ETF Screeners, Tools and Primers

Since I have been spending huge amounts of time researching Exchange Traded Funds (ETFs) in preparation for a complete re-structuring of my investments based almost completely on ETFs, it might be of interest for me to relate what I have found of use on the Internet.

ETF Primers, FAQs and Portfolio Principles:

• Wikipedia's ETF Entry - summary explanation of ETFs; lists of providers and exchanges around the world where ETFs are available; lots of links
• Efficient Market Canada's Example ETF Portfolio - Martin Gale explains how a Canadian can build a simple global portfolio using ETFs
• ETFs vs Index Mutual Funds and ETF vs Open-End Fund Shootout (Wm Bernstein) - pros and cons of each
• IFA Canada - lots of high-quality educational material as well as sample portfolios for this company that sells low cost funds, but the principles are the same.
• Altruist Financial Advisors - links to more complicated and technical references on ETFs (and many other investing topics) under the Reading Room tab
• Bogleheads Forum - fans of John Bogle, Vanguard Fund founder; lots of links to ETF and other investing material in the Reference Library, plus opportunity to ask questions of investing junkies who generally believe in low cost passive investing
• Seeking Alpha - extensive information on all aspects of ETFs, from basics, investment strategy, asset allocation resources and tools, indexes with many links, all of it annotated
  
• Financial Webring - Canadian investors, including those who write the most and have published some excellent resources; permanent section on funds and ETFs; good place for discussion and to ask questions

ETF Screeners and Comparison Data:

• Stock-Encyclopedia.com - Canadian, US and UK-traded ETFs in one place; useful categories / asset classes for portfolio building; ETF names are written out, not abbreviated; ticker symbols always visible to avoid confusion; ETF investment objective and reference index but little else - links to provider / sponsor websites for details; links to multiple quote websites like Yahoo, Bloomberg, Google, MSN Money; doesn't include all ETFs e.g. missing REITs like ICF, IYR; no side-by-side comparisons, portfolios or other fancy stuff but I found it to be very useful for preliminary identification of candidate ETFs because the site is so simple and quick and includes US and Canadian ETFs together
  
• MarketWatch.com (engine for Wall Street Journal and XTF.com - US ETFs only; Quickscreener tool has useful asset classes; includes Management Expense Ratio (MER), Net Assets, Performance, Turnover, Top Ten holdings, Sector breakdown in one compact, easy-to-read page but is missing Geographical breakdown for international funds and Number of Holdings; no links to Providers; fund names are abbreviated making some difficult to understand; no portfolio tool
• Morningstar.com engine for Investors Business Daily) Morningstar.co.uk and Morningstar.ca - US, UK and Canadian sites for each of those countries' ETFs and mutual funds; very sophisticated and complete but consequently complex and slow to use; important things are buried several clicks down, like ticker symbols, holdings, sector and geographical details; enables creation of a portfolio, which can then be characterized using the X-Ray tool to show sector and geographical dispersion, expected returns and other very useful stats to judge whether a proposed portfolio will be well diversified. Very cool! But it only works for the funds within that country so Canadian investors like me who want/need to use US funds to diversify properly cannot see the whole portfolio analyzed. It's still very handy and unique.
• IndexUniverse.com - US ETFs only; you need to register (it's free) to get access to the database and screener; same complete coverage of 498 US ETFs plus articles and commentary, discussion forum; the screener has a lot of variables one can choose but there are a lot of pre-set ones ticked having to do with performance so it is necessary to do a lot of un-clicking then re-clicking to select the factors one needs; the MER is one screen and it has a good increment of 0.25%; US investors have it easy since mutual funds and ETFs can be screened at the same time or separately; names of funds are somewhat abbreviated but not too badly and the ticker can always be made to appear; there are no market quotes, no links to provider websites and no sectoral of geographical breakdown of fund holdings, no total number of holdings within a fund, no portfolio capability.
• GlobeFund.com - Canadian ETFs along with mutual funds and it is hard to tell them apart from the way the data is presented and certainly the entry link doesn't mention ETFs. Nowhere, for instance, is the ticker symbol XSP shown for the ETF iShares S&P 500 C$ on this data page; it is possible to filter using MER, though the increment is only 0.50%; it is difficult to tell apart actively managed from passive funds, a matter of interest to me; the website is generally slow to respond; there are performance figures, sector and geographic weighting charts, though the latter doesn't work properly for the iShares EAFE ETF that is based on the US-traded ticker: EFA and so is marked as 100% US though it is everywhere but there underneath.
• Financial Post / National Post - Canadian mutual funds with the few domestic ETFs, though the website label doesn't say anything about ETFs ... oops, the Claymore Investments range isn't included; a lot less data than the other sites; with so little ETF choice in Canada it would be imperative to include them.
  
• iShares.ca - the most popular Canadian-traded ETFs with lots of useful data and explanations
  
• Vanguard and iShares.com - US websites of low cost US-traded ETFs that will likely attract most Canadian and UK (those who can trade on US exchanges) investors with a bent for passive index investing; good places to get the details on funds to round out the diversification objectives with other asset classes; Vanguard has a neat tool that lets you compare side-by-side any of its ETFs with another of any other company, e.g. for a European holding should it be VGK or IEV or EZU - Vanguard's tool provides more data than some of the big specialized websites above.

Happy research everyone. If anyone has other suggestions for sources, let me know.

Internationally Diversified Portfolios from IFA - US vs Canada

Now that Index Fund Advisors has opened up shop in Canada, there is the chance to see how some real experts approach the issue of building an internationally diversified portfolio based on principles of modern finance in two different countries - Canada and the USA. The websites of IFA Canada and IFA USA each present a series of twenty model portfolios with varying amounts allocated to various fixed income and equity asset classes.

For comparison, I've chosen a portfolio allocation that interests me - 70% equities and 30% fixed income - but you could pick any range from 0 to 100% for either asset class. It is extremely interesting that the Canadian version includes a hefty 16% Canadian equity allocation while there is zero separate Canadian allocation in the US version. This is apparently in keeping with the home company bias every country has. It isn't justified by finance theory that says a country's weight should approximate its value portion of the whole world, which is 3-4% in Canada's case. However, this makes no effective difference to the risk/volatility profile or the diversification effect since Canada's long term correlation with the US market is in the mid 90% area. It's a good illustration of the principle that in order to be an asset class, a grouping of equities needs to move up and down differently than, aka be uncorrelated with the other.

Another big difference is that Emerging markets is completely absent from the Canadian portfolio while it takes up 8% of the US portfolio. This time the problem is apparently that it is impossible at the moment to create the Emerging markets component in Canada ... it is apparently to be resolved by next year. Similar difficulties must explain the lack of breakdown in the fixed income portion into Global and Government components seen in the US version. The total number of holdings in the Canadian list is 12,924, much less than the 16,540 in the US list but it is still an awesome number.

IFA has just barely launched in Canada so it is a player worth watching and considering, given the high quality of its products in the USA.

Jonathan Chevreau Report: Index Fund Advisors come to Canada

Just came across the news on reporter Jonathan Chevreau's blog here that says the US firm Index Fund Advisors has expanded into Canada at this site. Anyone interested in passive portfolio index investing based on strategic asset allocation offered by real experts should take note and visit them, for ideas and background information if nothing else. IFA offers only funds created by Dimensional Fund Advisors, the Board of which includes a veritable who's who of modern investment research - such as Eugene Fama, Kenneth French, Roger Ibbotson, Myron Scholes, Robert Merton!!! IFA Canada will work with De Thomas Financial Corp. IFA will provide the website, educational material and portfolio construction while De Thomas will deal with customers.

To start off the minimum account size (to enable proper diversification) will be CDN$150,000 (vs $100,000 in the US - hey, our dollar has gone up lately!) though later there is an intention/hope to accept clients with $25,000. As in the US it will be mandatory to use the advisor (De Thomas in Canada) with the associated 1% advisor fee on top of the MERs of the DFA funds themselves, which range from 0.25 to 0.45%. For that, clients get guidance for their risk/volatility tolerance and corresponding optimal portfolio.

UK Tracker Indices not Wholly Representative of UK Economy

Came across this fascinating article titled "Buying British not what it seems" by Sylvia Morris that discusses how the presence of many foreign companies on the London Stock Exchange and the foreign operations of many UK based companies (even the big food retailer Tesco!) means that buying the FTSE 100 or the All Share Index entails a very significant foreign exposure. The All-Share is apparently not quite as foreign as the 100 Index but in either case one is more or less buying an internationally diversified holding. Hmmm, not sure what to do about this so that the UK holding better represents the UK economy as the more purely domestic funds in the UK are high-fee actively managed funds.

The progress of globalisation is no doubt having this growing effect in all markets and on all market indices. Might it be that the diversification benefits of international investing are becoming less and less so? Perhaps diversification on the basis of non-correlation of asset classes/holdings would be better pursued through asset classes based on something like industry sectors?

UK Portfolio - Part 4 - Fund Selection

This step of the creation of the new diversified UK portfolio required translating the asset class selection into an actual fund to purchase. The process turned out to be somewhat iterative as I discovered that my initial intention to obtain diversification by buying US small cap and value funds could not be done since there are no such low-cost funds (there are probably high-cost actively managed OEICs or unit trusts but those have been excluded from the potential purchase list due to the harmful effect of those fees) available on the UK markets. Instead I picked European ETFs from the iShares stable. Since the low correlation behaviour of small cap (e.g. this research paper) and value funds (see this reference at Dimensional Fund Advisors and this research paper titled Global Portfolios with Market, Size and Value Considerations) has been found to hold internationally as well as in the US, this switch seemed reasonable to do.

The result of the search and selection process is shown on the spreadsheet summary with the fund names in the boxes of each asset class. I conducted the fund search through a combination of the iShares UK website, since they are the only company currently offering ETFs on the UK market, the TrustNet website and the SelfTrade broker website (another reason that it won out as my next post explains). It is interesting (to me at least!) that there are a few index-tracking low cost OEIC (i,e, not ETF) funds available to represent the UK FTSE index and a pan-European index. The reason I chose them instead of the comparable iShares ETF, is that the ISF only holds the 100 largest UK FTSE-listed companies, whereas the M&G UK Index Tracker holds the whole market and has a lower expense ratio (0.30% vs 0.40%). Similarly, the M&G European fund is far more representative than the largest 50-company iShares DJ Stoxx 50.

So that's it, with eight holdings, there are around 2000 companies from around the world that will form part of the total portfolio.

UK Portfolio - Part 5 - Broker Selection

The final step in the UK portfolio revamp required selection of an appropriate broker through which mutual funds or ETFs could be purchased.

Since I was not very familiar with the UK scene, initially my search for a broker involved Google searches. It would have been far quicker had I known about the GoodWebGuide of Share Dealing brokerages, which contains a brief synopsis and rating of most if not all the online brokerages available in the UK, though be sure to follow the links to each company website as I discovered several instances of inaccurate or incomplete information in the synopsis. The main criteria I used included:

• low cost - per trade costs, monthly/quarterly/annual account administration costs, account closure or transfer costs. Since the investment strategy will involve few trades (once annually amongst a maximum of eight holdings) slightly higher trading fees may be offset by account inactivity fees or other costs.
  
• PEP, ISA and regular accounts - being able to have all types of accounts at one brokerage simplifies life in many ways, such as doing summaries/portfolio views, transferring money from a regular account into an ISA, as is planned to be done for the next number of years
• customer service - ability to phone and readily get explanations or assistance from a human being, a capability that was tested informally as I collected information from websites; for instance, eTrade quoted the cheapest prices but I got into voice mail wilderness trying to contact them while SelfTrade posts their phone number everywhere on their website and polite knowledgeable staff answered the phone quickly, a very handy thing whenever a less than expert investor is involved, as in this case. Some low trading fee brokerages, such as iDealing don't even offer phone support, only email support.
• direct foreign market access - ability to trade directly on foreign markets, especially the US' NYSE and Amex for ETFs due to the paucity of ETFs in the UK. This was a secondary objective in this case since adequate diversification could be achieved within what is available on the London Stock Exchange (LSE).
  

Some criteria that had no real importance but might for others with different investment strategies include:

• research tools - availability, breadth and quality of such tools as stock or fund screeners and research reports, charting tools, market news and market activity streamers
  
• discounts for frequent trading

Here are comments on some of the main players and the reason that they got disqualified:

• HSBC - no ISA account admin charge, nor any account closure or transfer fees but requires the opening of an HSBC bank account
• Abbey Sharedealing - the GoodWebGuide has more information than the Abbey website itself - pathetic!
• Barclays - charges account inactivity fees
• iDealing - low trading costs but offers only email support and website has very skimpy info
• Royal Bank of Scotland - higher trading, account admin and transfer/closure costs
• Lloyds TSB - higher trading fees and higher account admin costs
• eTrade - low trading fees but trying to talk to them is voice support hell
• Halifax Sharedealing - reasonable trading fees but higher admin costs
• TDWaterhouse - offers direct access to US NYSE, Amex markets, which means access to the wider range of ETFs available there, but I wasn't initially aware of TDWaterhouse and had already begun the process of opening accounts and transferring funds into SelfTrade so decided not to back track; maybe next year it will be worth switching.

In the end, it was SelfTrade that came out on top. The company's fees are in the middle for trading and low for account administration. By happy coincidence, SelfTrade has been offering no trading fees on purchase of LSE-quoted ETFs till May 31st, which is exactly suited to the ETF orientation of this portfolio. Best of all, SelfTrade wins on customer service: the phone gets answered quickly by knowledgeable, polite people both before and after one becomes a customer.

Book Review: Asset Allocation by Roger Gibson

The mere fact that this book is now in its 3rd edition indicates that to some degree it has stood the test of time. It is indeed a very good book, much of it brilliant, but it has some serious flaws and a 4th edition could/should correct those short-comings.

Gibson's primary target audience is financial planners and US investors. There is nevertheless a great deal of value for individual investors everywhere and as a do-it-yourself investor, I found much of personal benefit. Though not for the absolute beginner, this book is at an intermediate level and is understandable to anyone who has been dabbling in mutual funds and knows generally about bonds. He explains terms and builds knowledge carefully from a fairly low level, utilizing the results of finance research without delving into the heavy duty maths that characterize modern finance.

The subject matter of the book is not individual stocks and how to pick winners. It is instead about how to make money investing using a kind of tortoise strategy - moving ahead steadily but not spectacularly, in any given year always being behind the current winner but never worst, with the least chance of actually losing money and over the long term being ahead of every individual investment asset alternative. That approach is termed asset class investing in a portfolio built on observed diversification benefits of asset classes. Asset classes are groupings of investment securities that go up or down out of sync with one another, for example, the US stock market, international stock markets and real estate investments.

Gibson does a great job explaining how this works, with numerous graphs and tables using historical data. Chapter 8, titled the Rewards of Multiple-Asset-Class Investing is superb and worth the price of the book alone. Using a didactic method, he unveils the subject matter progressively to surprise the reader with the wonderful diversification benefit that I described in my previous post 3+1=5. This powerful result tells us to diversify using various asset classes such as international stock markets and real estate securities. It was very interesting and comforting for me to read the next chapter on portfolio optimization in which he shows how small changes in any of the inputs (estimates of future returns, volatility and correlation) among asset classes can have enormous effects on the computed optimal percentage allocation asset classes. This is comforting because a key decision is how much to put in Canadian equities vs US equities vs international vs fixed income/bonds. It doesn't matter enormously. Gibson's result is that there isn't a known correct answer - the most important benefits come from the different asset classes being represented, not the exact proportions, so one should spread out the investments relatively evenly (his answer is no less than 5% nor more than 20% in each).

This book does a very good job presenting the principles of asset class investing but does not get as detailed as Richard Ferri for example, whose book I previously reviewed, in identifying other useful asset classes for a portfolio, such as small cap stocks, value stocks and commodities. These asset classes do show up later in Figure 12-2, the Investment Portfolio Design Format but without any supporting explanation of why they are there. The book also does not get down to the actual securities that one can buy to build the portfolio, such as mutual funds and ETFs.

Some of the principles of asset class investing may surprise, e.g. tax minimization and income stream generation must be secondary to the proper asset allocation in a portfolio, which means among other things, do NOT design your portfolio with too much fixed income just to have interest income to live off in retirement. If you need money to spend, sell some of whatever asset class is currently above its allocation.

Where the book falls down in a significant way is the last quarter of the book from chapter 12 on, in which Gibson gives financial planners advice on how to deal with clients. In this section he seems to abandon substantiation and give arbitrary advice, or even worse, present as viable, options that are contradicted by material in the first part of the book. For example, on page 251 and elsewhere he seems to accept that "frame-of-reference" risk (the feeling by his client investors that they want to not be different than their peers), is puzzling to say to say the least. Isn't is desirable to do better and thus perhaps inevitably different, than one's peers? And isn't it the financial planner's professional duty to guide the investor to better and probably different approaches to investing? The advocacy of dollar cost averaging as an investment approach on page 265 is simply wrong, as Moshe Milevsky shows in his book Money Logic (maybe Gibson succumbed to frame-of-reference risk too as no less a luminary than Sir John Templeton, founder of the Templeton Funds, repeats the same mistake in the forward on page xii). The worst sin of all is Gibson's acceptance of an active management approach by trying to pick asset class winners and timing the market on pages 260-261. The rest of the book says that is not necessary or desirable but Gibson blesses it here because some financial advisors do it. He should be stomping all over the idea. Similarly, on page 272-273, Gibson discusses mutual fund fees and manager's compensation as justified - "Similarly, at the level of individual security selection, the money management specialist should be paid for work well done." I ask, what work, what security selection? Doesn't one just buy the index/market of the asset class? Let's see, for the Canadian stock market amongst low cost alternatives of funds or ETFs, there are maybe half a dozen and a good advisor should know them by heart, have one already determined by previous research (mine is XIU). How much is that worth - 1% fee on assets per annum? There's no on-going work. Perhaps a flat one-time fee?

There is one great quote cited in the book. Asset class investing, despite being superior, cannot ensure that one makes money investing. Paul Volcker, former US Federal Reserve Chairman: "You cannot hedge the world." (p.304) At times of world crises, all asset classes become one and move together. There is no escape. And if the crisis were something like nuclear Armageddon or global environmental collapse, it wouldn't matter anyways.

Despite the flaws, this is a book worth buying. It gives one the knowledge and the confidence to go ahead to select the actual investment securities for a diversified portfolio. My rating, 3.5 out of 5.

Buy this book at
chapters.indigo.ca