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Good, 'cause my advice wasn't for you.



You are making generalizations. I did not recommend the "average balanced fund" in this thread. I recommended the brother consider one of two funds depending on the amount of money available to invest. One charges 1% and the other charges 1.2% in fees with no cost to buy and the ability to fully reinvest income distributions without further cost + the ability to do a pre-authorized investment.



So, you want to tell a 34 year old who has just started making enough money to invest and has never touched a mutual fund let alone stocks (which is what ETFs are) to just start buying ETFs? You wouldn't suggest this if you had an appreciation for the anxiety people feel in doing this. And this is relevant if they're out there on their own doing this.

People who frequent these forums are not your typical Canadian investor, and certainly not your typical Canadian DIY investor.
IMHO investing in etfs isn't scary at all. As a matter of fact mutual funds are starting to become obsolete. ETFS are the way of the future.

Even BMO just came out with a new series of ETFS today as a matter of fact.

With a lot of these etfs you can get synthetic drips as well. Therefore it might wind up not costing him any extra money in commissions either?

I'm also not suggesting he invest in complicated sector etfs. IMHO xiu, xbb, xsp and xin are basic and popular etfs that are in fact easier to understand then the average balanced fund.
 
IMHO investing in etfs isn't scary at all.
For you and most on this forum, no it isn't. And I'm not saying it makes a lot of sense but you're out of touch with the average Canadian investor. It's intimidating and it's foreign territory. It is what it is, whether you choose to believe it or not.

As a matter of fact mutual funds are starting to become obsolete. ETFS are the way of the future. Even BMO just came out with a new series of ETFS today as a matter of fact.
That's an overdone theme. Mutual funds aren't going anywhere. Their growth may slow but their not going away. And ETFs are a small and growing part of the industry and that's the reason BMO entered the game.

With a lot of these etfs you can get synthetic drips as well. Therefore it might wind up not costing him any extra money in commissions either?
Yes but how will he do monthly purchases in ETFs without it costing him a fortune. And you can't invest an exact amount in an ETF. You have to instead buy some number of shares and you get to invest whatever that costs, which usually leaves some extra cash that has to sit on the sidelines. But even if he does the broker sponsored DRIP, that's another phone call that has to be made in order to set it up and perhaps a form(?).

I'm also not suggesting he invest in complicated sector etfs. IMHO xiu, xbb, xsp and xin are basic and popular etfs that are in fact easier to understand then the average balanced fund.
Really? Ever try to explain the mechanics of creation units to a novice investor? How about how the price you pay for the ETF can be lower or higher than the value of the underlying investments? Can you even tell that the price you pay is above or below NAV at the precise time of the trade?

ETFs are not as simple as you make them out to be. They function very much like mutual funds but there are more moving parts than people realize. The bull/bear ETFs are a case in point. Everybody complains about these things and it seems to be mainly because nobody has read the prospectus.
 
Uh. Why would you have any more struggle in explaining ETF creation units than you would in explaining MF units?

I don't personally think that ETFs are conceptually more difficult to understand than are MFs and, in fact, I would probably argue that ETFs are intuitively more simple to understand.
 
Here's a couple of other things I plan to tell him that maybe someone wants to comment on:

- given his 30+ year investment horizon, he should consider investing in 80 - 100% equity vs. bond funds for the next couple of decades. I personally would choose 100%. Maybe:
25% TD Canadian Index
25% TD U.S. Index (the cheaper vanilla version, not the Currency Neutral one)
25% TD International Index (ditto, the non-Currency Neutral version)
12.5% TD European Index
12.5% TD Japanese Index
Another thing you may want to consider is how your brother may feel about market volatility. Even though this portfolio is diverse (in equity), it may still be healthy to have a bit of fixed income (ie: the Canadian Bond Index) just to smooth those bumps along the way. It may make sense to put a large % into equities, but it will be painful if the market declines by +30% and he "panic sells". Try to get a feel for how he takes this and then see if you guys can work on an asset allocation that works for him. You may want to get him to read "The Intelligent Asset Allocator" by William Berstein.

In terms of TFSA/RRSP, it also depends on his situation. If you are planning to setup an emergency fund for him, you may want to get him to put the funds into a Tax Free High Interest Savings account. The reason being is, you never know when you'll actually need the emergency fund, so it makes sense to have the money in something safe. If the funds are down, and he needs money (a real emergency), it still doesn't make sense for him to tap into the account because he'll be redeeming his funds at a loss. Maybe set aside some cash for actual emergencies, and set aside the rest for investing. You guys are well on your way!
 
Uh. Why would you have any more struggle in explaining ETF creation units than you would in explaining MF units?
Uh, it's easy to explain that when a client invests in a mutual fund, the fund issues more units to sell to new investors and buys back units from investors who want some/all of their money back. In all transactions, you always trade at a price equal to the value of the investments held in the fund. Simple and easy to understand.

ETFs don't work this way. I'll give you a test, if you choose to take it. How would you explain, in plain English, how creation units facilitate in and out flows and how arbitrageurs keep the price as close to NAV as possible even though you risk paying more on buys and getting less when selling. And before you chalk this up to a useless nuance this speaks to the risk of trading at a discount or premium - and it can be significant with ETFs investing in less liquid securities.

While reminds me of the other myth with ETFs. Try explaining the liquidity risk with ETFs and how it doesn't matter how many ETF units trade.

I don't personally think that ETFs are conceptually more difficult to understand than are MFs and, in fact, I would probably argue that ETFs are intuitively more simple to understand.
Conceptually, in broad terms, you're right. But there are issues that clients need to be familiar with if you're going to cover your *** (a reality for those of us with a license and an obligation to not only know your client but know your product). Look, this doesn't make ETFs inferior or anything like that. But let's face it, they are structurally more complex than mutual funds - and that has pros and cons.

But back to the original issue....it's not a matter of who's better but which is most suitable to the beginner investor. You have to admit that it's MUCH easier and convenient to walk into your local RBC bank branch, drop a cheque in front of the account manager, fill out the application, and invest in the RBC Monthly Income fund than it is to buy ETFs.

Somebody mentioned streetwise funds, which is fine but it costs the same as the two funds I suggested early in this discussion. Compare that with the time to set up your DIY brokerage account, get online access, search for symbols, and start trading (and do so without getting sucked into the loser's game of starting to buy penny stocks and the IPOs the broker will advertise and the Agriculture ETF and the double short natural gas ETF and so on), investigate the DRIPs and sign up for those, etc. It's a cake walk for savvier investors but it's a lot of work for beginners, not to mention intimidating.

If all you've ever done is buy GICs and savings bonds, jumping straight to stock trading is too big of a jump unless the person in question has really ramped up on their knowledge. Kind of like moving out of your parents' home. For a lot of people, they should rent for six to twelve months to ease into the responsibilities and financial burden of buying a home.
 
Fair enough.

The two brokerages I worked in were fully stock and ETF houses; we didn't really deal in conventional MFs at all (except, for the most part, if a client brought them over with DSCs and it didn't make sense to dump them).

I guess I have often wondered how I would explain MFs. I always thought, does the FA give some version of "the managers worry about all of that"? Are MFs more popular *because* they don't require FAs to explain the structural complexities of ETFs?

I do think your example about comparing the ease of investing in conventional MFs with an advisor at a local branch with setting up an account at a discount brokerage is slightly misleading - only because I do not think the process is less complex with an advisor, there's just another person there helping you do it.

You could also argue, I think, that investing with an advisor brings its own set of complex, intimidating problems - mainly in determining who to trust and what metrics you should employ to know whether you should trust this person (and his or her advice) or some other person.

There are really important decisions for both DIY investors and those who invest with an advisor. I just think the decisions are different in the two cases - and, for DIY investors, the decision is much more about their own capacity for self-knowledge and self-education. If you trust that more than you fear sharing responsibility with an advisor, that's probably the way to go for you.
 
Uh, it's easy to explain that when a client invests in a mutual fund, the fund issues more units to sell to new investors and buys back units from investors who want some/all of their money back. In all transactions, you always trade at a price equal to the value of the investments held in the fund. Simple and easy to understand.

ETFs don't work this way. I'll give you a test, if you choose to take it. How would you explain, in plain English, how creation units facilitate in and out flows and how arbitrageurs keep the price as close to NAV as possible even though you risk paying more on buys and getting less when selling. And before you chalk this up to a useless nuance this speaks to the risk of trading at a discount or premium - and it can be significant with ETFs investing in less liquid securities.

While reminds me of the other myth with ETFs. Try explaining the liquidity risk with ETFs and how it doesn't matter how many ETF units trade.



Conceptually, in broad terms, you're right. But there are issues that clients need to be familiar with if you're going to cover your *** (a reality for those of us with a license and an obligation to not only know your client but know your product). Look, this doesn't make ETFs inferior or anything like that. But let's face it, they are structurally more complex than mutual funds - and that has pros and cons.

But back to the original issue....it's not a matter of who's better but which is most suitable to the beginner investor. You have to admit that it's MUCH easier and convenient to walk into your local RBC bank branch, drop a cheque in front of the account manager, fill out the application, and invest in the RBC Monthly Income fund than it is to buy ETFs.

Somebody mentioned streetwise funds, which is fine but it costs the same as the two funds I suggested early in this discussion. Compare that with the time to set up your DIY brokerage account, get online access, search for symbols, and start trading (and do so without getting sucked into the loser's game of starting to buy penny stocks and the IPOs the broker will advertise and the Agriculture ETF and the double short natural gas ETF and so on), investigate the DRIPs and sign up for those, etc. It's a cake walk for savvier investors but it's a lot of work for beginners, not to mention intimidating.

If all you've ever done is buy GICs and savings bonds, jumping straight to stock trading is too big of a jump unless the person in question has really ramped up on their knowledge. Kind of like moving out of your parents' home. For a lot of people, they should rent for six to twelve months to ease into the responsibilities and financial burden of buying a home.
First of all only 1 in 10 advisors are licensed to sell etfs in the first place. Therefore the majority of diyers who buy etfs do so without an advisor.

IMHO for very liquid etfs such as the xiu the price always trades pretty close to nav.

Personally I used to invest in mutual funds through td canada trust. For the most part these mutual fund reps were useless. all they wanted was your money. They never explained the inner workings of a mutual fund. You were basically paying these bank reps a trailer fee for doing nothing.

You should give diy investors more credit. With the advent of the internet all the information that is available to the advisors is also available to the general public as well.

Just to repeat. Setting up a discount brokerage account is not that difficult. Most investors who just stick to a couch potato etf portfolio should be fine. Of course financial advisors want to create this big mystique around investing so they can get more business.

Personally I have been a diy etf investor for 5 years in a discount brokerage account and have never looked back.
 
First of all only 1 in 10 advisors are licensed to sell etfs in the first place. Therefore the majority of diyers who buy etfs do so without an advisor.

IMHO for very liquid etfs such as the xiu the price always trades pretty close to nav.

Personally I used to invest in mutual funds through td canada trust. For the most part these mutual fund reps were useless. all they wanted was your money. They never explained the inner workings of a mutual fund. You were basically paying these bank reps a trailer fee for doing nothing.

Personally I have been a diy etf investor for 5 years in a discount brokerage account and have never looked back.
you do know that the majority of bank FA's will tell you that the general public dont know their ar$e$ from their elbows and that is why bank advisors are the best to be trusted thing going:eek:

Squash if you have mastered DIY trading especially ETF's well done - you're one of the lucky ones, the rest I guess will lose money DIY or with an advisor

Everyone needs a shoulder to cry on - brokers and advisors are always winners

disclosure: I have not used an investment or financial advisor since 1987
 
Folks, we've gone off track. Understand that I'm not trying to create some mystique about it being complicated. For crying out loud I gave out free advice to the poster to buy something I could never make money on so WTF about that is complicated and self serving? Not one part of it.

In the interest of the poster's brother, I simply suggested that buying a mutual fund is simpler and more convenient - and hence more likely to be implemented - as compared to the relatively more involved brokerage/ETF solution. I didn't say the ETF route was bad or inferior - just not suitable for the majority of beginners.

What you all are missing are the practicalities of the situation and choosing a solution that not only has a higher likelihood of getting done, but getting done properly and with minimal maintenance. And it's an option that has a relatively lower chance of luring a novice investor into costly mistakes.

I agree that you'll have to rebuff the bank branch's sales tactics so staying focused on what you want is paramount. But then again, if opening a brokerage account is so easy, RBC Direct Investing will allow anyone with $10k buy the RBC Monthly Income in D series form with annual fees of just 0.84% which makes my argument even more compelling in my opinion.

And once more, if anyone wants to take me up on it, I'll reiterate my challenge from above...

me (from above) said:
I'll give you a test, if you choose to take it. How would you explain, in plain English, how creation units facilitate in and out flows and how arbitrageurs keep the price as close to NAV as possible even though you risk paying more on buys and getting less when selling. And before you chalk this up to a useless nuance this speaks to the risk of trading at a discount or premium - and it can be significant with ETFs investing in less liquid securities.

While reminds me of the other myth with ETFs. Try explaining the liquidity risk with ETFs and how it doesn't matter how many ETF units trade.
 
First of all only 1 in 10 advisors are licensed to sell etfs in the first place. Therefore the majority of diyers who buy etfs do so without an advisor.
Where'd you get that stat? Any stock broker can sell an ETF. I would have thought that stock brokers make up more than 1 in 10 advisors.

IMHO for very liquid etfs such as the xiu the price always trades pretty close to nav.
Yes, and the majority of XIU investors are institutions. But ETFs with a higher retail base like CPD and XCB have real liquidity risks and higher likely mispricings.

You should give diy investors more credit. With the advent of the internet all the information that is available to the advisors is also available to the general public as well.
More information does not make for a more informed investor or provide greater insight. More information, one could argue, adds to confusion because of information overload.

Just to repeat. Setting up a discount brokerage account is not that difficult. Most investors who just stick to a couch potato etf portfolio should be fine.
How many people do you know, squash, that actually use ETFs the way they were originally intended - eg with just a handful of funds covering the major asset classes a la couch potato? I haven't met one person yet. I haven't met anyone who could not resist the Ag ETF or the China ETF or the short ETF or whatever else is drawing attention and sounds real sexy. And that stuff destroys returns more than an extra 1% fee ever will.
 
I am jumping into this discussion late but, assuming that little brother has little to no investing knowledge, wouldn't the better approach be to discuss strategies, risk tolerance and concepts (i.e. build a knowledge base) before leaping right into product?

If big brother himself has a modest amount of knowledge, isn't the better exercise to learn the concepts together rather than say "buy this product or that product"?

Product is product, in a few years, we'll be arguing about why XYZ is better than an ETF which is better than a mutual fund which is better than a hedge fund which is better than purchasing individual stocks which is better than burying your money in the ground etc etc.

Perhaps the better advice to give is none at all but to listen first on what little brother wants in life, his risk tolerance, his personality type (for example, in the abstract, someone with a long investment horizon should be in heavier in equities but do you discount the weighting if the investor is a constant worrier and could not tolerate the roller coaster of the market).

I noticed you are "telling him" what to buy and not giving him options and telling him the pros and cons (as a younger sibling myself, you seem to be coming from a good place but it can come off badly if you are telling him to do something).

Then work on a statement of investment principles then find product that fits within that context.

I don't think your analysis is incorrect and you seemed to put a lot of thought into it. However, if your brother hasn't gone through the same thought process, you are, to mangle the old saying, not teaching him to fish but giving him the fish.
 
Where'd you get that stat? Any stock broker can sell an ETF. I would have thought that stock brokers make up more than 1 in 10 advisors.



Yes, and the majority of XIU investors are institutions. But ETFs with a higher retail base like CPD and XCB have real liquidity risks and higher likely mispricings.



More information does not make for a more informed investor or provide greater insight. More information, one could argue, adds to confusion because of information overload.



How many people do you know, squash, that actually use ETFs the way they were originally intended - eg with just a handful of funds covering the major asset classes a la couch potato? I haven't met one person yet. I haven't met anyone who could not resist the Ag ETF or the China ETF or the short ETF or whatever else is drawing attention and sounds real sexy. And that stuff destroys returns more than an extra 1% fee ever will.
According to Preet's website 75% of financial advisors cannot sell etfs. http://www.wheredoesallmymoneygo.com/should-mfda-advisors-be-allowed-to-sell-etfs/

Jon Chevreau wrote an article in the National post over a year ago which was reproduced on the Barclay's ishare website that claimed only 10% of advisors can sell etfs. I can't find that article at the moment.

IMHO a lot of retail investors invest in the xiu as well. The xiu has almost $9 billion in total assets.

Personally I read an article on the moneysense website talking about the etf couch potato portfolio. I'm sure I'm not the only investor who follows this investing mantra.

I don't mean to be rude but these are just my opinions.

Here's a link to the 1 in 10 advisors are licensed to sell etfs article. http://www.financialpost.com/scripts/story.html?id=0df05eb9-0296-45e3-8732-e2b474ddd5b5&k=40753
 
More information does not make for a more informed investor or provide greater insight. More information, one could argue, adds to confusion because of information overload.


How many people do you know, squash, that actually use ETFs the way they were originally intended - eg with just a handful of funds covering the major asset classes a la couch potato? I haven't met one person yet. I haven't met anyone who could not resist the Ag ETF or the China ETF or the short ETF or whatever else is drawing attention and sounds real sexy. And that stuff destroys returns more than an extra 1% fee ever will.
The OP big brother as well as little brother if they are reading this thread now must be totally confused

ONTFA, you made a comment "How many people do you know, squash, that actually use ETFs the way they were originally intended - eg with just a handful of funds covering the major asset classes a la couch potato? "

would you care to expand or elaborate on that specific to "use" and "intended to"?

My POV the way that I see it is that an ETF is just another equity of sort to buy, hold, collect dividends (roll them over to buy more stock if you dont need the income) and then maybe one day exit with a nice profit or have enough dividends to supplement your living costs (couch potato style)

Of course the more experienced investors may trade in/out, even sell CC options on the ETF's and role the option money with the dividends to buy more ETF's (dont go there)
 
Inexpensive TD Managed Index-e portfolio's are also readily available.

http://www.tdcanadatrust.com/mutualfunds/prices_MAP.jsp

TD MAP e-Series
TD Managed Index Aggressive Growth -e
TD Managed Index Balanced Growth -e
TD Managed Index Income -e
TD Managed Index Income & Moderate Growth -e
TD Managed Index Maximum Equity Growth -e

More detail below on one of the TD Managed e-Series Index Fund portfolios from their web site.

TD Managed Index Balanced Growth -e

Investment Objective

The fundamental investment objective is to generate long-term capital growth while also providing the opportunity to earn some interest and dividend income. The Portfolio invests primarily in units of TD Index Mutual Funds, with an emphasis on mutual funds which focus on equities for greater potential capital growth. The Portfolio may also invest directly in guaranteed investment certificates, bonds issued by the Canadian or provincial governments and Strip Bonds. The fundamental investment objective may only be changed with the approval of a majority of unitholders at a meeting called for that purpose.

Benchmark Statement
40% DEX Universe Bond Index; 17% S&P/TSX Composite Index; 43% Morgan Stanley Capital International World Index (C$).

Recommended For
The Portfolio may be suitable for investors who: are seeking an increased exposure to international markets; prefer to have professional managers determine the selection and composition of their investments, as well as provide ongoing monitoring services; want long term growth of capital, and income; are willing to accept a low to moderate degree of risk; have a medium to long term investment time horizon.

Why Invest
Constructed using a blend of equities and fixed income, the TD Managed Index Balanced Growth Portfolio provides a balance between long-term capital appreciation and the opportunity for income.

The TD Managed Assets Program is a professionally constructed, managed and monitored solution, designed to moderate the effect of market volatility through multi-facet diversification.

Portfolio Update
Overall, Canadian bonds gained in value in March. Corporate bonds outperformed government bonds during the month and the first quarter of 2009, as corporate credit spreads came in. Canadian corporate credit spreads narrowed thanks to a more positive tone in the market so far this year, with trading activity and liquidity improving slightly. Canadian stocks rallied last month, ending a six-month losing streak, on optimism action by policy makers may help revive global credit markets and restore confidence in the financial system. The S&P/TSX Composite Index rose, with seven of ten sectors advancing, led by financials, energy and information technology. South of the border, the S&P 500 Index posted its best monthly performance since October 2002 with all ten sectors advancing. Meanwhile, European stock markets enjoyed their first monthly gain since last August, as aggressive quantitative easing by major central banks provided a positive backdrop for equities. Japanese shares also rose sharply in March, amid optimism the government was expected to announce further stimulus measures to help lift the economy out of recession.

(March 31, 2009)

General Description
Fund Codes: TDB852
Minimum non-RSP Investment: $ 2000.00
Minimum RSP Investment: $ 2000.00
Minimum Subsequent Investment: $ 100.00
Early Redemption: Up to 2.00% of purchase cost if redeemed within 90 days of purchase.
MER: 1.27% as of June 30, 2008.
Sector Class: Global Neutral Balanced
Inception Date: Nov. 26, 1999
Assets: $ 40.55 million as of May 31, 2009.
Minimum PPP Amount: $25.00
 
According to Preet's website 75% of financial advisors cannot sell etfs. http://www.wheredoesallmymoneygo.com/should-mfda-advisors-be-allowed-to-sell-etfs/

Jon Chevreau wrote an article in the National post over a year ago which was reproduced on the Barclay's ishare website that claimed only 10% of advisors can sell etfs. I can't find that article at the moment.
Okay, I'm clearly wrong on this one but the definition of advisor is clearly quite broad as it includes everybody licensed to sell some type of investment. But fair enough on the 10%-25% of advisors can sell ETFs.

IMHO a lot of retail investors invest in the xiu as well. The xiu has almost $9 billion in total assets.
But when something is a matter of fact, opinion doesn't matter. And it is a fact that the majority of assets in XIU belong to institutions, which came as a result of the take over of the old TSE index participation units funds (i.e. ETFs).

Personally I read an article on the moneysense website talking about the etf couch potato portfolio. I'm sure I'm not the only investor who follows this investing mantra.
If you and MoneyGal truly invest like this and in nothing else, you are truly unique. I'm shocked that you don't buy bank stocks, other dividend paying stocks/trusts, no sector ETFs, no long/short ETFs, and nothing other than broad based funds. I am genuinely shocked if this is the case.

Inexpensive TD Managed Index-e portfolio's are also readily available.

[snip]

More detail below on one of the TD Managed e-Series Index Fund portfolios from their web site.

TD Managed Index Balanced Growth -e

[snip]

MER: 1.27% as of June 30, 2008.
That's a good suggestion FeeOnly. I'd think that the ING Streetwise funds are even more convenient to purchase, however, and they have a slightly lower fee of 1% - as do my two suggestions for that matter.
 
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