of “new wave” ETF products that do not track any standard index.  Instead some new ETF products or niche products have been designed to mirror creative indices.  In a few cases, these ETF products have very low trading volumes, so I liken them to venture stocks.  There are now double-inverse ETFs that go beyond inverse ETFs, so you can try and profit from declines in broad market indicies.  Seems like a good idea but I struggle with these types of products, at least for my portfolio.  As an investor, maybe I’m not sophisticated enough.  Then again I’ve always been a fan of vanilla over neapolitan.

While the differences between mutual funds and ETFs are numerous I can’t help but think some of today’s new wave ETFs are cheaper, repackaged mutual funds in disguise.  Mutual funds still offer Canadian investors a means to accumulate wealth if selected and used properly, but that’s a big IF in my opinion.  Some of these niche ETFs seem to offer the same personalized investment solutions that many mutual funds have delivered for generations:

• Convenient administration
• Risk management through diversification
• Opportunities for foreign and domestic holdings
• Innovative fee structures

How long will it be before the number of ETFs rival the number mutual funds?  10 years?  More?  Less?

I really don’t know the answer but I confess the answer doesn’t matter to me because to date I only invest in broad market ETFs that track established industry indices; S&P/TSX 60 Index and the DEX Bond Universe Index to name a couple.   ETFs like XIU and XBB provide me with a great deal of security, knowing I’ll receive near market returns less miniscule fees.  If I’m looking for fun, I got plenty of practice years ago trying to play/trade small cap stocks.  Those days are long over.  I invest in only broad market ETFs like XIU, XBB, VWO and a couple of others, and Canadian and U.S. dividend-paying stocks.  That’s it.

While I think the majority of existing ETFs are excellent products for many investors, based on some of the boutique ETFs I’ve read about…I say to the financial industry keep them coming.  I won’t be buying any.

What about you?  Share your comments!

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Thanks for reading and sharing this article.

 

A few weeks ago, Larry Swedroe wrote in a CBS News Moneywatch article that buying what you know is a bad investment strategy.

I disagree with that actually.

For those who might now know who Larry Swedroe is, he is the Principal and Director of Research for Buckingham Asset Management and an accomplished author who has published 11 investment books, the most recent one, The Quest for Alpha.  He’s a very bright guy, he’s legendary actually.   I had the pleasure of meeting Larry last year here in Ottawa.  When it comes to passive investing or investing in general, Larry knows his stuff.   However, when he made the claim “buy what you know” is a bad investment strategy, I took notice and dared to disagree.

I think buying what you know can be an excellent strategy.

First, let’s go to the article and to some of the findings the article referenced.

The Moneywatch article referenced a recent study entitled “Do Individual Investors Have Asymmetric Information Based on Work Experience?” to put the “buy what you know” theory to test.  Some of the findings of this study are summarized below (my thoughts follow in italics):

• Individuals failed to diversify their human capital, overweighting stocks in their industry of employment.

I suspect this is not uncommon but this seems more like a diversification issue than a “buying what you know” issue.

• Individuals didn’t earn abnormal returns when trading professionally close stocks. On a one-year level, a portfolio of stocks related to investors’ areas of expertise had a negative alpha of about 5 percent (meaning investors performed worse than the benchmark).

I think a one-year window for investment analysis purposes or to suggest a trend, is a very short window.  Actually, the window is barely open to take a decent look.

• Individuals traded excessively in professionally close stocks, showing that investors felt more confident trading stocks of companies they knew.

In my opinion, trading is not investing.  Going another step further, I think excessive trading is more akin to gambling.  I’m not a financial pro by any means but I believe investing is correlated to making a financial plan and sticking with it.  This plan can include stocks, bonds, a savings account, debt repayment or any combination of these. 

• Advanced degrees didn’t provide any benefit. Those with a Ph.D. didn’t generate abnormal returns.

Not sure how advanced degrees have anything to do with buying what you know but I can only assume there is a bias to being overconfident because you are a subject matter expert if you hold a Ph.D.

If the findings from the study want to suggest investors have a false sense of security when they invest in the stocks of their employer, I can support that.  These individuals may be overconfident owners of their company based on the industry they work in.  Yet buying what you know can make great sense as long as you are following good portfolio management practices – buying a diversified set of what you know over time. 

Many mutual funds and exchange-traded funds (ETFs) have done this diversification for you, for a fee of course, which makes things much easier since you have instant diversification.  To this point, dividend investors have a challenge that index investors do not have, they are taking some risk upon themselves to diversify their portfolio over time.  

The following companies have been dividend stalwarts for decades.  These companies also comprise the top holdings of many dividend and equity exchange-traded funds (ETFs) in Canada.  In the  name of buying what you know, I figure if the biggest funds and ETFs in Canada hold these companies, if I’m going to own stocks directly then I should own them too.  Here are some examples of what many Canadian dividend and equity funds own as part of their top holdings:

• Major financial companies (TD Bank, Royal Bank, Bank of Montreal, CIBC, Bank of Nova Scotia, Manulife)
• Major energy and utility companies (Enbridge, Suncor, Canadian Natural Resources, TransCanada, Fortis, TransAlta)
• Major telecommunications companies (Bell Canada, Rogers, Telus, Shaw)

If you owned these companies, you might be surprised that through buying what you know, you’d own about 50% of the equities in the TSX by market value.

In closing, I definitely agree with Larry Swedroe that diversification is the only free lunch in investing so you might as well eat a lot of it but buying what you know can make great sense as long as diversification principles are applied.  Otherwise, if you’re going to put your eggs in one basket just remember it’s one basket.

Thanks for reading and sharing this article.