[Jon Chevreau]

If markets keep surging, ETFs could hit a $1 trillion in assets soon, according to ETFtrends. Much of it has to be from investors switching from mutual funds, it suggests. In my blog today, I note that Canada's high MERs and high taxes also add to the appeal of this alternative.

Not sure how many here use ETFs as opposed to investing in mutual funds or directly in stocks and bonds. I suspect most here are DIY investors at discount brokerages, using forums like this to validate their investment ideas?

Here's the blog on it, also linked via Twitter.

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/05/06/mutual-fund-execs-brace-yourself-for-etfs-hitting-the-1-trillion-mark-in-assets.aspx

 

[CanadianCapitalist]

If markets keep surging, ETFs could hit a $1 trillion in assets soon, according to ETFtrends. Much of it has to be from investors switching from mutual funds, it suggests. In my blog today, I note that Canada's high MERs and high taxes also add to the appeal of this alternative.

Not sure how many here use ETFs as opposed to investing in mutual funds or directly in stocks and bonds. I suspect most here are DIY investors at discount brokerages, using forums like this to validate their investment ideas?

I have mixed feelings about the spurt in growth of ETFs. My sense is that most of the growth in ETFs does not come from broad market index funds but these new-fangled double and triple leveraged ETFs. Investors are using these as trading vehicles and not as buy-and-hold investments. In the US investors have access to Vanguard mutual funds -- there is not much reason for them to own ETFs.

Over 80% of my portfolio is in broad-market ETFs such as XIU, VTI, VEA and VWO.

 

[Rickson9]

When I hear statistics such as "ETF to hit $1 trillion in assets" my first question is, how does this benefit me? At the present time I don't see any benefit in investing in ETFs.

The issue we have with ETF/mutual funds is that we will likely not agree on the quality of the stocks in the portfolio. Even if the stocks are solid, it is unlikely that we would be buying all the stocks in the ETF/mutual fund at a great price.

We only invest in individual U.S. stocks. We are more able to pick a company we like at a price that we like. The combination of these two factors is probably the primary reason we are able to beat the market.

 

[Jon Chevreau]

Diversification? Lowering single-company risk? Ability to trade in and out of particular sectors nimbly, or short them?

 

[Sampson]

I view the news with the same skepticism as CC. There are leveraged ETF's - double bull, double bear. What the heck is that? Not exactly a straight forward investment.

I hope all the ex-mutual fund individual investors don't fall into what appears to be the new 'investment trap' - where the salesmen are pitching the products as low fee (because most equate ETF with low MER - not always the case), but with huge reward.

Once you start actively managing an ETF - how's that different from the old mutual funds?

We need a dual shift in investment vehicles - the first being low fees, and the second being passive investing.

 

[beyondfunds]

Jon, as you know, I believe this phenomenal growth will continue. I think the individual ETFs are very useful to most investors, while the double, triple, and short ETFs are pretty complex, and have become primarily a tool for short term traders

 

[Rickson9]

Diversification? Lowering single-company risk? Ability to trade in and out of particular sectors nimbly, or short them?

Diversification is a huge negative - one of the biggest mistakes that Canadians have been sold by the fund industry. Another reason Canadian investors do poorly is the ease at which they can "trade in and out". The combination of these two factors along with frictional costs (taxes, fees, commissions, etc.) virtually assures mediocrity.

With regards to diversification:
"I was suffering from my chronic delusion that one good share is safer than ten bad ones, and I am always forgetting that hardly anyone else shares this particular delusion." - John Maynard Keynes, 1942

"The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it." - Warren Buffett, 1993 Chairman's Letter to Shareholders

"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher, Forbes

With regards to "trading in and out":
"All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ***. - Charlie Munger at Berkshire Hathaway's 2000 Shareholder Meeting

"Charlie and I decided long ago that in an investment lifetime it's too hard to make hundreds of smart decisions. Therefore, we adopted a strategy that required our being smart - and not too smart at that - only a very few times. Indeed, we'll now settle for one good idea a year. (Charlie says it's my turn.)" - Warren Buffett

Single-company is a risk if one chooses a company in poor financial health. Definately.

The skill of successful shorting is far beyond the ability of an ETF investor.

There would be absolutely 0% chance that our finances would be where they are if we believed in diversification and the 'benefits' of trading in and out - because there are none.

 

[DrStan]

I think ETFs are excellent for midrange investors who have in the $100/$200K range in invested assets. They allow for reasonable diversification and relatively low trading costs. An entire portfolio can be composed of 2 ETFs (equity and fixed income) if an investor desires, although this may be a bit oversimplified. For now, we hold XDV (dividend); XFN (financials); XIU (TSX 60); XIN (MSCI EAFE), XSP (SP 500) and XCG (growth). There is some overlap between the first three, since many of the top holdings are similar, but overall no holding constitutes more than 5% of the portfolio.

When my wife and I reach the magic $200K threshold for our portfolio, we plan on slowly divesting the ETFs at opportune times and purchasing well-selected dividend stocks to be held for many years with no MER.

Now as to diversification... I strongly believe Canada is the place to invest. With our natural resources and good balance sheet, I think our economy will do very well in the next decades, and that's why over 70% of our equities are invested in Canada.

 

[lb71]

I browsed through some of Jon's links and couldn't find the number, but what is the size of the mutual fund assets out there? What number is comparable to the $600 billion in ETF assets?

 

[CanadianCapitalist]

Diversification is a huge negative - one of the biggest mistakes that Canadians have been sold by the fund industry. Another reason Canadian investors do poorly is the ease at which they can "trade in and out". The combination of these two factors along with frictional costs (taxes, fees, commissions, etc.) virtually assures mediocrity.

Well, that depends on what kind of an investor you are. Buffet himself qualifies the statement with "... if you know what you are doing". I'll argue that most investors, okay make that the overwhelming majority of investors out there don't. For them, a well-diversified, low-cost, easy maintenance portfolio is the best bet to closing the gap between really poor returns and market averages.

 

[Brad911]

Diversification? Lowering single-company risk? Ability to trade in and out of particular sectors nimbly, or short them?

Those are advantages to ETF's vs. individual stocks, but only if you use an ETF as it was originally intended. As CC pointed out far too many investors never use an ETF as a passive investment vehicle trade them frequently for the advantages of a short gain due to exposure to a sector.

I own a few ETF's in my portfolios, but the majority is dominated by individual equities and for a specific reason. With the exception of broad index ETF's I think it's a question of quantity over quality. When I look at a specific sector ETF for say healthcare I know that only 20% of the ETF has exposure to companies I would want to own. The rest are there for sector diversification, but are companies I would never want to own. This drags down performance in my view by investing in the many and only gaining from the few. Why would I use an investment vehicle that gives me exposure to proportionally more bad companies than a diversified portfolio of say 25-30 stocks. Some research suggests you eliminate more risk with a higher number of securities, but won't your returns be diluted proportionally unless you choose only the best performing companies?

I don't think I can "beat" the index, but I do think I can beat a market specific ETF by concentrating on only the best run companies, collecting their individual dividends (if available) and focusing on risk.

 

[AdamW]

I browsed through some of Jon's links and couldn't find the number, but what is the size of the mutual fund assets out there? What number is comparable to the $600 billion in ETF assets?

I know that mutual fund assets in the early part of 2000-2001 was close to $500 bln. It's very possible that number has more than doubled since then given market performance up to 2008.

 

[CanadianCapitalist]

Jon Chevreau wrote about the relative size of mutual funds and ETFs in a column in the Post:

We still love mutual funds but ETFs gaining ground

That's a big number but the mutual fund industry is still more than an order of magnitude [10 times] larger. Most recent data compiled by Vancouver-based Hahn Investment Stewards shows 93 million Americans owned US$9.25-trillion worth of mutual funds, compared to US$430-billion of ETFs.

In Canada, mutual fund assets fell to $497-billion at the end of March, according to the Investment Funds Institute of Canada. ETF assets here are about $23.2-billion, or roughly 5% of mutual fund assets, estimates Tyler Mordy, Hahn's director of research.

 

[Rickson9]

Jon Chevreau wrote about the relative size of mutual funds and ETFs in a column in the Post:

We still love mutual funds but ETFs gaining ground

Why are consumers infatuated with how large the mutual fund or ETF industry is? This is one thing I could never understand.

I remember watching an informercial about currency trading and they boasted that it was a $x trillion dollar market. Who cares? Would that really be the make-it or break-it difference for the average person watching the informercial?

My only guess is that it is the social imperative - to make sure that you're 'invested' where everybody else is. It gives individuals a sense of false comfort.

I'll tell you one thing, if you're financially illiterate, it doesn't matter how big the market is, you will still end up making no money.

 

[Mike H.]

Take a look in the mirror. If you see Warren Buffet's face, you should go out and pick a concentrated portfolio of stocks.

If not, you should probably do as Buffet advises - invest in an index mutual fund.