Archive for the ‘Filter ETF’ Category

ETF’s With A Currency Hedge…Or Not? You Have To Nail This One…

By: Pete | Date posted: 11.05.2012 (4:00 am)

I’ve gotta admit, this one drives me insane. Selecting an ETF doesn’t take a rocket scientist and it’s not a month long process. But if you’re not going to take 10-20 minutes to make sure that the ETF you will count on for your retirement is tracking what you’re looking for, then you might as well go pay out those high management fees and end up paying tens of thousands of dollars (or a lot more) in fees. Why? Because it’s the core of building an ETF portfolio.

One Great Example

In almost any dividend portfolio, international assets will occupy a decent weight. Why? The top benefit is diversification which I would describe as being able to generate additional return for the same level of risk. It’s a no-brainer when you think about it. That does not mean you will always outperform someone who does not have international ETF’s. However, over long periods of time, you will end up a winner more often than not. It’s the same reason why most of us prefer to buy an ETF that tracks the S&P500 rather than buying 1 or 2 stocks that we have great belief in.

International markets react differently than domestic ones which creates the diversification. Another aspect though is the currency. If you hold an ETF that tracks Australian stocks, chances are that you’d also like to have exposure to the Australian dollar! Why? Same reason, it gives you more diversification than an Australian ETF that has a currency hedge.

If You’re Not Convinced Yet

Just in case you’re still unsure, I do have one more argument. Currency hedging is tricky for ETF’s and because of that fund managers have historically struggled with hedging correctly which has created more tracking error and more fees.

What Do You Hold?

Have you purchased any international ETF’s? If so, I hope you know if they are currency hedged or not? What do you generally prefer? I know that some investors disagree but I’m personally convinced that almost all investors should hold ETF’s that DO NOT currency hedge.

Commission Free ETF Trading, Fact Or Reality?

By: Pete | Date posted: 10.05.2012 (12:37 am)

Both in Canada and the US, several brokers are able to offer commission free ETF trading. Several brokers such as Firstrade, TD Ameritrade and Fidelity offer this in the US. Basically, such brokers offer the ability to buy and sell a select group of ETF’s, free of charge. If you are considering building a long term ETF portfolio, it is very possible that this is something worth looking for. The main things I’d look for are:

-the list of the ETF’s that can be traded free of commission
-how those ETF’s compare to competing products

For example, Fidelity offers commission free trading on EEM which is good but has been an inferior offering compared to VWO for example which is offered commission free on TD Ameritrade. I don’t think you need to always have the best ETF but it’s worth trying to look for the best fit depending on how active you’ll end up being as well. Just as an example, here are the ones offered by Fidelity:

You can also see the even better list offered by TD Ameritrade:

As you can see, you are able to access ETF’s from virtually every asset class, free of charge, which can make a bug difference, especially for smaller size portfolios where the commissions can end up having an impact on returns.

How This Is Possible

If an ETF such as SPY is trading at the following market:

Bid: 145.12
Offer: 145.13

What the broker will do is offer you to buy for free at 145.13 and sell at 145.12. The goal is for the broker to make a small profit on each trade, especially when clients are trading both sides.

So yes, sometimes free really does exist

5 Different Ways To Filter ETF’s

By: Pete | Date posted: 01.22.2012 (9:29 pm)

While we did suggest a few different sample ETF portfolios, there are certainly chances that you will want to have different ETF’s in your own and there are a variety of reasons why that would be the case. In fact, even if you do end up using one of those, you would probably be much better off understanding ETF’s, how to judge and choose them, etc. There are many different things that you should look for when judging an ETF, here are a few:

#1-ETF objectives: You can generally get a summary from the issuer’s website or get more details by looking at documents like a prospectus. The main thing is that ETF’s that look similar can behave very differently. For example, an ETF that tracks gold could:

-Be buying gold company stocks
-Be buying gold futures
-Be buying physical gold

In each case, the result would be different. It’s critical for you to understand what the purpose of the ETF is.

#2-The Issuer: Companies like iShares and Vanguard have very solid track records, solid balance sheets and are backed, etc. That is a good thing but it’s also a good idea to not have all of your assets with one issuer, just in case. You can use 3 or 4 of them and get products that are as efficient.

#3-Volume and Spreads: Buying an ETF also means that at some point you will be selling right? Any trade involves a cost that is more than your commission. One part is the NAV discount or premium. If an ETF is worth $10.00 and you are buying it for $10.03 on the market, that $0.03 is a “loss”. In general, higher volume in an ETF also means that the bid-ask spread is smaller. That will result in a much smaller cost when you trade in and out of the ETF. It’s not always the case but it’s a good general rule. Another method would be to look at given points of the day how wide the spread is. Anything above $0.02-$0.03 is not a great sign.

#4-Fees: This is an obvious one. For example, when looking at 2 of the biggest US ETF’s that both track the MSCI Emerging Markets; VWO (from Vanguard) and EEM (from iShares) you would notice that the main difference between the two is the much smalleer fees on VWO. That explains why EEM which used to be 10 times bigger than VWO is now actually smaller. There is no reason to pay additional fees for a similar ETF if spreads and other terms are acceptable.

#5-Tracking Error: In general, I would say that you always want to own ETF’s that have little tracking error. Even if that tracking error is positive, it is generally not a great sign for a passively managed ETF to have tracking error. One big thing to look for though is which index the ETF tracks. When tracking public indexes such as the S&P500 index, the tracking error result will be meaningful. However, some ETF’s track a custom made index and in that case, the result could be more difficult to interpret.

There you have it, 5 different things you should be looking for when buying an ETF. It is not a perfect guide but I think that any ETF that does well on these would be a good addition to your own portfolio (provided it is part of your asset allocation target of course!).