Volume 18, Number 3
Single Issue $15.00
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* Mutual Funds still tops - BMO released results of a recent survey which showed that for those making contributions in the current RRSP season, mutual funds were by far the most popular investment choice. With 59% of the contributions, mutual funds topped GICs which garnered 25% of the new money, followed by individual stocks which received 22%, bonds with 12% and, despite all the media attention, ETFs received a mere 6%.
While we were a little surprised by the poor showing of ETFs, we are not surprised by the continuing popularity of mutual funds. For many investors, they are a familiar, comfortable option, and despite much of the negative press they receive, are still very good investment vehicles for many investors. Given the recent environment of higher volatility, many high quality, conservatively managed mutual funds have done a great job for investors in helping navigate the rough waters.
It is our expectation that ETFs will continue to gain in popularity. We have seen increased interest in them from many of the investment advisors that we deal with, and they remain a popular investment choice among do-it-yourself investors. As innovative new ETF products are brought to market such as more fundamental index products and actively managed ETFs, interest will continue to grow.
* Steadyhand launches new portfolio solution - Last month, Steadyhand launched a new portfolio fund, the Founders Fund, which is made up of a mix of their current fund offerings. The fund has a target asset mix of 60% equities and 40% fixed income, but will be tactically managed by Tom Bradley, the firm's founder and co-owner. He will set the asset mix based on market valuations and fundamentals. The fund has a minimum initial investment of $10,000 and carries an all-in cost to investors of 1.34%, which is considerably lower than the category average. Within the Steadyhand lineup, we have been fans of the Steadyhand Income Fund and the Steadyhand Small Cap Equity Fund for a while. We have begun following the Steadyhand Equity Fund more closely and have noticed a nice turnaround as of late. We would like to see a bit of a track record on this new fund before we can make any recommendation on it. Given the commitment of the firm to investors, there is a high probability that this will be a good choice for those investors looking for a simple, low cost, one stop portfolio solution.
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SMALL CAPS LEAD THE CHARGE
By Gordon Pape
Large companies are doing okay but it's the little ones that are paying off big so far this year.
Markets are off to a strong start this year but have you noticed which stocks are leading the pack? You might be surprised to learn it's the small caps. As of the close of trading on February 24, the S&P/TSX Small Cap Index was ahead 12.5% so far in 2012. That's more than double the gain of the large-cap S&P/TSX 60 Index which is up 6.2%.
In the U.S. it's a similar story although not quite as dramatic. The Russell 2000 Index, which tracks a large cross-section of small-cap companies, had gained 11.6% this year as of the Feb. 24 close. The Dow Jones Industrial Average, which reflects the performance of 30 of America's largest companies, had gained just 6.3% while the S&P 500 was up 8.6%. The little guys are stealing the show, at least so far.
Of course, there is no guarantee this pattern will continue. However, historically small-cap stocks have tended to outperform their big brothers during bull markets.
So are we in a new bull market? The way the year has started, you would think so. However, there is still a lot to worry about. Just because Greece got the second tranche of bail-out money does not mean that the European disease has been cured. Ratings agency Fitch downgraded the country's debt to CCC, one notch above default, after the latest deal was announced and there has been widespread speculation that Greece will have no choice but to eventually leave the eurozone.
To the east, tensions over Iran continue to rise, pushing the price of oil towards US$110 a barrel and raising the spectre of a new armed conflict that could turn nuclear.
But North American markets have been ignoring all that, fuelled by statistics that show the U.S. economy is slowly gaining strength and some strong earnings reports from Wall Street. Unless overseas developments unsettle investors, the rally could continue for a while.
Conservative investors will want to stick with lower-risk alternatives such as large-cap equity funds and bond funds. But those looking to add a little more oomph to their portfolio might want to toss in one or two small-cap funds. Here's a look at some of the best performers.
Canadian small-cap funds
Steadyhand Small-Cap Equity Fund. This small boutique fund was the top performer in the Canadian Small or Mid Cap Equity category over the 12 months to Jan. 31 with a gain of 13.1%. That was all the more remarkable when you consider that the average fund in this category was down almost 8%. The fund, which was launched in 2007, got off to a rocky start losing almost 30% in 2008 when stock markets plunged. However, it bounced back with three years of double-digit gains: 14.6% in 2009, 21.9% in 2010, and 12.7% in 2011.
The fund is managed by Will Wutherich, who operates a small Montreal-based house that mainly serves high net worth individuals. Previously, he has played a key role in building Van Berkom & Associates, regarded as one of the best small-cap managers in Canada.
As you'll often find in the best small/mid-cap funds, the portfolio is small - in this case 15-30 positions. The manager looks for companies with high relative earnings growth, reasonable valuations, a solid balance sheet, and a strong management team with an ownership stake in the business. About 80% of the portfolio is in Canadian stocks with the rest in U.S. issues. Turnover is low as stocks are typically held for three to five years. Largest holdings include Canadian Helicopters Group (9.7% of assets), engineering firm Stantec (6.9%), and Medical Facilities (6.6%).
The main downsides are the high cost of entry ($10,000) and the fact the fund is not available east of Ontario or in the Territories. Some third-party dealers offer it; otherwise buy directly from the Vancouver-based company. The MER is 1.78%, which is low for a fund of this type.
Pender Small Cap Opportunities Fund. If you've never heard of this one, you are not alone. It's a tiny fund (less than half a million dollars in assets) from a small company which, like Steadyhand, is based in Vancouver. But it's worth a look if you are the type of person who likes to get in on the ground floor of promising new securities.
PenderFund Capital Management bases its investment approach on a belief that people's willingness to tolerate risk decreased dramatically after the crash of 2008-09. As a result, the company has identified capital preservation, income and low relative volatility as its three money management priorities in the current environment.
Pender's managers use a value approach to stock selection, seeking companies with limited downside exposure and good risk-adjusted return potential. So far, the strategy is working just fine in the case of this fund which was launched in June 2009. Investors enjoyed a healthy gain of 22.9% in 2010 and a small profit of 4.7% in 2011, a year in which the average Canadian small/mid cap fund dropped more than 11%. So far in 2012, the A units are up an impressive 13.1% (to Feb. 27).
Most of the top holdings in the portfolio will be unfamiliar to investors although readers of our companion Internet Wealth Builder newsletter will know about Sangoma Technologies which was selected as a speculative buy. The largest positions are in Vigil Health Systems and Hemisphere GPS Inc., both of which account for more than 9% of the assets.
As with Steadyhand, the Pender funds are not available east of Ontario or in the Territories. The A units are sold only on a front-end load basis (maximum 5%) and the minimum initial investment is $2,500. The code for the A units is PGF315.
Sentry Small/Mid Cap Income Fund. If you would prefer a larger fund from a mainstream company, this is a good choice. Unlike most small-cap funds, it is income-oriented, investing in a portfolio of stocks and trusts that provide cash flow. Some of the equities are former income trusts that converted to corporations such as Progressive Waste Solutions and Transforce. Others are still trusts such as Chemtrade Logistics, Pizza Pizza Royalty Income Fund, and H&R REIT.
The track record is very impressive. Over the five years to Jan. 31, the fund posted an average annual compound rate of return of 12.2% compared to only 1.6% for the category - and that was despite a drop of 24.3% during the worst of the 2008-09 market crash. In the latest one-year period, the gain was 7.9% compared to an average loss for the category of almost 8%.
Almost three-quarters of the assets are in Canada with about 20% in the U.S. and the rest in bonds and cash. Monthly distributions are $0.05 a unit ($0.60 a year) for a yield of 4.2% based on an NAV of $14.25.
The MER is high at 2.84% but in this case you are getting value for your money. The minimum initial investment is $500 and the code for the front-end A units is NCE721.
U.S. small-cap funds
Trimark U.S. Small Companies Class (A units). This has been the star of the show in its category in recent years and continues to impress. The management team of Virginia Au, Rob Mikalachki, and Jason Whiting use rigorous analysis of company fundamentals to select stocks with good growth potential and potentially low downside risk. That said, small-cap stocks by nature are more volatile than large-caps so this is a higher risk fund.
The rewards in recent years have been outstanding, however. The fund gained 14.7% in the 12 months to Jan. 31 compared to a category average of just 1.5%. The three-year average annual compound rate of return to that point was 26.3%, almost 10 percentage points better than the peer group norm.
The portfolio is very concentrated (only 27 positions) and about one-quarter is in information technology. Major holdings include Alliance Data Systems (7.16% of assets), Brightpoint Inc. (7.03%), and International Rectifier (6.97%), all U.S. companies. The largest Canadian holding is First Service Corp. (4.34% of assets). There is a large 20% cash position.
The MER is on the high side at 2.92% but investors are unlikely to complain as long as the fund continues to produce such stellar results Code for the front-end load units is AIM5523.
Fidelity Small-Cap America Fund (B units). After taking some hard hits in 2007 and 2008, this Fidelity entry has come storming back. In the three years to Jan. 31, it was second only to Trimark U.S. Small Companies in terms of performance, turning in an average annual compound rate of return of 22.2% (B fund units). The latest one-year gain was 12.3% compared to a category average of 1.5%.
The fund is run by Steve MacMillan. He has only been at the helm since May of last year but the fund has been a first quartile performer since he took over. He uses a value/growth blend in selecting small and mid-cap stocks for a focused portfolio (41 positions).
Although this is primarily a U.S. fund, there is significant Canadian content, at 12% of total assets. The largest Canadian position is Progressive Waste Solutions, which operates both in this country and the U.S. and is a recommendation of our companion Income Investor newsletter.
Health care stocks make up 22.5% of the portfolio, the largest single block, followed by information technology (15.8%) and consumer discretionary (14.6%). The MER is 2.33% which is reasonable for a fund of this type. Code for the front-end B units is FID261.
The bottom line: Small-cap funds are volatile but they will tend to outperform in strong markets. If you think stocks are due to rebound, you should own one or two of these funds.
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NEW PICKS BRING ADDITIONAL DIVERSIFICATION
By Dave Paterson
A positive start to the year for all of our Recommended ETFs
Coming off what can best be described as a very disappointing year, global markets started things off right in 2012 with solid gains across the board. Leading the charge higher were precious metals and emerging markets, with the S&P/TSX Materials sector jumping more than 10% while the MSCI Emerging Markets Index rose by 9.7%. Our ETF Recommended List fared equally well with all of our picks posting gains in January.
We have made a few changes to our Recommended List in the past few months. We are now categorizing the ETFs based on their mandates. This will hopefully make it easier for you when looking to quickly find an ETF that meets your specific needs.
We have made a few additions to our list, bringing four new ETFs on board. There were no ETFs that were removed from our list.
Claymore Advantaged High Yield Bond ETF (TSX: CHB) - This new addition is designed to provide investors with a rate of return that matches that of the Barclay's Capital U.S. High Yield Very Liquid Index, after fees. With interest rates moving higher and the economy continuing to rebound, corporate and high yield bonds are expected to hold their value better than government bonds. This ETF will provide good exposure to very liquid high yield issues in the U.S. It uses a forward agreement to convert the interest income received into capital gains, which are treated more favourably for tax purposes. This ETF carries the lowest cost of any of the high yield ETFs and has a higher average trading volume than the BMO High Yield Corporate Bond ETF (ZHY) which is based on the same index. This is not for low risk investors, but for those with a medium to high risk tolerance this is a good addition to the fixed income component of your portfolio. We have started our coverage of the ETF as a BUY.
iShares S&P/TSX Completion Index ETF (TSX: XMD) - As Gordon mentions elsewhere in this edition, small cap stocks tend to outperform in strong markets. By all appearances, we are currently in a favourable environment for small and mid cap stocks. This ETF provides investors with exposure to both small and mid caps that trade on the Toronto Stock Exchange. While it may lag the pure small caps in rising markets, it has a lower level of volatility. This would be suitable for growth oriented investors looking to add a little bit of kick to their portfolios. Income investors and those with lower risk tolerances are advised to steer clear of this ETF. We are initiating coverage with a rating of BUY, however, given the potential volatility of the sector, we would envision this to be more of a shorter term momentum play, rather than a long term hold.
Claymore Global Monthly Advantaged Dividend ETF (TSX: CYH) - In volatile markets, it has traditionally been the higher quality, dividend paying large cap stocks that have outperformed. This ETF provides exposure to those types of companies through its replication of the Zacks Global Multi-Asset Income Index. Performance has been strong since inception, but it is more volatile than one would expect out of a traditional dividend focused investment. The ETF pays investors a monthly dividend of $0.053 per unit, which works out to an annualized yield of just over 6% at current prices. This fund is a good way to gain some global equity exposure in a well diversified portfolio, but can also help to generate income. Given the volatility profile, it is our opinion that this is only suitable to those investors who are comfortable with medium to high levels of risk in their portfolio. We are initiating coverage of this ETF with a BUY rating.
BMO Global Infrastructure Index ETF (TSX: ZGI) - For more aggressive investors looking for additional return from their investments, infrastructure can be a way to do that. According to Brookfield Asset Management, it is estimated that global spending on infrastructure is expected to exceed $2 trillion annually through 2015. This spending will occur in a number of areas including the building of much needed infrastructure in the developing world, the need to replace much of the deteriorating infrastructure in the developed world, and the developed world's increasing reliance on the private sector to build and maintain portions of the needed infrastructure such as highways and bridges. The BMO Global Infrastructure ETF is a great way to gain that infrastructure exposure in your portfolio. It is designed to replicate the performance of the Dow Jones Brookfield Global Infrastructure Index, net of fees and expenses. While the volatility of the fund has been lower than the broader indices, we would expect that given the narrowness of the mandate, there may be periods of time where the fund will exhibit higher levels of volatility. In reviewing the overall risk reward profile of this ETF, we would suggest that it may be appropriate for medium to high risk investors with a longer term time horizon. We are initiating coverage of this ETF with a rating of BUY.
Claymore 1-5 Year Laddered Government Bond ETF (TSX: CLF) - We downgraded this ETF from a STRONG BUY to a BUY. This is still a great safe haven for the market volatility and a great way to shorten the overall duration of your fixed income holdings.
iShares DEX Short Term Bond Index Fund ETF (TSX: XSB) - We downgraded this ETF from a STRONG BUY to a BUY for the same reasons as given for CLF. This ETF has a bit more corporate bond exposure than the Claymore fund, so it should produce slightly higher returns over the long term.
iShares DEX Universe Bond Index ETF (TSX: XBB) - This ETF provides exposure to the broad Canadian bond market. However, given the outlook for fixed income we would be reluctant to add significantly to our exposure to traditional fixed income investments. Therefore, we are downgrading this core holding from a BUY to a HOLD. We should point out that this is still very much a core holding in a well diversified portfolio.
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By Dave Paterson, CFA
Performance has improved but still lags more active strategies
It was another positive quarter for our couch potato portfolio which gained 2.7% for the three months ending January 31. Since the launch of the portfolio in January 2008, it has risen by 4.2%, which translates into an annualized compound return of 1.0% per year.
All the ETFs in the portfolio were in the black during the most recent quarter, but it was the iShares S&P 500 Index Fund (CAD Hedged) (TSX: XSP) that was the biggest gainer in percentage terms, rising 5.4%. The iShares S&P/TSX Capped Composite Index Fund (TSX: XIC) and the iShares MSCI EAFE Index Fund (CAD Hedged) (TSX: XIN) each gained 2.7% during the quarter. Typically, fixed income investments move in the opposite direction to equities. That trend was bucked of late as the iShares DEX Universe Bond Index Fund (TSX: XBB) increased by a respectable 2.1% during the quarter.
As we mentioned in our last review, we like the conceptual appeal of the couch potato portfolio. It is simple to understand and easy to put into action. We believe that it may be a good solution for those investors who have a long term time horizon and want to be able to set up their portfolio and forget about it until many years down the road.
But because of its simplicity, there may also be extended periods of time where the couch potato style of investing may lag an approach that is much more hands on. We believe that we are in the tail end of one of those periods. We have been through periods of extreme market volatility and while things appear to have settled down slightly, there are still many headwinds and issues that remain unresolved.
In this uncertain environment, it is our view that investors would be better suited using a more active strategy, either by making tactical shifts within their portfolios themselves or by investing in high quality, actively managed funds.
Here is the latest report on the couch potato portfolio performance. Results are based on the prices as of January 31, 2012.
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By Dave Paterson, CFA
Portfolios may be missing out on potential returns offered by emerging markets
The countries which make up the emerging markets are now home to 80% of the world's population and are undergoing an economic renaissance. As a result, emerging market economies make up more than half of all global GDP output, yet they represented only 14% of the world stock market capitalization in 2010. While this may seem low, it is up from less than 1% in 1987 and this trend is expected to continue for the next several decades.
In many of the portfolio reviews I have conducted for advisors, it appears that emerging market exposure is underrepresented in many client portfolios. According to the Investment Funds Institute of Canada, there was $5.5 billion invested in emerging market mutual funds on June 30, 2011. This is less than 1% of the total assets invested in all mutual funds and is considerably less than their market footprint would dictate.
The question then becomes how much emerging market exposure is enough? That is totally dependent on the individual's risk tolerance. Emerging market investments are risky and considerably more volatile than an investment in many developed markets. The average monthly standard deviation (a measure of variation in investment returns) of emerging markets funds was 6.1% for the 60 months ended January 31. In comparison, the standard deviation for the MSCI EAFE Index was 4.4%.
Before bringing an emerging markets fund into a portfolio, you must be fully aware that you will be adding volatility risk. Therefore, the more risk you are willing to accept as an investor, the more exposure you can accept in your portfolio.
It is our opinion that the additional exposure you may want to add to your portfolio should range between 5% and 10%. Some conservative investors may not wish to add any additional emerging markets exposure to their portfolios, while an aggressive investor may wish to add an additional 10%.
Our top picks in the markets sector are:
AGF Emerging Markets Fund (AGF 791) - Manager Patricia Perez-Coutts uses a fundamentally driven, bottom up stock selection process in managing the fund. Performance has been strong, both on an absolute and relative basis, handily outpacing the MSCI Emerging Markets Index as well as the majority of its peer group in both up and down markets. Ms. Perez-Coutts has done a good job in managing volatility, delivering performance in excess of the benchmark with less volatility. The downside to this fund is that it is expensive, with an MER that is currently 3.07%. Normally we would not even consider a fund with an MER over 3%, but the performance has more than offset this level of cost. Should we begin to experience a prolonged downturn in the emerging markets region, the cost may become a factor and cause us to sell the fund.
iShares MSCI Emerging Markets Index Fund (TSX: XEM) - This ETF is designed to replicate the performance of the MSCI Emerging Markets Index, net of expenses. The costs of the fund are very reasonable, with an MER of 0.82%. Launched in June 2009, the ETF had a rough 2010, finishing the fourth quartile. In other time periods, the fund has held up relatively well, finishing in either the first or second quartile. This is the best choice for cost conscious investors seeking emerging market exposure.
CIBC Emerging Markets Index Fund (CIB 519) - For price conscious investors looking for a relatively low cost mutual fund designed to replicate the MSCI Emerging Markets Index, net of expenses, this is a decent choice. This is a no load fund sold through CIBC and carries an MER of 1.20%. However, it is our opinion that the XEM ETF is a better choice for most investors, assuming it can be bought with a low sales commission.
Brandes Emerging Markets Equity Fund (BIP 171) - This fund is managed using a deep value process which looks to buy stocks of quality companies trading at a deep discount to its intrinsic value. Given their adherence to the deep value philosophy, there will be periods of time when the fund falls out of favour. This happened in 2005 to 2007 where the fund was a consistent laggard. Since then, the market has begun to focus on deep value names which has fared relatively well for the fund, allowing it to handily outpace the index for the most recent three, four and five year period. The MER for the fund is 2.69% which, while high, is in the lower half of the category.
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By Dave Paterson, CFA
Clearing up a common misconception about mutual fund fees
Read the comments section of any article that discusses mutual funds in the national papers and you will be treated to a barrage of criticism filled with hate and vitriol rarely witnessed in a civilized society. They claim that mutual funds are evil, advisors are crooks, and of course, the biggest sources of the wrath are the high costs that many mutual funds charge.
Along with the rage, there is also a level of confusion surrounding mutual fund costs and posted returns. In many cases, investors believe that the returns that are posted by the funds do not include the impact of the MERs and other associated costs. They believe that to determine the true performance of a fund, you need to reduce the stated returns by the amount of the MER. This is incorrect.
The stated returns of any mutual fund have already taken into account the full impact of all direct costs including its management fees, operating expenses, trading expenses and sales taxes. If you were an investor who held the fund during the periods for which the fund is stating its returns, the posted returns are what you would have actually earned.
Another misconception about mutual fund fees is that many do-it-yourself investors believe that cost is the only factor that should be considered when selecting an investment. Again, I believe that this is wrong.
For example, let's take a look at Dynamic Power American Growth Fund. This is a fund that I was recently taken to task for by a reader because of its 3.61% MER. Is this high? Yes, but it also includes a performance fee that the manager earns for generating returns that are greater than the benchmark. The reader could not believe that I would recommend a fund with such a high MER. Now I don't recommend this fund as a core holding for most investors. It is much too volatile for that. But it is a great pick for higher risk investors looking for a bit of excitement in their portfolios. Noah Blackstein has done a tremendous job in adding excess returns for investors using his momentum focused, high turnover, concentrated approach. Instead, the reader thought that I should have recommended the iShares S&P 500 Index Fund (TSX: XSP) with its 0.25% MER.
By focusing solely on the cost, the reader may have overlooked a wonderful investment opportunity. The ten year return for the Dynamic Power American Growth Fund as of January 31 was 3.26% while the return of the iShares S&P 500 Index Fund in Canadian dollar terms was a loss of 1.12%.
If the reader had invested $10,000 in the Dynamic Power American Growth Fund ten years ago, it would be worth approximately $13,782 today, despite having paid approximately $4,800 in management fees (assuming a 3.61% management fee in all years, which would be overstated because of the performance fee charged). If that investor had gone with the lower cost option and invested $10,000 in the iShares ETF, he would have paid only $260 in management fees. However, the original $10,000 investment would be worth only $8,953. In other words, the Dynamic fund would be worth $4,800 more than the ETF.
The bottom line
I'm not trying to defend Dynamic's fee structure. 3.61% is too high, there is no doubt. My point is to emphasize that cost is only one part of the picture when evaluating a mutual fund, or any investment for that matter. There are a host of other factors to consider including manager, style, process, risk management, and overall risks. Because I conduct my analysis on returns that have already taken the impact of cost into account, I don't spend a great deal of time focusing on costs. I find that more often than not, I use them as a tie breaker. In a situation where I am considering two investments of similar expected risk and reward characteristics, I tend to favour the one which has the lower cost.
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PowerShares Funds vs. ETFs - Which is the better choice?
Q - What is your opinion of the Invesco PowerShares Funds, specifically the PowerShares 1-5 Year Laddered Corporate Bond Fund (AIM 53203) and the PowerShares High Yield Corporate Bond Fund (AIM 55203)? How would you rate them for fixed income portion of an RRSP portfolio as opposed to straight ETFs?
A - The PowerShares Funds that are offered by Invesco are basically their PowerShares ETFs that are packaged as mutual funds. There are currently more than 20 PowerShares funds available, covering all major asset classes as well as a number of sector specific offerings.
The equity funds tend to follow a fundamental indexing process that is based on the FTSE RAFI indices which select and weight stocks based on a number of fundamental factors including valuation, earnings, sales, cash flow and dividends. The fixed income funds are based on traditional fixed income indices that are offered by DEX and Bank of America Merrill Lynch.
The PowerShares funds are decent products. They offer good exposure to a wide range of asset classes and come with a total cost that is lower than the costs associated with most other traditional mutual funds, but are higher than most ETFs. In their short two year history, performance for the fixed income and global focused ETFs has been strong on a relative basis, finishing in the top two quartiles in most time frames. The Canadian equity ETFs have lagged both the broader market and the competition.
You had asked about two fixed income funds in particular. First, let's take a look at the PowerShares 1-5 Year Laddered Corporate Bond Fund. It is designed to track the performance of the DEX Investment Grade 1-5 Year Corporate Bond Index. The index is made up of corporate bonds that are rated BBB or higher with equally weighted, laddered maturities between one and five years. Performance has been strong on both an absolute and relative basis since its inception and the fund has consistently finished in the first or second quartile of the short term bond fund category. It is reasonably priced, with an MER of 0.98%, which is lower than the 1.35% category median.
The Claymore 1-5 Year Laddered Bond ETF (TSX: CBO) is based on the same index and is very similar to the PowerShares fund in terms of holdings. With the ETF carrying an MER of 70 basis points less than the fund, it not surprising that the performance of the ETF has been stronger. However, the ETF will carry a commission to buy and sell, which will have to be factored into the total cost of ownership.
The PowerShares High Yield Corporate Bond Index Fund is based on the BofA Merrill Lynch U.S. High Yield 100 Index. This index invests in U.S. dollar denominated bonds that are rated between BB1 and CCC3. The fund's performance has been strong on both a relative and absolute basis, with a two year return of 7.6%, finishing in the upper half of the category. While the fund has performed well compared with the high yield mutual fund category, it has lagged the high yield ETFs by a significant margin. The reason for this underperformance is twofold. The first is that the PowerShares fund is based on a different index. The other high yield ETFs offered by Claymore, iShares and BMO are all based on the Barclays Capital U.S. High Yield Very Liquid Index. This index has outperformed. Second, the return differential can also be attributed to the higher cost. The MER for the PowerShares Fund is 1.28% while the MER of the ETFs ranges between 0.56% and 0.63%.
In our opinion, the ETFs will be a better choice than the PowerShares fund in a situation where your account size is large enough to offset the impact of any sales commissions that will be charged to buy and sell the ETFs. For smaller account sizes, a mutual fund would be a better choice. Before you invest in the PowerShares funds, you may want to explore other low cost investment options that are available, which may end up offering a better risk reward profile and may make a better fit for your portfolio. - DP
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Mutual Funds / ETFs Update
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