Russell Wild - Exchange-Traded Funds for Canadians for Dummies

Exchange-Traded Funds For Canadians For Dummies

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Library and Archives Canada Cataloguing in Publication Data

Wild, Russell, author

Exchange-traded funds for Canadians for dummies / Russell Wild,

Bryan Borzykowski.

(For dummies)

Includes index.

Canadian edition of Exchange-traded funds for dummies, c2012.

Issued in print and electronic formats.

ISBN 978-1-118-52457-2 (pbk.).ISBN 978-1-118-52463-3 (epub).

ISBN 978-1-118-52464-0 (mobi).ISBN 978-1-118-52462-6 (pdf)

1. Exchange traded funds. 2. Stock index futures.

I. Borzykowski, Bryan, author II. Title. III. Series: For dummies

HG6043.W44 2013 332.63'27 C2013-903237-1

C2013-903238-X

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

Introduction

E very month, it seems, Bay Street comes up with some newfangled investment idea. The array of financial products (replete with 164-page prospectuses) is now so dizzying that the old lumpy mattress is starting to look like a more comfortable place to stash the cash. But one relatively new product out there is definitely worth looking at. Its something of a cross between an index mutual fund and a stock, and its called an exchange-traded fund, or ETF.

Just as computers and fax machines were used by big institutions before they caught on with individual consumers, so it was with ETFs. This made-in-Canada product (its true!) was first embraced by institutional traders investment banks, hedge funds, and insurance firms because, among other things, ETFs allow for the quick juggling of massive holdings. Big traders like that sort of thing. During the past several years, millions of North American investors have poured their savings into ETFs mostly U.S.-based ones, but the Canadian market has been gaining steam too.

We like and use ETFs too. They have grown exponentially in the past few years, and they will surely continue to grow and gain influence. While we cant claim that our purchases and recommendations of ETFs account for much of the growing $1 trillion-plus ETF market, were happy to be a (very) small part of it. After youve read Exchange-Traded Funds For Canadians For Dummies, you may decide to become part of it as well, if you havent already.

During the last few years, most of the financial world has been focused on imploding hedge funds, mutual fund redemptions, and Bernie Madofflike swindlers. But one story that should be getting more attention is the rising popularity of ETFs. Thanks to the recession and todays slow-moving market, many folks have ditched their advisors and are now buying these low-cost products. ETFs are almost always cheaper than mutual funds, and they serve as solid building blocks for a diversified portfolio.

But ETFs have gotten a bad rap, too, especially for the role they played in the infamous flash crash of May 6, 2010 (see ), and for the ongoing role they are playing in the increasingly nauseating volatility of the markets. According to one 2010 report from the Ewing Marion Kauffman Foundation, ETFs are choking the recovery and may pose unrecognized risks to the financial markets.

Well, were not so sure about that (especially given that the stock market shot up 10 percent in the six months immediately following the Kauffman report, and the S&P 500 continues to climb today). We discuss the overall effect that ETFs have had on financial markets, but what we concentrate on most in this book is how changes in the ETF market affect you the individual investor. And in that arena, without question, there have been many changes both positive and negative.

One very positive change in the past several years is that investors now have access to ETFs that cover most areas of the market. Half a decade ago, you couldnt buy an ETF that would give you exposure to high-yield bonds. Or international bonds. Or international real estate investment trusts (REITs). All that has changed. ETFs that represent all those asset classes, and many more, now exist. Building an entire well-diversified portfolio out of ETFs was not humanly possible several years ago; it is very possible today.

Another very positive development: ETFs are being used more and more in Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), where many of Canadas hard-working people store the bulk of their savings. And theyve been appearing in Registered Education Savings Plans (RESPs), too. Insurance companies have also jumped into the fray, offering ETFs in some of their annuity plans (which, unfortunately, are still often overpriced).