How ETFs broaden your investment opportunities

We are holding a FREE seminar on Exchange-traded funds on Thursday April 26th and we would love to have you join us! Space is limited so to reserve your spot, please call Anna Procio at 416-763-5575 x200. The flyer below has all the details. 

Not sure what ETFs are all about? Well, we've posted an article that appeared this week in Meest newspaper below the seminar poster. The article was written by Michael Zienchuk who will be hosting the seminar on the 26th. Of course attending the seminar would let you pose any questions you might have directly to Michael.

Exchange Traded Funds (ETFs) – Expanding The Footprint

We’ve run an article about Exchange Traded Funds last October and believe now is a good time to touch upon this subject again.  ETFs are a fairly new phenomenon, but have seen rapid growth both in the number of ETFs available, as well as in the variety of investment strategies that they encompass.  Just in the 1^st quarter of 2012 (January to March), over $4.8 billion in net new money flowed into Canadian ETFs, a record for any 3 month period.  The total amount of money in Canadian ETFs is just under $50 billion, while globally there is over $1 trillion invested in various ETFs.

iShares S&P/TSX Capped Information Technology
Index Fund ETFSource: UCU and Bloomberg.  

The first ETF was launched on the Toronto Stock Exchange in 1989, the TIPS 35.  What makes ETFs compelling as an investment option?  First, as their name suggests, they are exchange traded, meaning that investors can purchase and sell these on a regular stock exchange, no different than any other type of company stock or shares.  This allows for easy and quick buying or selling, without having to wait for day end results to determine their value (unlike a mutual fund).  The stock-like trading features of ETFs also allow for purchases on margin, the use of limit and stop orders as well as short-selling – fully flexible in investment approach.

Second, ETFs cover a wide array of investible options, which allow investors to obtain the investment exposure they are exactly looking for.  For instance, if an investor wants to gain exposure to the technology sector, without having to worry about picking the best technology stock (is it Research in Motion now, or Open Text, or CGI Group?), there are ETFs that can provide investors with exposure to the whole sector.  An example of this is the iShares S&P/TSX Capped Information Technology Index ETF on the Toronto Stock Exchange.

As well, if an investor wants to take a view on the market – for instance, they are very bullish that stocks will go higher, then can take a leveraged position to capitalize on this.  Following sizable market corrections, investors can buy 2x bull ETFs on the overall market index, such as the S&P 500 Index in the US.  For the first three months of 2012, ending on March 31, 2012, the S&P 500 Index was up over 10%.  If an investor purchased the Horizons BetaPro S&P 500 Bull Plus ETF (HSU on the TSX) and held it for the same period, they would have realized a 22% gain.

S&P 500 Index vs. Horizons BetaPro S&P 500
Bull Plus ETF - HSU
Source: UCU and Bloomberg. 

Not only can investors take a positive view of the markets and leverage that view to earn more than the market return, but if investors believe that the stock market will fall, they can take advantage of that through ETFs.  Traditionally, investors using mutual funds could only either be invested in the market, or hold cash.  With inverse ETFs, investors can now take a negative view, and go against the market.  An example of this is the Horizons BetaPro NYMEX Natural Gas Inverse ETF (HIN on the TSX).  During the 1^st quarter of 2012, natural gas futures fell by almost 30%, while the Natural Gas Inverse ETF actually rose over 45%!

Horizons BetaPro NYMEX Natural Gas Inverse ETF - HINSource: УКС and Bloomberg.  

ETF investment options are also a much less expensive than traditional mutual funds, because their expense ratios are much lower.  For example, the ETFs that we have mentioned above carry expense ratios from a range of 0.12% for the Vanguard REIT ETF to 0.79% for the iShares CDN MSCI Emerging Markets Fund ETF.  Typically, for similar types of mutual funds, expense ratios would be running in the 2.00% to 2.5% range, if not higher.  However, because the ETFs have a high trading frequency, transaction costs may offset some of the benefits of a low expense ratio.

Finally, we’d like to highlight some other benefits of ETFs that make them compelling for investors.  ЕТFs offer diversification across all securities in the index that they track.  ETFs are also fully invested in the index they track, offering full participation in market movements.  Furthermore, they offer greater transparency, as investors know which underlying index each ETF is specifically tracking – with mutual funds holdings are only periodically disclosed to investors.

If you are interested in looking at options to gain exposure to very specific industries, sectors, commodities or asset classes, while lowering the cost of investment through very low expense ratios, ETFs may be a very interesting option for you.  The UCU Wealth Strategies team will be holding a seminar on ETFs (in English) on Thursday April 26^th at 7pm in our office at 2265 Bloor St. W., so please contact Anna Procio at 416-763-5575 xt 200 to reserve a spot (seating is limited).

Michael Zienchuk, Manager, Wealth Strategies Group

416763-5575 x208