What Is An ETF (Exchange Traded Funds)?

Exchange-Traded Funds (ETF)

First Published: ADawnJournal.com March 28, 2010

What Is An ETF?

An ETF is a type of investment product that trades on an exchange like a stock. However, unlike a stock an ETF is not made of a single entity. An ETF is made of a group of investments. These groups can be a group of stock, bonds, natural resources, commodities, precious metals, etc. In most cases, an ETF follows an Index, as an Index is already made of a group of stock (or other investment products).

Advantages of ETFs

Lower Cost – The ongoing cost of holding ETFs (called Management Expenses Ratio or MER) is lower than mutual funds or index funds. For example, An ETF MER can be in the range of 0.25% – 1.00%; a mutual fund or an index fund MER can run in the range of 1.00% – 3.50%.

Flexibility – ETFs offer more flexibility as they trade on the stock exchange and can be bought or sold throughout the day during regular trading hours. Mutual funds do not offer this option, as they can be transacted using the NAV (Net Asset Value) which comes out at the end of the day.

Diversification – As ETFs are made of a basket of varieties of investments, they provide broad diversification and convenience. It would be time consuming, a lot of hassle, and almost impossible to get the same level of diversification with anything else.

You See What You Get – A major advantage of holding ETFs is that at least you get the return of the underlying index the ETF is tracking. You know what you are getting and you see what you get. With mutual funds, it is totally different. In general, regular mutual funds are made of many individual stocks (or other types of investment products) and most of the time you will have a hard time seeing what you are getting.

Tax Advantage – Tax liabilities are created when trading occurs in the fund. Active fund managers are always buying and selling securities in regular mutual funds. When you sell your mutual funds, fund managers have to sell securities to provide you with cash for your sell. However, this is not the case when you sell your ETFs. When you sell your ETFs, trading can occur between other ETF units holders (in-kind trade) – triggering no capital gain. This means ETFs do not need frequent trading to pay an investor who wants to redeem his part. Less trading creates less tax liability and thus, minimal to none capital gains. However, ETFs do need to trade occasionally. This type of trading occurs when index changes (as they are tracking index).

Easier Asset Allocation – ETFs let you easily manage asset allocation as you are able to see your entire ETFs in one place (your trading account) and thus track and manage asset allocation easily.

Low Maintenance – ETFs allow you to hold a broad range of indexes with minimal supervision. Studies show that experienced ETF investors beat most professional fund managers with a fraction of time and effort spent.

Disadvantages of ETFs

Requires Investment Knowledge – Buying ETFs is not as easy as mutual funds. You need to have a trading account and need to be some sort of investment savvy to hold ETFs.

Brokerage Fees – Buying ETFs incur brokerage commission or trading fees – just like stock, you pay fees to buy and to see. This makes buying ETFs for smaller amounts not justifiable.

No Dollar-Cost-Averaging – Since ETFs incur fees each time and buy and sell, it’s not a good vehicle for dollar cost averaging.

Market Timing – Since ETFs are easy to trade, it may tempt investors to do market timing (buy and sell to chase returns) via frequent trading and thus incurring a lots of transaction fees. ETFs work best for long time investors.

How ETFs Choose Its Holdings or Products

ETFs mainly use two methods to pick its holdings. These are called: Market-capitalization /Cap-weighted indexing and fundamental indexing.

Market-capitalization /Cap-weighted indexing replicates a market as-is. In this methodology, bigger companies have greater influence. Most common indexes such as the S&P/TSX Composite and the S&P 500 use this method. In Canada iShares and in the U.S. Vanguard use this method to operate many equity ETFs.

Fundamental indexing picks stocks by looking at fundamentals (such as earnings, book value, sales, dividends etc), not by size. Fundamental indexing proponents argue that Market-capitalization /Cap-weighted indexing overvalues larger and undervalues smaller equities. So to get true value, stocks’ fundamentals, not sizes should be looked at.

There are other methodologies such as price-weighted indexing, equal- weighted indexing, etc. If you are looking for the best indexing, there is no clear answer. You need to do a little research to find the best one that suits your needs. If you are looking for the cheapest one, Market-capitalization /Cap-weighted ETFs are usually the winner.

How to Buy or Sell ETFs

Since ETFs trade on exchanges, you need a trading account (discount brokerage account) to buy ETFs; just the same way you would buy stocks. In Invest Now, I have mentioned how to open a trading account at an ease.

Are There Any ETFs In Canada?

Canada is the country that invented ETF. |The world’s first ETF traded on the Toronto Stock Exchange in March 1990. Here are some ETF providers in Canada:

iShares Canada – The oldest and largest ETF provider in Canada.

Horizons – Horizons offers AlphaPro and betaPro ETFs. Horizons AlphaPro is the only ETF family that is actively managed ETF in Canada. Horizons BetaPro offers leveraged and inverse leveraged ETFs to profit in both bull and bear markets.

Claymore ETFs – Claymore offers various innovative intelligent investment strategies ETFs. This is the only company that offers ETFs that can do DRIPs (dividend reinvestment plan) in Canada.

BMO Exchange Traded Funds – New player in the ETF markets and the only major Canadian financial group to offer ETFs.

TMXMoney has a section on Exchange Traded Funds and I strongly encourage you to visit it.

How to Build an ETF Portfolio

I recommend you read these two articles I wrote.

How to Build an Investment Portfolio

What Is Asset Allocation?

A Dawn Portfolio (I am still working on this project and will add a link once done)

Once you are finished reading, do some more research and do some more reading from various other sources to have a good grasp of ETF. And then, if you are confident enough, construct a suitable portfolio that fits your needs. If you are not comfortable figuring out on your own, seek help from professional financial advisors.

NB – Currently, I do not have any articles giving ETF ideas, examples of Indices ETFs track and so on. I will be writing more on these in the future.

How Risky Are ETFs?

No investments come without risk (except some fixed income products like money market instruments, T – Bills, etc). However, due to the fact that ETFs provide a broad diversification with a wide variety of investments, you may be able to reduce some risk.

Last Word

As I mentioned in Invest Now, investment is an art. As such, it requires discipline, hard work and consistency. Do not blindly follow any ETF model portfolios or tools just because it looks cool. You are different than anyone else – make an educated decision based on your time horizon, risk tolerance, financial goals, and your overall financial situation.

Is A Dawn Journal The Best Personal Finance Blog?

Is A Dawn Journal The Top Personal Finance Blog?

First Published: ADawnJournal.com May 4, 2010

Is it possible to rank a personal finance blog or website “The Best” based on its traffic or content? I don’t know how many personal finance blogs exist today on the Internet; however, I do know that there are roughly 130 million blogs live these days and this number will only grow in the future. Among the total number of blogs, even if only a few percentages are personal finance blogs, that makes the total number of financial blogs a significant big number. And claiming one particular blog, such as A Dawn Journal to be “The Best Personal Finance Blog or Website” or “The Top Personal Finance Blog or website” would be preposterous. However, I would not hesitate to claim A Dawn Journal to be a very “different kind of personal finance blog or website” and I can claim that with confidence.

Here are some facts that make ADJ fairly distinguishable from its peers, different from any other financial blogs. Let’s go over some of these facts:

o You will come across many personal finance blogs these days; however, you will hardly come across situations in which the authors of these blogs have both education and work- related financial background. I come from both an educational and work-related strong financial background. My extensive education, training and experience have enabled me to develop the knowledge and skills required to write this and many other blogs.

o Most other financial sites have something in common – they are for professional investors; hardly will you find a personal finance blog which is easy to absorb and written in clear and simple English for regular and simple readers who are trying to enhance personal finance knowledge to build a secure financial future – just like you.

o Repetition of subjects is what you will find in many other personal finance blogs. How many times you can read articles in same subjects over and over? Do you really want to hold an MBA on TFSA account, discount brokerage ratings, ins and outs of smith maneuvering, how to do wash trading in your brokerage account and so on?

o I try to balance articles on ADJ on a variety of topics ranging across a wide array of subjects. You will come across articles from different viewpoints and every walk of life. The reason I do this? I would like to keep you informed and entertained without boring you and keeping things simple.

o I am one of the few financial bloggers who is also a Financial Author, an Internet Entrepreneur, and a full time Analyst at a Canadian Wealth Management Corp. trying to achieve my goal of living a Dot Com Lifestyle. My interest varies on a broad range of topics from International Real Estate to Green Living. I own lots of domains and many websites. At the end of this post, I will give you a list of my sites for which I write and update manually by myself.

After considering all the facts I presented above, it is up to you to see A Dawn Journal as the best or top personal finance blog or website, a different financial blog, or the worst personal finance blog ever. Regardless of what you think of ADJ, I appreciate your time for reading A Dawn Journal and hope to see you again.

What Is Asset Allocation?

Asset Allocation, Diversification, and Your Portfolio

First Published: ADawnJournal.com March 3, 2010

Asset allocation is an investment strategy which simply entails allocating your assets (your investment portfolio) among different categories of investments, such as stocks, bonds, money market funds, cash etc. Asset allocation helps to minimize risks and maximize gains because it diversifies your portfolio among various types of investment or investment products instead of keeping them in one place.

What Types of Asset Allocation Will Work Best For Me?

Although there are many rules of thumb regarding asset allocation, no one can tell you exactly which one is right or which one is wrong for you – as this is a very personal matter which largely depends on various factors as described below:

·   Time Horizon: Time horizon is how much time you have ahead of you to invest in reaching your financial goals. An investor with a longer time horizon has time on his side and will be able to choose volatile or riskier products for maximum returns – because if markets go down, this investor can wait to ride out the volatility. On the other hand, an investor with shorter time horizon will not be able to afford risky product, as he will not have the luxury to wait for the market to go up if he falls into financial meltdown.

·   Risk Tolerance: Risk tolerance is your ability to take risks for better returns. In the investment world, risk and reward are inextricably entwined. If you are young (like in your 20s or 30s), you may not care that much about losing 35% of your value, as you know you have a long way to go. But when you are in your 40s or 50s, with kids’ education and retirement in mind, a 20% drop in your portfolio may be enough to lose sleep at night.

·   Investing Is An Ongoing Learning Process: In my book Invest Now, I have mentioned that investment is nothing but a discipline, and it has to be orchestrated with great passion and care. Investment is not like going to the shopping mall and buying a few things impulsively – it is a lifelong learning process. Asset allocation or any other investment ideas are not set in stone and these will change as time changes. Always upgrade yourself with financial changes in the broad global perspective and you will have to change your investment strategies to bridge the gap between the present and the future.

·   Individuality Counts: Although you will find there are many rules of thumb or pre-made portfolios when it comes to asset allocation, there is no single allocation or portfolio available that will be right for everyone. Everyone is different and so should be their asset allocation. The onus is on you to find out the best asset allocation that suits your needs.

What Are Some Major Asset Categories?

These days, a wide array of investment products exist to give you a wide range of asset allocation with a broad diversification. However, there are only three major asset categories I will mention here:

·   Equities or Stocks: The word “stock” is interchangeable with “share,” “equity,” “security” and so on. Stocks represent ownership in a company and historically offer the greatest risk and highest returns among other asset groups mentioned here. Stocks should not be used as a short term investment as it can be very volatile to hold for a short period of time.

·   Fixed Income Investments or Bonds: Some other fixed income investment products are government savings bonds, bond mutual funds, etc. These types of products are less volatile than equities and offer modest returns as well. Fixed income products can offer steady flow of income – depending on its objective.

·   Cash Equivalents or Cash: This can be plain cash or products like savings accounts, money market funds, treasury bills, etc. These are considered the safest investments with minimal returns with almost no risks.

Why Asset Allocation Works?

Due to economic and market conditions, no one can predict the best performing assets and it varies year to year. Time has proved that during bad and good economic times, all asset classes do not move in the same direction. By diversifying your assets among various categories, you are minimizing your risks. If one asset class goes down, the other asset class is there to protect you by averaging out. Also, to reach your financial goals, you need to balance your portfolio by keeping both high-return and low-return investment products. If you keep only one type of product in your portfolio, you may never be able to reach your investment objectives – as it will be either too risky or too safe. Asset allocation helps you to diversify and balance your portfolio.

What Are Some Common Asset Allocation Rules of Thumb?

There are so many rules of thumb on this topic that it can be overwhelming. Many consider a neutral asset allocation should be 60% stocks and 40% bonds. Another rule of thumb goes like: subtract your age from 100 and you will get the percentage to hold in stocks. For example, if you are 40, 100-40 = 60% of your portfolio should be in stocks and 40% should be in bonds.

Is Diversification Same As Asset Allocation?

The old saying “Don’t put all your eggs in one basket” was good advice 100 years ago, and it will be good advice forever. Whether you are a first-time or a veteran investor, you always need to spread out your investments to minimize your risks. Diversification refers to the process of spreading investments among various equities. Asset allocation refers to the process of spreading investments beyond multiple equities and over several asset classes such equities, bonds, cash, etc.

Asset Allocation is a diversification strategy that helps you to offset decline in any particular asset classes by gains in other asset classes – thus reducing the fluctuations of performance of a portfolio. It is unlikely that all asset classes will go downhill at the same time.

Do You Have Your Own Asset Allocation Model Portfolio?

Yes, to make investing simple and worry-free, I have invented a model portfolio called “A Dawn Timeless Portfolio” or simply ADTP. You can read more about ADTP here – (I am still working on this project and will add a link once done)

To find many other online asset allocation calculators, do a search by entering these keyword phrases: “asset allocation calculators,” “portfolio asset allocations tools,” etc.

Last Word

Model portfolios and asset allocation tools are to help you understand asset allocation. Do not blindly follow any model portfolios or tools just because it looks cool. You are different than anyone else – make an educated decision based on your time horizon, risk tolerance, financial goals, and your overall financial situation.

How to Build an Investment Portfolio

How to Create an Investment Portfolio

First Published: ADawnJournal.com March 14, 2010

What Is An Investment Portfolio?

An investment portfolio is nothing but your collection of investments. You can hold a wide range of investments such as stocks, bonds, money market instruments, and so on in your portfolio. The objective of building a portfolio is to minimize risks and maximize return by diversify it among variety of investments. Diversification can be made within same asset class or across different asset classes. Research has shown that a diversified portfolio spreading across different classes always is the key to build a successful portfolio.

What I Need To Consider Before Building A Portfolio?

There are various factors you should consider before start building a portfolio. These factors are:

– Your time horizon
– Your risk Tolerance
– Your investment objects etc
I discussed about these in another article. Please follow this link to read it – What Is Asset Allocation?

Are There Any General Rules of Thumb Building An Investment Portfolio?

There are too many, actually. I would have to say, the most common rule is the 100 – age rule. This is simply getting the percentage of stocks and bonds you should hold by subtracting your age from 100. For example, if you are 30, you should hold (100 – 30) 70 per cent stocks and 30 per cent bonds. As you grow older, you should be reducing your stock portion according to this rule. When you are 60, you should be holding 40 per cent stocks and 60 per cent bonds.

Another simple portfolio building approach is the Neutral Allocation – which is holding 60 per cent stocks and 40 per cent bonds. Two other portfolios worth mentioning are Lazy man or couch potato portfolios by Scott Burns and The Permanent Portfolio by Harry Browne.

To find many other portfolio ideas, do a search by entering these keyword phrases: “investment portfolio mix,” “portfolio asset allocations tools,” “model investment portfolio,”etc.

Do You Have Your Own Investment Model Portfolio?

Yes, to make investing simple and worry-free, I have been invented a model portfolio called “A Dawn Portfolio” or simply ADP. You can read more about ADP here – (I am still working on this project and will add a link once done)

To find many other online asset allocation calculators, do a search by entering these keyword phrases: “asset allocation calculators,” “portfolio asset allocations tools,” etc

Last Word

Of course, you need to decide if the recommended allocations match with your personal risk tolerance and market views. Investments must be considered in context

If you are at all interested in asset allocation strategies, I strongly recommend that you read about the science. Don’t just follow conventional thinking and rules of thumb.

What Is A GIC (Guaranteed Investment Certificate)?

What Is A GIC (Guaranteed Investment Certificate)?

First Published: September 13, 2009 ADawnJournal.com

GICs are investment product (like mutual funds, bonds) that guarantees you to protect your principle (the amount you put in) with a guaranteed income for a particular period of time.

How Do GICs Work?

When you buy GICs, you are lending your money to the financial institution at a fixed or a variable interest rate, or based on a pre-determined formula (or arrangements) for a certain period of time. In return, at the end of the term, financial institution is giving you back the money you originally invested (called principle or capital) plus the interest you earned.

How Many Types Of GICs Are There?

Financial institutions will try to confuse you by giving many fancy names for their GICs. However, there are mainly two types of GICs. The first type pays fixed interest rate, and the second type pays variable interest rate. The second type can be linked to an index, a stock market, or a prime interest rate to pay you variable interest rate. Now let’s look at some other common terms institutions use:

Cashable GICs – You can cash it any times based on the terms provided by financial institutions. This may also be known as Redeemable GICs.

Non-Redeemable GICs – You won’t be able to redeem it until your GIC matures.

Index-Linked GICs – GICs that are linked to stock markets. This may also be known as Market-Linked GICs.

Where Can I Buy GIC?

Various financial institutions sell GICs such as banks, credit unions, discount brokerages, and other financial institutions. Also, your financial advisors are able to sell GICs through the institutions they are affiliated with.

Advantages of GICs

Here are the main advantages of GICs:

Principle Protection: Depending on what you buy, money invested in GICs can be safe and secure. At the end of the term, you will get back your capital you original invested. However, if you have security in your mind, it is recommended that you talk to a qualified financial professional.

Safe Parking: If you are not sure where to invest your money for the long term, you can park your money in short-term GICS while you can search for other options.

Higher Interest: GIC pays higher interest than traditional savings account.

CDIC Protection: Some GICs offered by CDIC insured institutions are protected for up to $100,000. Talk to your financial institutions to investigate this further.

Easy and Simple: GICs are easy to understand and simple to manage. You don’t need to have an MBA to invest your money in GICS.

Disadvantages of GICs

Here are the main disadvantages of GICs:

Liquidity: GICs aren’t very liquid (easy to withdraw) when you need your money
right away. A high interest savings account offers better liquidity than
GICs in most cases. With a GIC, your money is tied up for a specific period of time, i.e.,
one to three years.

Interest Income: If held in a non-registered account, interest earned on a GIC is
is taxed at a higher rate, for example, taxed at your full marginal tax rate.

Don’t Forget Inflation: Let’s say your GIC is giving you 2% interest. And consider that the annual inflation rate is 3%. If you keep $100 in your GIC for one year, you should have $102 in your hands after one year, right? Well, yes, technically, but that $102 is less than you started with. Due to inflation, you need $103 to buy same goods you would have bought with $100 a year ago. So actually, you lost money-$1, to be exact. Yes, real rates of return GICs can be negative or lower than what you actually see.

Final Word

I am not a fan of GICs. In Invest Now: A Canadian’s Guide to Investing I have discussed how to invest without being a financial guru in non-GIC products such as mutual funds. If the idea of losing money makes you lose sleep and you absolutely can’t take the slightest risks, may be GICS are an option for you. Talk to a qualified financial professional – before making any decisions.