ReportWire

Tag: index funds

  • “Get to know and minimize the investing fees you pay”: Michael McCullough, MoneySense contributing editor – MoneySense

    “Get to know and minimize the investing fees you pay”: Michael McCullough, MoneySense contributing editor – MoneySense

    [ad_1]

    Image courtesy of Wiley

    Recently, Michael helped to update the Canadian version of Personal Finance for Dummies (7th edition), a comprehensive guide to everything from budgeting and spending to taxes and retirement. Below, he shares his own money experiences and what he thinks is the most underrated financial advice.

    Who are your finance or investing heroes?

    Maybe John Bogle, who founded The Vanguard Group, an investment firm in the U.S. that created the first index funds for retail investors. He was driven by more than self-interest. He wanted to empower small investors. Bogle also wrote The Little Book of Common Sense Investing, which made it into MoneySense’s list of 25 timeless personal finance books.

    How do you like to spend your free time?

    Cycling, hiking, running. I live in the Cowichan Valley on Vancouver Island, which has amazing trails right outside your door.

    If money were no object, what would you be doing right now?

    Michael McCullough stands on a hiking trail in front of mountains.
    Hiking in Tofino, B.C. Photo courtesy of Michael McCullough.

    Travelling to expensive destinations like Paris, Japan and the South Pacific.

    What was your first memory about money?

    I seemed to “get” money from a young age. I’d save it and loan it to my teenaged siblings at pretty high rates of interest. This was the late 1970s and early ’80s, when interest rates were sky-high. Then I learned about credit risk!

    What’s the first thing you remember buying with your own money?

    A K-tel compilation record full of one-hit wonders from the 1970s.

    What was your first job?

    I sold service-station coupons door-to-door on commission. It was a racket. I quit after two weeks.

    What was the biggest money lesson you learned as an adult?

    When I was 22, I got ripped off by a criminal gang in Thailand. I basically had to buy my way out of possible captivity with gold, paid for with an American Express card my dad had given me for emergencies. It took me months to pay my dad back, but I knew even then that it’s only money.

    [ad_2]

    MoneySense Editors

    Source link

  • Boost your portfolio: Why and how to increase small-cap exposure with ETFs – MoneySense

    Boost your portfolio: Why and how to increase small-cap exposure with ETFs – MoneySense

    [ad_1]

    Interestingly, small-cap stocks have historically outperformed their larger counterparts and, if academics are to be believed, will continue to do so over the long term. Don’t let recency bias sway you; the dominance of mega-cap stocks over the last decade isn’t the whole story.

    What is a market cap?

    Market cap, short for market capitalization, is the total market value of a company’s outstanding shares, or stocks. To calculate market cap, multiple the number of shares by the market price of one share. (For example, a company with 10 million shares priced at $25 each has a market cap of $250 million.) People in the investing community use market cap to indicate a company’s value and compare its size relative to others in the same industry or sector. Stock exchanges and cryptocurrencies also have a market cap. 

    Read more in the MoneySense Glossary of Investing terms: What is a market cap?

    When it comes to the stock market, there are certain formulas, known as asset pricing models, that help us understand why stocks move the way they do. You might have heard of one called CAPM, or the Capital Asset Pricing Model. Basically, CAPM tells us that the return you should expect from a stock is tied to how risky it is compared to the whole market. It’s like saying, the riskier the stock, the bigger the potential reward should be.

    Here’s the twist: CAPM doesn’t reveal the whole story. It misses out on some other factors that can also affect a stock’s performance. Back in the 1990s, two professors from the University of Chicago, Eugene Fama and Kenneth French, added more layers to this model. It’s called the Fama-French three-factor model. It later grew into a five-factor model, but to keep it simple, let’s go with the original three:

    1. Market Factor (Rm-Rf): This is the extra return you’d expect from investing in the stock market over something super safe, like government bonds.
    2. Size Factor (SMB for Small Minus Big): This one’s interesting because it shows that smaller companies often outperform larger ones. It’s kind of like rooting for the underdog.
    3. Value Factor (HML for High Minus Low): This tells us that stocks that are priced lower relative to their book values (think bargain stocks) often do better than those that are more expensive.

    So, focusing on the size factor, it explains why, over time, these smaller companies, or “small caps” as we call them, might give you better returns than the giants of the stock world. 

    Source: Test.io

    To understand the performance dynamics between large- and small-cap stocks, we can examine two older U.S. index-based mutual funds: the Vanguard 500 Index Fund Admiral Shares (VFIAX), which tracks the S&P 500, and the Vanguard Small-Cap Index Fund Admiral Shares (VSMAX). 

    We’ll use a back-test period from November 14, 2000, to September 19, 2024. This timeline is particularly insightful as it includes several major market events: the dot-com bust, the 2008 financial crisis, the COVID-19 pandemic and the ensuing bull market primarily driven by technology stocks.

    During this period, small caps, represented by VSMAX, outperformed the S&P 500, as tracked by VFIAX. The Compound Annual Growth Rate (CAGR) for VSMAX stood at 9.21% compared to 7.98% for VFIAX. However, this higher return came with increased volatility and larger drawdowns (price drops from peak to trough).

    On a risk-adjusted basis, the performance of both funds essentially leveled out with an identical 0.31 Sharpe ratio, meaning that investors in VSMAX were compensated more or less fairly for the higher risk associated with small-cap investments. 

    [ad_2]

    Tony Dong

    Source link

  • Cap-weighted vs. equal-weighted ETFs: Which is best for Canadian investors? – MoneySense

    Cap-weighted vs. equal-weighted ETFs: Which is best for Canadian investors? – MoneySense

    [ad_1]

    Source: Multpl.com

    The CAPE Ratio assesses a stock’s price compared to its average earnings over the past 10 years, adjusted for inflation. A high CAPE Ratio suggests that stocks might be overvalued relative to historical earnings, indicating potential downside risks.

    The picture isn’t as clear-cut as it seems, however. One of the primary drawbacks of equal weighting, as critics point out, is the additional drag on performance from its methodology. 

    Source: testfol.io

    Take the Invesco S&P 500 Equal Weight ETF (RSP) as an example. It has a 21% turnover and a 0.20% expense ratio. The Canadian-listed version is the Invesco S&P 500 Equal Weight Index ETF (EQL, EQL.F). In contrast, SPY maintains a mere 2% turnover and a lower expense ratio of 0.0945%.

    While it’s true that RSP outperformed SPY in total returns since its inception in April 2003, the victory isn’t as clear-cut as it might seem. The risk-adjusted return of RSP, indicated by a Sharpe ratio of 0.45, is slightly lower than SPY’s 0.48. What does that mean? It could suggest that RSP took on higher volatility for only marginally better returns. Moreover, RSP experienced a deeper maximum drawdown than SPY. A maximum drawdown measures the largest single drop from peak to trough during a specified period, indicating a higher historical risk of losses for investors.

    Source: testfol.io

    Further analysis via factor regression reveals that most of RSP’s outperformance can be attributed to the size. Essentially, RSP’s equal-weighted methodology has inadvertently skewed its exposure towards smaller and more undervalued companies, which historically have contributed to outperformance.

    This raises a critical point: If the goal is to invest in these kinds of companies, wouldn’t it be more straightforward and efficient to target them directly based on fundamental metrics rather than adopting a blanket equal-weighting approach to the entire S&P 500?

    I find myself siding with cap weighting now. The primary appeal is simplicity. Market-cap strategies require fewer decisions regarding rebalancing or reconstitution, which in turn keeps sources of friction like turnover and fees considerably lower—resulting in fewer headwinds to performance.

    In an ideal frictionless world, the appeal of equal weighting is clear. However, the reality of quarterly rebalancing and higher fees associated with equal-weight ETFs has not historically yielded better risk-adjusted returns over the last two decades. 

    [ad_2]

    Tony Dong

    Source link

  • Is VFV a good buy? What about other U.S. ETFs with even lower fees? – MoneySense

    Is VFV a good buy? What about other U.S. ETFs with even lower fees? – MoneySense

    [ad_1]

    Sure, investing in these ETFs means you’ll forfeit 15% of your dividends to withholding tax. Yet, for many, it’s a worthwhile trade-off to gain access the most significant U.S. equity index—a benchmark that, according to the Standard & Poor’s Indices Versus Active (SPIVA) report, has outperformed 88% of all U.S. large-cap funds over the past 15 years.

    But hold on, these aren’t your only choices. And here’s something you might not know: they aren’t even the cheapest around. Just like opting for no-name brands at the store can offer the same quality for a lower price, other ETF managers have been quietly rolling out competing U.S. equity index ETFs that come with even lower fees. Here’s what you need to know to make an informed choice.

    Exploring cheaper alternatives to the well-known S&P 500 ETFs—like VFV, ZSP and XUS—leads us to a pair of lesser known but highly competitive options: the TD U.S. Equity Index ETF (TPU) and the Desjardins American Equity Index ETF (DMEU). Launched in March 2016 and April 2024, respectively, these ETFs track the Solactive US Large Cap CAD Index (CA NTR) and the Solactive GBS United States 500 CAD Index. The “CA NTR” stands for “net total return,” which means the index accounts for after-withholding tax returns, providing a more accurate measure of what Canadian investors might take home.

    Essentially, these indices offer U.S. equity exposure without the licensing costs associated with the brand-name S&P 500 index, which is a significant advantage for keeping expenses low. You can think of Solactive as the RC Cola of the indexing industry, and S&P Global as Coca-Cola, and MSCI as Pepsi. 

    For TPU, the management fee is set at 0.06%, with a total MER of 0.07%. DMEU charges a management fee of just 0.05%. Since it hasn’t been trading for a full year yet, its MER is still to be determined but is expected to be competitively low.

    In terms of portfolio composition, there’s scant difference between the these ETFs: VFV, TPU and DMEU. Glance at the top 10 holdings, and you’ll see the weightings of these ETFs reveals very similar exposure, with only minor deviations. Similarly, when comparing sector allocations between TPU and VFV, they align closely, reflecting a consistent approach to capturing the broad U.S. equity market. However, look a bit deeper into the technical aspects, the indices that these ETFs track—the Solactive indices for TPU and DMEU versus the S&P 500 for VFV—exhibit some notable differences. 

    The S&P 500 is not as straightforward as it might seem, though. It doesn’t just track the 500 largest U.S. stocks. Instead, what is included is at the discretion of a committee, subject to eligibility criteria including market capitalization, liquidity, public float and positive earnings. This makes it more stringent and somewhat more active than you might have thought.

    In contrast, the Solactive indices used by TPU and DMEU are more passive. They simply track the largest 500 U.S. stocks by market cap, with minimal additional screening criteria. This straightforward approach lends a more passive characteristic to these indices compared to the S&P 500.

    [ad_2]

    Tony Dong

    Source link

  • New Money Nate urges followers to invest in themselves – MoneySense

    New Money Nate urges followers to invest in themselves – MoneySense

    [ad_1]

    Who are your money/finance/investing heroes?

    I don’t really have any heroes per se but the collective community of personal finance bloggers in the 2010s, like Mr. Money Mustache, Ramit Seth and The Financial Samurai, were a huge source of inspiration for me in university.

    How do you like to spend your free time?

    Love listening to podcasts and playing as many sports as I can after work.

    If money were no object, what would you be doing right now?

    Likely the same thing I’m doing now.

    What was your earliest memory about money?

    When I was younger, I remember feeling the weight of how important money was in different circumstances that came up with my family. It taught me that I need to not only make but keep a good amount of money to maintain good financial health.

    What’s the first thing you remember buying with your own money?

    Probably fast food.

    What was your first job?

    I was a dishwasher. I probably just ate out with the money from my first paycheque.

    What was the biggest money lesson you learned as an adult?

    Investing in yourself has infinitely higher returns than the market. I absolutely love things like index funds, and I preach them all day long, but I’ve learned that if you’re able to invest capital and time into yourself through upscaling so you can get a new job or starting a business, you’ll be able to earn more and more that you can then reinvest and create a wealth-building money machine.

    What’s the best money advice you’ve ever received?

    Bet on yourself.

    [ad_2]

    MoneySense Editors

    Source link

  • Responsible investing is growing in Canada. Which ESG factors matter most? – MoneySense

    Responsible investing is growing in Canada. Which ESG factors matter most? – MoneySense

    [ad_1]

    According to the 2023 Canadian Responsible Investment Trends Report, released on Oct. 26 by the Responsible Investment Association (RIA), the answer is yes: investors continue to prioritize responsible investing, and more growth is expected as local and international reporting standards improve. Survey responses are from Canadian institutional asset managers and asset owners who answered questions in mid-2023. The data shared paints a picture of the industry on Dec. 31, 2022. Here are some highlights from the report.

    About half of assets under management are invested responsibly

    With $2.9 trillion of assets under management in responsible investments (RI) in Canada, this is no small industry. And while this number is a slight decrease from the previous year, that’s a product of market conditions: it actually reflects a higher proportion of all Canadian professionally managed assets than in 2021, and RI’s market share has grown from 47% to 49%.

    Responsible investing is a risk management strategy

    You might think the main motivation for anyone choosing responsible investing is what’s in the ESG acronym: environmental, social and governance factors. And while those are definitely important—14% of survey respondents said their organization’s primary reason for choosing RI was to fulfill its mission, purpose or values—there are many other factors at play. One of the big ones? A common goal for any type of investment: minimizing risk and maximizing value.

    In fact, 35% of organizations surveyed said that minimizing risk over time was their primary reason for choosing responsible investing, and a further 41% ranked it second or third. And 61% said that improving returns over time was one of the top three factors influencing their choice to prioritize ESG investments.

    Another issue that mattered to many respondents was fiduciary duty—their obligation to maximize their clients’ returns—which 26% listed as their organization’s primary motivation.

    Which ESG factors do organizations consider? All of them

    The risks facing our society due to climate change are top of mind for Canadians, and the investors here are no exception. This year, 93% of respondents said that greenhouse gas emissions were a factor they considered in their investment decisions, an increase from 85% in 2022. Climate change mitigation and climate change adaptation were the other top environmental factors mentioned by respondents, at 84% and 76% respectively.

    Top social factors mentioned by respondents include equity, diversity and inclusion (81%), human rights (76%), labour practices (76%), and health and safety (71%). The governance factors that respondents deemed significant included board diversity and inclusion (87%), executive pay (71%) and shareholder rights (70%).

    Many strategies make for comprehensive decisions

    Organizations surveyed use a number of tools to help themselves include ESG factors in their decision-making. These three topped the list:

    [ad_2]

    Kat Tancock

    Source link

  • Stock picking isn’t dead. But for most investors it might as well be | CNN Business

    Stock picking isn’t dead. But for most investors it might as well be | CNN Business

    [ad_1]


    New York
    CNN Business
     — 

    What’s the best way to invest? Plenty of active traders are out there trying to make a quick buck on meme stocks like AMC and GameStop, fads like Snap and Peloton or bitcoin and other cryptocurrencies. Professional money managers try to identify stocks that can beat the broader market over the long haul.

    But for most individual investors, a strategy of buying and holding so-called passive funds that track top indexes like the S&P 500 and Nasdaq 100 makes the most sense if you want to accumulate wealth for retirement. It’s like that popular old rotisserie chicken infomercial slogan: Set it and forget it.

    Index funds tend to be cheaper. New data from S&P Dow Jones Indices showed that investors saved more than $400 billion in fees with index funds over the past quarter of a century.

    Obviously, index provider S&P Global

    (SPGI)     has a vested interest in promoting passive funds backed to various benchmark indexes.

    The company, along with competitors like iShares owner BlackRock

    (BLK)     and index provider MSCI

    (MSCI)    , offers many options for investors looking to get exposure to the broader market without trying to pick individual winners and losers.

    Even legendary investing guru Warren Buffett of Berkshire Hathaway

    (BRKB)     has extolled the virtues of index funds for average investors. That’s because Buffett, despite being one of the most successful stock pickers ever, doesn’t believe most active investment managers can beat the broader market.

    The 92-year-old Oracle of Omaha famously wrote in Berkshire’s 2014 annual shareholder letter that his advice for the trustee of his estate is to “put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund” for his wife. (Buffett suggested one from Vanguard.)

    “I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers,” he wrote.

    And given how some high-profile active investors have lagged the market lately, there is something to be said for conservative investors with a long-term horizon betting on the S&P 500 over a handful of stocks.

    Just look at Cathie Wood at Ark, who has made big, high profile bets on companies like Tesla

    (TSLA)    , Zoom

    (ZM)    , Roku

    (ROKU)     and Teladoc

    (TDOC)    . Ark’s flagship Innovation ETF has plunged 60% this year, compared to “just” a 20% drop for the S&P 500.

    “Actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons,” said Bryan Armour, director of passive strategies research for North America at Morningstar, in a report last month. He noted that just one of every four active funds beat their passive benchmarks over the ten years ending in June.

    Of course, buying index funds is no guarantee of investing success either…especially not in the short-term. After all, the S&P 500 has plunged this year, too.

    “Diversified portfolios do okay usually, but they’ve been hit hard lately by the rise in rates,” said Shamik Dhar, chief economist at BNY Mellon Investment Management, in an interview with CNN Business.

    Even the vaunted 60/40 asset allocation recommendation for investors, i.e. owning 60% stocks and 40% bonds, has so far failed to beat the market in 2022.

    “This year, it seems like there has been a broad-based source of fear. It’s shock therapy. There is slowing growth and inflation. That is disorienting investors,” said Adam Hetts, global head of portfolio construction and strategy at Janus Henderson Investors, in an interview with CNN Business.

    Along those lines, any investor with decent exposure to bonds, hoping that they’d hold up better as stocks tanked, has gotten a rude awakening. The iShares 20+ Year Treasury Bond ETF

    (TLT)    , a top proxy for long-term bonds, has done even worse than the stock market, plunging more than 35% this year.

    That’s why some investors aren’t singing a funeral dirge for active stock picking – just yet.

    “A 10-year ‘secular bear market’ is underway,” said Stifel chief equity strategist Barry Bannister in a recent report, who predicts that the market may be stuck in a narrow range throughout the rest of the decade.

    “We believe this environment favors the following approach: active (not broad passive) management,” he said.

    [ad_2]

    Source link