• Index funds are usually has lower management fees compared to actively manage funds.
• Many actively managed funds cannot beat index funds in the long term.

Recently, we questioned ourselves, can find actively managed funds that can beat the index in the last couple years? If yes, should we switch some of our money to these actively managed funds.

We ran a simple query on Funds Filter from The Globe and Mail; searching for Canadian equity funds that have MER lower than 2% and no load. We found a couple of interesting actively managed funds, i.e.:

• Mawer Canadian Equity (MER: 1.26%)
• PH&N Canadian Equity D (MER: 1.11%)
• RBC O’Shaughnessy Canadian Equity (MER: 1.47%)

Then, we did the same charting to what we did recently with index funds, i.e. comparing the return of these funds to S&P/TSX in the last 10 years.

Links

• Comparing Canadian Index Funds

As you might know, that our Lazy Portfolio currently uses CIBC Canadian Index. It is not really the best option to invest in Canadian index, as we discussed in our previous posting, Comparing Canadian Index Fund.

Why did we choose CIBC Canadian Index fund then? It is just a historical reason. When we first came to Canada, we opened our first bank with CIBC. The reason is because CIBC has a “small branch” in Singapore, where we used to live. We opened our bank account when we were still in Singapore. Since then, we have been happily doing all our financial needs with CIBC. This includes investing our money in CIBC’s index funds.

Recently, we tried to do a simple calculation. Currently we have about $20K invested in CIBC index funds. We pay a little bit more than 1% of management fee. It means we have to pay about $200 every year to CIBC for managing our money.

If we looked at TD e-series funds; most of them have management fee of less than 0.5%. It means we can save more than $100 every year just to convert our investment to them.

If we look further, there is a performance difference between CIBC Canadian Index and TD Canadian Index. CIBC Canadian Index is lagging by more than 5% compared to TD Canadian Index in the last 10 years. Although it doesn’t mean that TD Canadian Index will always outperform CIBC Canadian Index; we think that paying less fees is still better.

Links

• Comparing Canadian Index Fund

There are a couple of Canadian index mutual funds from major institutions in Canada, e.g.:

• CIBC Canadian Index
• RBC Canadian Index
• Scotia Canadian Index
• TD Canadian Index

If we use chart comparison from The Globe and Mail, the chart of those funds in the last 10 year looks like the following:

The chart above assumes that we invest $10,000 in January 2000.

As we can see here, the four funds above have different result. CIBC Canadian Index has the lowest return, i.e. $15,713. Meanwhile, RBC Canadian Index has the highest return, i.e. $16.529.

There is more than 6% difference between the return of CIBC Canadian Index and RBC Canadian Index. We are not really sure why. We are also not sure why the gap between S&P/TSX total return and those funds are quite significant.

Link

• Funds Filter from The Globe and Mail
• Searching for Good Canadian Mutual Funds
• Searching for Low Cost Emerging Market Funds

Why not emerging market ETF? Well, it is unfortunate that we cannot buy commission-free ETFs in Canada yet. We just hope that this will come soon.

We read about Claymore’s Pre-authorized Contribution Plan (PACC). It sounds like a very good plan. Unfortunately, our bank is not in the participating list yet. It is either we have to move our funds first to one of the participating institutions; or just wait until our bank is supported.

Anyway, we are using fund filter from The Globe and Mail to do our filtering. Here is the filter that we use:

• Asset class: Emerging Market Equity
• MER: 2.5% –> we don’t want to pay funds that have very high MER
• Load Type: No Load
• Fund Type: Open-Ended

As of today, the filter gives 19 funds. Some of them are actually ETF; so they can be eliminated. Some others are for advisors that charges fees; so they can be eliminated as well.

After eliminating some of the funds, here is the list that we got:

It seems that our options are only CIBC Emerging Market Index or RBC Emerging Market D. We just eliminate Mackenzie fund because the management fee is just too high. Besides we don’t quite understand what “-M” at the end of the fund name means.

Links

• Funds Filter from The Globe and Mail
• Searching for Good Canadian Mutual Funds
• Comparing Canadian Index Funds

As we saw lately, gold price has been soaring. It is not traded at above $1,200 per ounce. Are we (we = 1stmilliondollar.net) a gold bug? Are we buying gold?

We used to like keeping money in gold. However, we have changed our strategy since last year, i.e. not to invest in gold at all. Why? First of all, we read Warren Buffett’s quote about gold:

[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head

Basically he is saying that why invest in something that has no utility. Gold will do nothing for us. This quote keeps us thinking, why we are investing in gold then.

The second reason is because gold is just a currency. The value will never go up or down. It is just our dollar that goes up or down in value. If we can buy a car with 1 bar of gold today; we should be able to buy the same car with 1 bar of gold in 20 years from now. The price of the car might be double or triple; but in terms of value, it is just the same.

As summary, we don’t invest in gold at all these days. However, we invest in some gold companies indirectly through Canadian index. The two largest gold mining companies in the world are Canadian companies; and they are included in Canadian’s S&P/TSX index.

(Picture is from Mykl Roventine @ flickr.)

With the current market pullback recently, some people have got a “margin call”. They have to, either add more money or liquidate their investment (meaning sell in low price).

For those who don’t know, “margin” basically means borrow money from your broker to invest. On the one hand, using a margin can accelerate our return. On the other hand, there is a greater risk when we have market pullback, just what we had recently.

Let’s take an example: suppose that we invest $10,000. Using a 2:1 margin ratio, we can invest up to $20,000. Let’s assume that we invest the whole $20,000.

Scenario 1: Our investment goes up by 50%. Our balance is now $30,000. It means we have a profit of $10,000; so our return of investment is 100%. Remember that our original principal is $10,000.

Scenario 2: Our investment goes down by 50%. Our balance is now $10,000. Since we still “owe” our broker $10,000. we lost all of our principal money. In other words, our return is –100%.

Usually, you won’t be able to lost all of your principal when investing using a margin. Your broker usually will do “margin call” if your margin ratio dropped below a certain level. For example, if your broker allows up to 3:1 margin ratio, once your principal is less than 33% of your total investment; they will call you.

Getting a margin call is always not a good experience. Sometimes, we have to sell our investment in a very low price.

(Picture is from stock.xchng.)

We have been quite interesting with a closed-end fund, called Aberdeen Asia Pacific Income Investment Fund (TSE:FAP). This fund invests mostly in government bonds of Asia Pacific countries, such as Australia and emerging market countries, such as Indonesia, India, Mexico and Brazil.

There seems to be a similar fund traded in American Stock Exchange, i.e. FAX. Their top holdings are a little bit different; so their dividends are also not the same. Furthermore, these funds are not currency-hedged, meaning there is a risk of currency fluctuation. That’s why; the return of Canadian funds is much worse compared to the American fund. I guess this is mainly due to stronger Canadian dollar recently.

Why are we interested in the Canadian fund (FAP)? The only reason is because Canadian dollar is our “native currency”. We work in Canada and earn money in Canadian dollar. So, it is easier to invest in Canadian fund.

After doing a little research on Aberdeen’s web site, we could not find the management fee of this fund. Management fee is one of our criteria before investing in a fund. We tried to look at the number from Globe and Mail database; and the number is not there either.

Then, we did search on CEFConnect. Unfortunately, we could only get the data for the American fund. We got the following number:

• Management Fees: 0.70%
• Other Expenses: 0.67%
• Interest Expense: 0.82%
• Total: 2.20%

The total expense for this fund is more than 2%, which we think it is pretty high. We assume the management fee of the Canadian fund (FAP) is more or less the same.

What is our conclusion then? Since the management fee seems to be very high, we decided not to invest in this fund.

I am sure that all of you know that we had a market pullback last week. Dow Jones Industrial Averages lost about 700 points in a week. Although the market has rebounded yesterday, we can expect high volatility in the next couple of days.

I heard that some people are buying leveraged bull ETFs in this pullback. Their rationale is that we are still in a bull market. This is only a temporary pullback. The market should make a new high soon. By buying leveraged ETFs, they hope to double or triple their profits.

For those who don’t know about leveraged ETF, you can read our previous posting, Leveraged ETF = Getting Rich Quickly. A leveraged ETF is basically a financial derivative that amplifies the return of the underlying index. For example, SSO is a double (2x) leverage ETF of S&P 500 from ProShares. It means, when S&P 500 goes up 1% on a single day; this ETF goes up 2% in price. On the other hand, when S&P drops 2%, this ETF drops 4%.

Should we buy leveraged ETFs? Personally, we had a bad experience with leveraged ETFs in the last market crash. Here is the story:

When leveraged ETFs are still pretty new to the market about 3 years ago, we bought them with a large amount of money. We didn’t do enough research. We didn’t even realize that it amplifies the underlying index on a daily basis. Then, it came market crash in 2008. That’s when we realize that this product is just garbage. As we pointed out in our previous posting, SSO lost –46% from 2006 to 2010; while the underlying index, S&P 500 lost only –11%.

Our recommendation, stay away from leveraged ETFs. It is not a good investment vehicle. If you want to do day-trading with them, it is up to you.

Link

• Leveraged ETF = Getting Rich Quickly

Recently we came across a discussion at one of financial forums. It’s surprising to see that many people cannot really apply diversification in real life. When we buy Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) stocks; are we diversified? We invest in two different companies; one is the king of consumer and mobile devices; while the other one is the king of Internet search engine. Personally, we would say it is not diversified. Both are large-cap companies. Both are in the technology sector. Both are US-based companies.

How do we diversify then? There are a couple of criteria’s that we can think of:

• Market capitalization: large-cap, medium-cap or small-cap
• Sectors: consumer staples, consumer discretionary, financials, industrials, energy, materials, technology, telecommunication, health-care, utility.
• Country: US, BRIC (Brazil, Russia, India, China), Europe, etc.

Anything else?

What we usually do is pick the leader in one of these criteria’s. We also need to be careful for not over-diversified, i.e. having investment all over the places.

(Picture is from Toni Blay.)

How can we beat the index? Some people use market timing to buy low and sell high. Many end-up by buying high and selling low. Some other people use stock picks, just like us, to buy the best stocks and hope that it will beat the index.

There is a strategy called Relative Strength Investing. We read about this strategy in Gerald Appel’s book, Technical Analysis: Power Tools for Active Investors. For those who don’t know, Gerald Appel is the creator of technical indicator MACD (Moving Average Convergence Divergence). We are using MACD extensively in our trading activities.

How does Relative Strength Investing work? It works like betting in a race track. First, we start betting on any horses. After first turn, we change our bet to the horse leading that time. If our horse is still leading, then we hold our bet. After second turn, we change our bet again to the leading horse. The idea is that we always stay with the leader. Gerald suggested that we use no-load mutual funds to apply this strategy. The basic principles are:

• Identify the leaders
• Buy the leaders
• Hold the leaders as long as they lead.
• When the leaders slow down, sell them and buy new leaders.

You can read the detail of this strategy in his book. He also shows how the performance of the strategy compared to S&P 500.