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When it comes to financial innovation, Canada is usually considered a backwater (sorry Bay Street, but it’s true). Our fractured regulatory system is the poster child for bureaucratic inefficiency, our venture capital exchange has degenerated into a shell game, and our mutual funds are among the world’s most expensive.
But there is one area in which we are global leaders and this week we got some recognition for it. Twenty-five years ago, the Toronto Stock Exchange launched the world’s first exchange-traded fund (ETF), known at the time as TIPs, for Toronto 35 Index Participation Units, and now as the iShares S&P/TSX 60 Index ETF.
Today, ETFs worldwide have more than $ 2 trillion (U.S.) in assets under management. In Canada alone, the industry has grown to be worth more than $ 86 billion, with new money flowing in at a rate of $ 2 billion a month so far this year. That’s a long way from the humble beginning of TIPs back in 1990.
The original ETFs tracked the performance of well-known stock indexes. The TSX 35 was our equivalent of the Dow at the time and other ETFs quickly appeared that mirrored the Dow, the S&P 500, the Nasdaq Composite and major overseas markets.
Costs were kept low because there was no active management involved — no one was making complex buy/sell decisions. The ETF simply purchased a portfolio of securities that emulated its target index and only made adjustments when the underlying index changed. That simplicity enabled ETF companies to charge management fees of 0.25 per cent or less and still make a profit. Investors looked at the two per cent plus they were paying for many of their mutual funds and voted with their dollars.
But, as too often happens with good ideas, things have changed. The ETF industry has become much more complicated as companies have launched a range of products designed to pull in more business. We now have ETFs that invest in commodities (gold, oil, water), in economic sectors (infrastructure, health care, technology), and in various world regions (Asia-Pacific, Emerging Markets, Europe). We have bull and bear ETFs, which enable investors to place bets on which way markets will move. We have leveraged ETFs, which magnify gains (or losses) by two or three times. Some of these more sophisticated products have a distinctive casino-like aura.
I very much like the bond ETFs because they offer an inexpensive way to add a diversified portfolio of fixed income securities to your personal assets. Because there is no retail bond market, it’s virtually impossible for individual investors to put together a decent bond portfolio. An ETF such as the Vanguard Aggregate Bond Index ETF provides exposure to a broad cross-section of government and corporate fixed income offerings at a cost of only 0.12 per cent annually.
Buying in Florida
“I really enjoyed the article on purchasing land in Florida, but I believe that there is one important factor that was not mentioned. Florida law, and this is true for a number of states, prohibits foreigners from doing their own maintenance/renovation on their properties — they must use local tradesmen to do the work.
“This substantially adds to the cost of a property that any do-it-yourself person wishes to buy. In fact, it goes beyond the law, which I believe is not disclosed in sale agreements. Local stores, such as Home Depot, plumbing, and ceramic stores, will challenge shoppers who they believe may not be U.S. citizens. I learned this from friends who bought a condo — when they went to look at tiles for their kitchen reno at Home Depot they were asked almost immediately: ‘Are you doing the work yourselves?’ To which they hastily replied: ‘No, we’re hiring someone to do it, we’re just picking the tiles ourselves.’ — John Collins.