It has not been a good year for most equity-based exchange-traded funds. With the S&P/TSX Composite Index down 11.5% for 2011 (to Nov. 18), broadly-based Canadian ETFs have fallen by roughly the same amount.
The reason is obvious. Index funds are designed to closely track their benchmarks. When the index rises, you win. When it falls, you lose. It’s as simple as that.
Active fund managers can raise cash and/or move to more defensive stocks during bear markets. With ETFs, there is nowhere to hide. You have to take whatever the market gives you. If you are not comfortable with that, you have two choices: trade in and out of ETFs just as you would a single stock or stand clear of them entirely.
Personally, I have always believed that ETFs are much better trading vehicles than buy-and-hold funds and the mediocre performance of the Couch Potato Portfolio that we have been tracking on the Fund Library bears this out. This year, we’ve seen outstanding performances from several ETFs, several of which are in the Precious Metals category. Here are some of the 2011 winners.
Claymore Gold Bullion ETF (TSX: CGL). This is Canada’s top-performing unleveraged ETF so far in 2011, with a gain of 21.3% to Nov. 18. It invests in physical gold, not mining stocks, with the bullion held in the vaults of a Canadian bank.
The fund was started in May 2009, so as with many Canadian ETFs, we have little history to work with. For what it’s worth (which is not much), the average annual compound rate of return since inception was 20.3% to Sept. 30.
All returns are hedged back to Canadian dollars to remove currency risk from the equation. The MER is 0.56%. There have been no distributions so far and none are expected. Pape’s Mutual Funds Update Rating: $$$.
Horizons COMEX Gold ETF (TSX: HUG). This ETF aims at replicating returns from COMEX gold futures contracts. (COMEX is a division of the New York Mercantile Exchange and is the world’s largest commodities futures exchange.) To the extent possible, profits and losses are hedged back into Canadian currency.
Gold prices have been highly volatile this year, but the recent rebound in bullion has boosted returns on this ETF. The gain for October was 6.2%, while November has been flat, bringing the total advance for the year to 19.8%. Because this ETF was launched in June 2009, the average annual compound rate of return (to Oct. 31) has been a very impressive 26.9%.
We don’t have enough history to know how it will perform over the long haul, but risk-averse investors should be cautious given the volatility of bullion. This might be a good choice for an aggressively managed TFSA, however. The MER is 0.65%. Pape’s Mutual Funds Update Rating: $$$.
iShares S&P/TSX Capped REIT Index Fund (TSX: XRE). This ETF invests in a portfolio of 13 Canadian real estate investment trusts (REITs). However, one security, RioCan REIT (TSX: REI.UN), represents almost one-quarter of the total assets, so if that top-heavy weighting is a concern, then this isn’t the right choice for you.
REITs took a battering during the market downturn, and this ETF lost 38.3% in 2008. However, it staged a strong recovery in 2009, with a gain of 53.3% and added another 20.7% in 2010. So far in 2011 (to Nov. 18), it is up by 15%. Those gains were enough to pull up the five-year average annual compound rate of return to a very respectable 6% (to Oct. 31). That was well above the category average of -2.6%, although that is something of an apples-to-oranges comparison, because most of the funds in this group invest in global real estate stocks, not domestic REITs.
It’s unlikely that this ETF can continue its recent torrid pace for much longer. However, the units offer good cash flow for income investors, with monthly distributions currently running at around $0.06 per unit. If that rate is maintained, the yield over the next 12 months will be almost 5%.
This is a decent choice for investors who want exposure to the REIT sector but don’t want to choose specific securities. Pape’s Mutual Funds Update Rating: $$$.
Gordon Pape is one of Canada’s best-known personal finance commentators and mutual fund experts and a regular contributor to the Fund Library. He is publisher of Gordon Pape’s Mutual Funds/ETFs Update newsletter, providing advice on investment strategies. Click here for more information on a three-month trial subscription.
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Notes and Disclaimers
© 2011 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
Commissions, trailing commissions, management fees, and expenses all may be associated with investment fund purchases. Please read the simplified prospectus before investing. Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that a fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in a fund will be returned to you. Fund values change frequently and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact author to discuss your particular circumstances.