Low-Cost, Broad-Market, Passively-Managed Products

 

Low-cost, broad market, passively managed products exist.  This is a relatively new development and smart investors are taking advantage.  Smart investors earn the market return less a low cost.  The investing novice, with no expertise, will outperform the after-cost returns generated by most market professionals. 

 

Let’s explore products from two product providers.  Vanguard and Blackrock (iShares) are the two largest ETF providers in the world and have the lowest costing ETFs on the market.  They are direct competitors and compete on price with many of their products.  Both Vanguard and Blackrock are massive, global companies that manage over $10 trillion in client money.  Both have offices in Canada.  There are many other product providers but they do not have the scale to compete on price (MER).

Both Vanguard and Blackrock have great products for the do-it-yourself financial advisor.  They have products for all.  BYOFA's focus is on their low-cost, broad-market, passively-managed products.  These products suit the novice who has neither the time nor inclination to become a skilled investor.  The only reason we highlight these products is low cost.  We would replace our recommendations with lower costing broad market investment vehicles if they are offered.  I doubt this will happen.  Cost can go only so low.

ETF Education - before we look at the products, a little ETF education is required.

Here is what an ETF is.  And here.  You can learn everything you need to know about the products and the companies offering the products through the links.  Let Sal explain the difference between a mutual fund and an exchange traded fund.  Mutual fund.  Mutual fund 2.  ETF.

Mutual funds accommodate systematic transactions well.  An example of a systematic transaction is $100 per week to be invested into (or withdrawn from) a mutual fund.  ETFs can not do this.  This is the one distinct advantage mutual funds have on ETFs; but there are "work-arounds".

We separate investments into growth and safety investments.

Growth = Company stock or shares or equity.  The terms are synonymous.  Let Sal explain a stock.    

Safety = Fixed income.  Fixed income pays interest.  Bonds and GICs are fixed income investments.  Let Sal explain a bond. 

All products track market capitalization weighted indices.  Market capitalization definition. 

Cost is measured through basis points.  1 basis point = 1/100 of a percentage point.  For example, if I hold an investment worth $100,000 in Vanguard Total World Stock ETF, with a cost of 11 basis points, I pay $110 per year.  Compare that to a typical 2% fee charged by mutual funds.  At 200 basis points, or 2 percentage points, I pay $2,000 per year.

   

Equity Exchange Traded Funds - Growth (Equities)

Canadian Equity

 

Vanguard Canada FTSE All Cap Index ETF – seeks to track the performance of the FTSE All Cap. Canada Index.

Details are here.  Cost is 6 basis points.  

iShares Core S&P/TSX Capped Composite Index ETF – Seeks to track the investment performance of S&P®/TSX® Capped Composite Index (Canada).  Details are here.  Cost is 6 basis points.

US Equity

iShares Core S&P Total U.S. Stock Market ETF - Seeks to track the investment results of a broad-based index composed of U.S. equities.  Details are here.  Cost is 3 basis points.  Priced in US dollars.

Vanguard Total Stock Market ETF - Seeks to track the investment results of the CRSP US Total Market Index.  Details are here.  Cost is 3 basis points.  Priced in US dollars.

Non-North American Developed Market Equity

iShares Core MSCI EAFE ETF - Seeks to track the investment results of an index composed of large-, mid- and small-capitalization developed market equities, excluding the U.S. and Canada.  Details are here.  Cost is 7 basis points.  Priced in US dollars.

Vanguard FTSE Developed All-Cap ex North America ETF - Seeks to track the investment results of an index composed of large-, mid- and small-capitalization developed market equities, excluding the U.S. and Canada.  Details are here. Cost is 23 basis points.  Priced in Canadian dollars.  Vanguard has other developed international products that are price competitive but all include Canadian equity.

Emerging Markets

Vanguard FTSE Emerging Markets ETF - seeks to track the investment results of the FTSE Emerging Markets All Cap China A Inclusion Index.  Details are here.  Cost is 12 basis points.  Priced in US dollars.

iShares Core MSCI Emerging Markets ETF – Seeks to track the investment results of an index composed of large-, mid- and small-capitalization emerging market equities.  Details are here.  Cost is 15 basis points.  Priced in US dollars.

Fixed Income (Bond ETFs & GICs) - Safety

GICs – All online brokers offer GICs from various institutions.  You have choice.  You can see the choice for 3-year terms offered through RBC Direct Investing here.  This is about half the choice for 3-year terms on September 25, 2017.  There is a wide range of rates.  You choose the term and provider.  Unlike a bank branch, there is no negotiation.  Note that GICs are not ETFs.  GIC money is locked in for the duration of the term.

Note: If you only invest in GICs you may want to consider an online brokerage account.  With so much GIC choice you are assured of getting top rates every time you purchase or renew.  More on this topic here.

 

Vanguard Canada Canadian Short-Term Bond ETF – Seeks to track the investment results of an index composed of government and investment grade corporate bonds that mature within 5 years.  Details are here.  Cost is 11 basis points.

 

Vanguard Canadian Aggregate Bond ETF – Seeks to track the investment results of an index composed of government and investment grade corporate bonds.  Details are here.  Cost is 13 basis points.  

iShares Core Canadian Short-Term Bond ETF – Seeks to track the investment results of an index composed of government and investment grade corporate bonds with maturities no longer than 5 years.  Details are here.  Cost is around 11 basis points.  It is a new product.

Asset Allocation Funds - combine diversified equity and diversifed fixed income into one product.  (They are more expensive than building a portfolio with the above products but significantly less expensive than the 1.5 to 2.5 percentage point charge in traditional actively managed mutual funds.)  Rebalancing is done automatically. 

Vanguard Asset Allocation Funds - Completely diversified, passively managed portfolios that differ in the allocation between equity and fixed income.  Details are here.  Cost is 25 basis points. 

iShares Core ETF Portfolios - Completely diversified, passively managed portfolios that differ in the allocation between equity and fixed income.  Details are here.  Management fee is 18 basis points.  These are new products so no MER yet.

Specialty Funds

iShares S&P/TSX Canadian Preferred Share ETF – Seeks to track the investment results of the S&P/TSX Preferred Share index.  Details are here.  Cost is 51 basis points.  This is a product that is suited for specific purposes only.  his product is for non-registered accounts and is meant to replace fully taxable interest income with tax advantaged dividend income without adding much risk.  Here is a short video on preferred shares.  It is pricey but serves a specific purpose that could be appropriate for retirees.

Vanguard Total World Stock ETF – Seeks to track the investment performance of the FTSE Global All Cap Index.

Details are here.  Cost is 11 basis points.  This is for the extremely hands-off, do-it-yourself financial advisor.  This ETF invests in almost 8,000 companies from around the world.  Note that the value of all US companies represents 52% of the value of all companies in the world.  Canadian companies represent 3% of the value of all companies in the world.  For 11 basis points you get complete global diversification.  Note that it is reasonable to overweight Canadian companies.  We know and use Canadian companies.  Home country bias is reasonable.  If so, this product would have to be coupled with a Canadian equity product. The fund is bought and valued in US dollars.

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