Let’s talk a little about investing with Investors Group, which is one of Canada’s largest wealth management companies. It has approximately $130 billion in assets under management, or about what I have hiding in the couch cushions for a rainy day.There are some 5,000 Investors Group
advisors sales people spread out across Canada.
The investing process starts with a financial plan, which goes over all parts of your finances from your mortgage to your insurance to your investments. The client is told the process is so their needs can be fulfilled in the best way possible. This is a lie. It’s a sales process, nothing more.
Recently, Investors Group has been in the news for a couple of main reasons. The first is the company’s opposition to Canada’s new mutual fund disclosure rules. Before, disclosure of fees in a percentage form was fine. These days, fees must be disclosed as an actual dollar figure.
The company also made headlines for announcing it was doing away with deferred sales charges. This meant investors who get out of Investors Group mutual funds before a certain time period (usually 5-7 years) don’t have to pay huge penalties any longer. Such generosity! The company also cut fees on many of its in-house mutual funds.
Investors Group is actually really excited about this. Veteran investors know you should never invest with Investors Group, but there are literally millions of Canadians who don’t know any better. This post is for you.
An apples to apples comparison
Let’s take a closer look at one of Investors Group’s largest funds to see just how serious the company is about cutting fees.
The largest IG mutual fund is the Investors Dividend Fund. Because this company likes making things complicated, there are about a million different slightly different iterations of the same damn fund.
After a little clicking around, I’ve come to the conclusion that you’d be most likely to be sold is the Series B. It no longer has a deferred sales charge and the prospectus breaks down what the advisor gets paid in great detail.
The fund has 88% of its assets in Canadian equities, with the remainder in bonds and cash. It has a total of 125 different positions, but 57% of assets are in the top 10 stocks. Top positions include:
- Royal Bank (8.4%)
- Scotiabank (8.1%)
- TransCanada (6.0%)
- CIBC (5.7%)
- Power Financial (5.6%)
- Bank of Montreal (5.5%)
The management fee? It was 2.48%, but the company SLASHED it, proving once and for all Investors Group cares about its investors. The new fee? It’s 2.38%.
OMG YOU GUYS I’D BETTER GET THE FAINTING COUCH.
In 2016, the fund paid a distribution of $0.77, giving it a yield of just over 3%.
Now let’s compare it to the largest Canadian dividend ETF, which is the iShares Dividend Select ETF (TSX:XDV). It has 100% of assets invested in Canadian stocks. The largest positions include:
- CIBC (8.2%)
- Agrium (7.6%)
- Royal Bank (5.8%)
- Bank of Montreal (5.7%)
- Scotiabank (5.0%)
59% of XDV’s assets are invested in the financial sector. The Investors Dividend Fund has 57% of its assets invested in financials. There’s a lot in common between the two funds, not just that. They’re not identical, but damn close.
XDV has a trailing yield of 3.7%, a full 20% higher than the Investors Dividend Fund.
Where XDV really shines is its management fee. Investors are paying 0.55% annually to own XDV. That’s a full 78% less than owning an equivalent product with Investors Group. (And 0.55% is a little expensive in the ETF world. You can find ETFs for less than 0.10%).
We could look at other fund categories, but it would yield similar results. If you invest with Investors Group, be prepared to pay a hell of a lot more for something that can easily be replicated with a cheaper ETF.
Just don’t invest with Investors Group
Investors Group does a great job of presenting themselves in a professional manner and the average advisor will instill a sense of confidence into a newbie investor.
But ultimately, that comes at a huge cost to the client. A 2% difference in fees will make a huge difference in your retirement.
The bottom line? You’re better off to choose a simple ETF portfolio on your own. You’ll save tens of thousands of dollars in fees (if not more!) if you don’t invest with Investors Group.
Now before anybody starts throwing the internet version of rotten tomatoes at me, let me backtrack from that title a little. I like robo-advisors for small-time investors who are just starting out.
My mother is the perfect example. She barely has time to think after going to work and then cooking me three dinners. DAMMIT MOM THOSE FIRST TWO WEREN’T GOOD ENOUGH.
(tips over plates and then makes her clean up the mess)
She has very little interest in money except spending it to go on vacation. And scratch tickets.
There’s no way she’s going to ever gain the knowledge to choose a basket of ETFs on her own. Traditionally, somebody like her would go down to the bank and an hour later emerge the owner of some overpriced mutual funds. If she uses a robo-advisor, she’s accomplishing the same thing while paying less in fees. It’s a decent deal.
But just because the fees are less doesn’t mean they won’t add up in the future.
The tale of two funds
Greg from Control Your Cash (RIP) used to call this the low-tar cigarette argument.
The average mutual fund in Canada has a management expense ratio (MER) of about 2%. Most of these funds are BAD NEWS, except there are a few that consistently outperform the market enough to justify their fees.
Then there are cheaper mutual funds. Tangerine has a total of five mutual funds that each charge 1.07% annually in management fees. This is a hell of a lot better than 2% or 2.5%. But it’s still damn expensive.
Say each of these Tangerine funds trail the market by 1% over the long-term. The market would make you 8% a year, while you’re taking home 7% a year with a Tangerine fund. It’s the same argument that’s been made in favor of index funds for years. The numbers are just smaller.
The sad part is I know personal finance bloggers who own Tangerine Funds. These people bill themselves as money experts, too.
Now let’s compare Tangerine funds to the average robo-advisor offering. If you’ve got $100,000 invested with Bank of Montreal’s robo-advisory service, you’re paying around 1% a year for fees. That drops to 0.9% with a quarter mil invested and 0.8% with a million bucks contributed.
Again, that’s a hell of a lot cheaper than a mutual fund. But it’s also way more expensive than just owning the damn index on your own.
The power of small numbers over time
Let’s crack out the ol’ compound interest machine and run a couple of scenarios.
The first investor uses a robo-advisor and pays, on average, 0.9% of their assets each year for the privilege of being able to phone somebody if they feel a little jittery. The market itself returns 8% a year, which means our investor makes 7.1% after fees but before taxes. He starts out with $10,000 (drug money, obvs) and adds another $10,000 each year from age 25 to 65.
Here’s how much money he ends up with.
Not bad, skippy. Not bad. Can I have a loan? I promise I won’t squander it on peanut butter cups.
Now let’s run the same scenario, but with an investor who finds the cheapest way to match the market. A portfolio filled with the cheapest Vanguard ETFs would average about 0.1% per year in fees. So we’ll assume our imaginary investor gets a 7.9% return.
The difference is staggering.
That “small” fee the average robo-advisor takes? It can add up to $600,000 over a lifetime. Or to put it another way, the person who minimized fees ended up with 25%(!!!!!) more money than the person who chose the so-called low-cost option.
Fees matter. Even small fees.
The crux of the argument is pretty simple. Switching from expensive mutual funds to cheaper alternatives is like cutting your three slurpees per day habit down to two. Sure, it helps, but it’s not the best solution.
Look. You read Financial Uproar. You’re smart enough to start investing on your own. There’s no reason for you to keep using a robo-advisor. I’m convinced that damn near anybody can figure this stuff out and then only consulting a professional when absolutely needed. All it takes is a little patience and reading a few books.
You owe it to yourself. Even if you’re not saving $10k a year, fees can still add up to a lot over time. Avoid them with extreme prejudice.
Last week we look a closer look at the 10 best dividend ETFs in Canada. It was filled with covered call ETFs, high-yield bonds, REITs, and one hot little fund which held a little bit of everything, the iShares Diversified Income Fund. That bad boy was sexier than that time I typed 58008 and then flipped my calculator upside down.
Yeah, that’s right. A grade three joke. Go ahead, stop reading. I’m practically daring you at this point.
One thing I noticed about this exercise is the universe of high-yield dividend ETFs up here in Canuckstan is a little lacking. Our ETF market just doesn’t have the weird variety that the U.S.’s does.
So I decided we’d expand the exercise. Here are the 10 best U.S. dividend ETFs.
The best U.S. dividend ETFs table
Like last time, we’re going to stick these bad boys into a table and sort them by yield.
|Etracs Monthly Pay 2x Leveraged Mortgage REIT (NYSE:SMHD)
|Etracs Monthly Pay 2x Leverage Closed-End Fund (NYSE:CEFL)
|Infracap MLP ETF (NYSE:AMZA)
|Etracs 2x Leverage Business Development Company Index (NYSE:BDCL)
|Etracs 2x Leverage Wells Fargo MLP (Ex-Energy) (NYSE:LMLP)
|Etracs 2x Leverage U.S. Small-Cap High Dividend ETN (NYSE:SMHD)
|Etracs 2x Leverage Diversified High Income ETN (NYSE:DVHL)
|Exchange Traded Concept Trust (NYSE:YYY)
|U.S. Equity High Volatility Put Write Index Fund (NYSE:HVPW)
|SPDR Dow Jones International Real Estate ETF (NYSE:RWX)
A couple things to mention before we go any further:
- ETF screeners are 46 different kinds of useless. I would pay at least $3 to use one that doesn’t suck. Thus, this list may not be complete
- And I omitted a few funds that looked very similar to ones listed here
A lot of these are double-leveraged ETFs, which is good. I only have to explain the concept once and then apply it to all sorts of different asset classes.
These double-leveraged ETFs are all the same. They invest $1 and borrow an additional $1 to put in the fund. If the debt is at 2% and the underlying assets pay 8%, it creates 6% more income on the leveraged side of the equation.
Here’s a simple example. You have $100 that pays you $10 per year. You borrow an additional $100 at 3% and invest it at $10 per year. Which means you’d end up with:
- $200 invested
- $20 in income
- $3 in expenses
- $17 in profit
And that’s it. You’ve created a 17% return on your original $100 investment. Isn’t leverage fun?
Real estate investors do this all the time. This is how the concept of cash-on-cash return came to be. The problem with cash-on-cash return (or as stock market investors call it, returns on equity) is all you need to do to increase your return on equity is borrow more money. If we increase the amount borrowed to $200 in our original example, you get $24 in profit, or a 24% return on equity.
If you’re doing such a thing to buy a house, and it’s a property you intend on holding for a long time, it’s not so bad. The problem becomes when you use leverage to buy things that track the whims of the stock market. If such an investment would fall by 50%, you’d be more screwed than a teetotaler at a frat party.
The other risk with leveraged income ETFs
There are two reasons why a company would introduce a 2x leverage income ETF. The first is to make money on the ETF itself, obvs. Most of these products have fees flirting with 1%, which are exceptionally high for ETFs.
The other reason is to profit lending the ETF the money, although as far as I can tell this isn’t excessive. The UBS leveraged ETFs are being charged the three-month LIBOR rate, which is just a hair over 1% annually.
Now it’s time to talk about risk. If stock markets all go to hell and this thing loses a whole bunch of money, the creditor will always get paid first. So, in theory, if any of these leveraged ETFs fall 50%, the issuer could just wrap them up, pay off the creditor (themselves), and leave the investor with nothing.
You also have to worry about the credit of the issuing company. What happens if UBS runs into real financial trouble? It’s not exactly known as a top tier bank these days.
The other ETF
There’s really only one name on this list that isn’t levered to hell, and that’s the last one. Let’s take a closer look at the SPDR Global Real Estate ETF.
It’s got $3.6 billion invested in REITs (and other real estate companies) that aren’t in the United States. 25.5% of assets are in Japan, followed by 15.5% in Australia, 12.6% in the UK, 11.6% in France, and so on. There are a bunch of countries represented.
The ETF has 135 different holdings, and it has an MER of 0.59%. The SPDR website lists the yield at closer to 8.6%, but it still seems like a decent income option. The other thing this fund has going for it is it’s a bet against the U.S. Dollar. If the dollar falls versus other currencies, those currencies will be more valuable. This will increase income without doing anything, at least in local currency.
If you’re looking for a real estate ETF for your portfolio, I don’t hate this one. You’ll only have minimal exposure to Canada’s housing bubble.
This is the fifth installment of the “invest in blank” series. Today’s topic is how to invest in Mexico. I’ve previously looked at how to invest in Poland, Russia, Turkey, and Pakistan. I’ll probably look at a couple more countries before the series is over. Or not. I like to keep you guys on your toes.
Ah, Mexico. Your beaches are fine, your ladies lovely, and your streets are filled with millions upon millions of drug dealers. Or so the internet has told me. What do y’all expect, research?
Also, this picture:
The guy on the right is El Chapo. Remember him? He’s much less dangerous than Sean Penn.
Mexico has been in the news lately for being Donald Trump’s bitch. The new President campaigned on the promise of building a wall to keep Mexican workers fleeing the country out of America, a project that looks like it’ll be paid for by a tariff on Mexican goods coming back to the United States. The country exported a little less than $250 billion worth of stuff to the United States (or about 80% of total exports), so a 20% tariff would be a big deal.
Mexico’s economy has slowly grown into one of the world’s largest, with a GDP of $1.1 trillion. Canada’s GDP is $1.6 trillion, but we manage to produce that much with about half the population. GDP per capita is a little less than $9,000. Economic growth has averaged between 1-2% for the last decade. Nothing exciting.
Oil’s decline has hurt Mexico, and so will anything that impacts the industrial sector. If the 20% tariff on Mexican goods comes into force, it could impact everything from making cars to growing tomatoes.
Mexico isn’t a particularly cheap country, either. Its main stock market index has a CAPE ratio of 21.5 and a trailing price-to-earnings ratio of 21.1. It trades at 2.4 times book value and 1.4 times sales. It is one of the most expensive stock markets in the world, and pretty much twice as expensive as Turkey, Russia or Poland.
If you’re going to invest in Mexico, I’d suggest picking individual stocks. The good news is this is far easier to do with Mexico versus almost every other country. Dozens of Mexican stocks trade on U.S. exchanges.
How to invest in Mexico — individual stocks
I’m going to borrow the first individual stock idea from Ian Bezek, the guy who’s probably responsible for 100% of Financial Uproar’s Mexico-based visitors. He’s a former hedge fund guy who lives there.
He likes Gruop Aeroportuario del Pacifico (NYSE:PAC), four words my spell check does not. It’s a holding company that owns a bunch of Mexican airports, including Guadalajara, Tijuana, Cabos, and Puerto Vallarta. Despite its largest airports posting fantastic growth, it trades at a little over nine times enterprise value-to-EBITDA. That compares to valuations of between 15 and 20 times EBITDA for comparable European airports. It’s cheap and pays a 5% dividend.
About a year ago I took a closer look at Grupo Mexico (OTC:GMBXF), which owns a big chunk of Southern Copper Corp (NYSE:SCCO), along with owning FM Rail Holding, which is Mexico’s largest railway. It has more than 10,000 km of track.
There were rumblings the company was going to spin out the rail division into its own company. Based on the valuation of other North American rails, there was some value there. But that plan looks to be shelved, so don’t expect any near-term pops from that. Could be a decent long-term play though.
The ETF route
As always, it’s much easier to use ETFs to invest in Mexico. But like I mentioned, it’s hardly a cheap country. I’d be more inclined to avoid it if I was a guy who only invested with ETFs. It’s a stock pickers market, in other words.
The big Mexico ETF is the iShares MSCI Mexico ETF (NYSE:EWW), which has a market cap of just under $2 billion. It trades about a million shares per day on average and is flirting with a 52-week low because of the whole Trump dealie. It has a yield of about 2.5%, which isn’t bad, and an expense ratio of 0.48%.
The largest holding is America Movil L, which provides wireless service to customers in about 20 countries. About 12% of the portfolio is invested in that one stock. Other large holdings include Fomento Economico Mexicano (FEMSA), which is a conglomerate that owns a bunch of different holdings including a Coca-Cola bottler, a chain of convenience stores, and a soccer team. It’s 8.3% of assets.
Other top holdings include Cemex (7.5%) of assets), GPO Finance Banorte (7.1% of assets), and Grupo Mexico (6.5%). I just cannot get enough of these goofy Mexican names. My favorite is definitely Grupo Bimbo, a company I surprisingly did not name in a drunken stupor.
Let’s end this
Personally, I wouldn’t invest in Mexico. Not right now, anyway. Their market is every bit as expensive as Canada or the United States. The country has a bunch of conglomerates that would probably create some value if they broke themselves into pieces, but I doubt that’s going to happen. You’ll do better putting your money somewhere else.
If I know anything about you guys, you like yield more than I like dirty pee porn. I mean, uh, more than my friend Smelson likes pee porn. Let’s never speak of this again.
There are a lot of people who want to invest in high yielding stuff, but don’t bother because they think the whole sector is risky. These investments are like Tim Tebow on a baseball diamond. Something’s not right here. We gotta go see what’s up.
(whispers) Wait. HE’S DOING WHAT?!?!?
He’s not losing his virginity, that’s for sure. Hey-o!
Italics man is going to throw tomatoes at me, isn’t he? If he was real, anyway.
ETFs are the solution to this. They offer instant diversification while only charging comparatively little in return. And some of them offer access to some very, uh, interesting asset classes. You’ll see.
Let’s take a closer look at some of Canada’s best dividend ETFs, ranked by their trailing twelve month yield. I’ll then do a little analysis of each product for y’all.
The best dividend ETFs table
Here they are, ranked by yield.
|First Asset Materials Covered Call ETF (TSX:MXF)
|First Asset U.S. & Canada Lifeco Income Fund (TSX:FLI)
|Horizons Active High Yield Bond ETF (TSX:HYI)
|Horizons Enhanced Income U.S. Equity (USD) (TSX:HEA.U)
|BMO U.S. Dividend Covered Call ETF (TSX:ZWH)
|iShares U.S. High Yield Bond Index ETF (TSX:XHY)
|First Asset Active Credit ETF (TSX:FAO)
|BMO Equal Weight REITs Index ETF (TSX:ZRE)
|First Asset Canadian REIT Income Fund (TSX:RIT)
|iShares Diversified Monthly Income Fund (TSX:XTR)
The good news is a lot of these dividend ETFs are somewhat similar. That’ll make our analysis easier.
Let’s start with the oddest one of all, the First Asset Materials Covered Call ETF. This bad boy holds a bunch of gold and mining stocks and then writes covered calls against them (I went over covered calls here if you’re not sure what they are). It really did pay out a 10% distribution in 2016, but that might be an anomaly. The distribution was $1.62 per share in 2016, versus $0.61 in 2015 and $0.46 in 2014.
Keep in mind this fund is tiny. It has 406,666 units outstanding for a total market cap of $7.6 million. And it has a 0.65% management fee if you care about such things.
Next up is the First Asset U.S. and Canada Lifeco Income Fund, which has just 10 holdings. They’re all insurance companies, as you’d expect. It also sells covered calls to generate additional income. We’ll group the Horizons Enhanced Income U.S. Equity ETF and BMO U.S. Dividend Covered Call ETF under the same category. They all do basically the same thing and have about the same yield. They are the Generic Debt Bloggers of the ETF world.
Next we’ll look at junk bond ETFs, which include Horizons Active High Yield Bond ETF, iShares U.S. High Yield Bond ETF, and First Asset Active Credit ETF. Both the Horizons and First Asset funds are actively managed with fewer holdings than the iShares version. They all hold the same types of assets, just in slightly different ways. The Horizons fund has the highest yield (5.72%) with the lowest management fee (0.65%). I’d probably go with it.
Then we’ve got two REIT ETFs, the BMO Equal Weights REIT Index and the First Asset Canadian REIT Income Fund. There really isn’t much difference between the two. I’d go for the BMO one just because the MER is about 15 basis points less.
And finally, we’ve got the iShares Diversified Monthly Income Fund, which holds a bunch of underlying ETFs. It’s got some equity, some bonds, some high yield debt, and even some preferred shares. It’s basically a balanced fund with a MER of 0.60%.
I should note that each of these funds charges between 0.6% and 0.8% a year in fees. They’re cheap versus mutual funds, but relatively expensive compared to TSX Composite or S&P 500 ETFs.
Which would Nelly buy?
I’m a big fan of junk bonds, but I’d probably get a little friskier and buy a levered junk bond closed end fund. I’m paying a higher management fee, but those closed end funds use their own debt to get better returns. It works out well if you ignore the price.
Some of the biggest leverage junk bond ETFs are:
- Pimco High Income Fund (NYSE:PHK)(12.16% yield)
- Calamos Convertible and Hi Income Fund (NASDAQ:CHY)(10.8% yield)
- DoubleLine Income Solutions Fund (NYSE:DSL)(9.2% yield)
- Dreyfus High Yield Strategies Fund (NYSE:DHF)(9.3% yield)
(Reminder: I own NYSE:DHF)
The last three trade close to the value of their underlying assets, but the PIMCO fund regularly trades at a 50% premium to net asset value. Paying $1.50 for $1 is not my idea of a good time. I’d avoid that one.
I’m not really a fan of the covered call ETFs, either. Remember, the big knock against covered calls is you lose a lot of upside potential in exchange for getting paid today. I like getting paid today, but not if I’m going to end up with less money in the long run.
Buying a REIT ETF is fine, but I’m a bigger fan of picking my own that yield more and buying them individually.
That leaves us with the last choice, the iShares ETF that owns a bunch of other underlying assets. I probably wouldn’t own it, but I can certainly see the thought process behind it, especially if you were looking for a good dividend ETF.
This is the end
If I was looking for a high dividend ETF, I’d be more inclined to choose the iShares Diversified Monthly Income Fund over the others. It’s got lots of diversification coupled with a decent management fee. Oh, and it pays monthly, too, which is perfect for the retirees. I’d probably avoid the rest on this list, but you might find one that works for you.