Exchange-traded funds starting to attract attention from retail investors

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Exchange-traded funds are one of the dramatic growth stories in North American investing this decade. And they've just begun to scratch the surface with retail investors.

Only about 11 per cent of Canadians actually know what ETFs are, even though the stock/mutual fund hybrids now rank among the most actively-traded securities in Canada, said Som Seif, president of Toronto-based Claymore Investments Inc. He was in town last week for an address to Concordia University's Goodman Institute of Investment Management.
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Seif's company, a division of the U.S.-based Claymore Group, has been one of the major beneficiaries of the ETF explosion in Canada, increasing its assets under management from $600 million at the start of 2008 to more than $4.4 billion at the end of 2009.

It has a stable of 26 ETFs, the first launched in 2005, and ranks second of the four providers in Canada, a list dominated by BlackRock Asset Management (iShares). Combined, their 120 ETFs represent $35 billion in assets, and Seif expects that to double in two years.

While it's still a fraction of the sum invested in mutual funds, momentum clearly is on the ETF side.

Investors unhappy with the fees and performance of mutual funds are redirecting money to ETFs, which are similar in that they offer exposure to a basket of equities, bonds or stock-market indices, but with much lower management expenses.
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4 B' L" ]: W; ^9 v) UVirtually all Claymore's products have annual management expenses that fall in a range of 0.15 per cent (the government bond ETF) to 0.65 per cent. You can easily pay double in a mutual fund, for results that ordinarily lag market indices by a significantly wider margin.
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Just over seven per cent of Canadian equity fund managers outperformed the Toronto Stock Exchange over a five-year period that ended last December, Seif said.

"In the '80s and '90s, a phenomenal amount of money flowed to active money management, some of which has not been good," he said.

' Q9 Z! j0 Z9 l, \) w) Y: L"That's made passive investing more attractive. There's now a levelling of the playing field. Passive (investing) acts as a benchmark check for those who want to charge fees and don't deserve it."
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ETFs trade like stocks, and now represent a significant proportion of the daily trading volumes on equity exchanges around the world.

About 40 per cent of market trading in the U.S. in 2009 was ETFs, with institutional investors accounting for the lion's share of the volume, Seif said. In Canada, it was about 15 per cent.
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& u) s! I9 z0 q9 p) S& g) KHe believes ETFs are an appropriate portfolio component for almost all investors. "The flexibility makes them anybody's solution," he said.
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They're not all created equal, however, and investors need to look at the fine print to see what's included, what index is being tracked and what the strategy is.

1 Y* [; a# l4 L6 T1 \3 \8 P  }Claymore's S&P/TSX Canadian Dividend fund, for instance, holds only companies that have raised dividends five years in a row. It's very different from the iShares Canadian Dividend Index Fund, which makes its choices using a combination of yield, average payout rates and dividend growth. Of the top 10 holdings in both ETFs, there were only two duplicates: Telus Corp. and IGM.

8 ^. G' K+ [! H4 ^9 N) `4 n% `Similarly, the iShares Canadian LargeCap 60 Index ETF and Claymore Canadian Fundamental Index ETF use different methodologies for their selections, resulting in significant shifts in weightings and a 30-per-cent variance in their top 10 stocks.

: E% ?% v) d. r- _9 u# R& r  YFor retail investors, one of the barriers to ETF ownership has been trading commissions, which can be onerous for small transactions. In an effort to encourage dollar-cost averaging among those with limited bankrolls, Claymore allows existing unit-holders to make regular, commission-free purchases of additional units each month or quarter in amounts as small as $50 (although none of the bank-owned brokerages are participating yet).
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