Monthly Archives: March 2017

How to add value in the Great Migration from mutual funds to ETFs

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By Luciano Siracusano III, Chief Investment Strategist, WisdomTree

and Christopher Carrano, Investment Analyst

 

Over the past few years, as hundreds of billions of dollars has flowed out of equity mutual funds and into exchange-traded funds (ETFs), a great migration of assets has been under way in the asset management business. This is occurring because of the changing business models of advisors and brokers-dealers and because of the unique benefits that ETFs can bring to investors, including relatively lower fees1, transparency of holdings, intraday liquidity and the potential for greater tax efficiency.

In many cases, “low-cost beta” ETFs, which track broad indexes, have outperformed the vast majority of active managers over time.2 This has made the decision to move assets from actively managed mutual funds into ETFs not just a decision based on cost, but also one based on performance.

But investors making this migration today have a choice that goes beyond just low-cost beta. For the past 10 years, WisdomTree has been showing investors ways to generate “low-cost alpha” in the form of fundamentally weighted ETFs that provide broad market exposure but that rebalance equity markets based on income, not market value. In recent years, other ETF managers have followed similar paths, creating narrower exposures that seek to tap into return premiums such as value, size, quality, momentum or low volatility—all of which have been associated with generating excess returns versus the market over time.

In the table above, we show how portfolios targeting value, size, quality, momentum and low volatility have performed compared to the S&P 500 Index in each calendar year since 2000. The last column on the right shows the annualized returns of these factor-based baskets over the 16-year period. Note that in each and every case, the annualized returns exceeded those of the broader market over the entire holding period.

Factors’ long-run performance

Yet, it is important to note that, despite all five of these factors outperforming the S&P 500 since 2000, they did not do so in each and every year. Factors are subject to the ebbs and flows of the business cycle, much like the sectors of the S&P. But, unlike factors, it is impossible for every sector of the S&P 500 to individually and collectively outperform the entire S&P 500 Index over time. The appeal of factor-based investing is that these major return premiums, based on decades of data, appear not to be subject to this same constraint.

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The Pros and Cons of Universal Life Insurance

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By Lorne Marr, LSM Insurance

Special to the Financial Independence Hub

Universal Life Insurance gives you flexible, cost-effective coverage that lasts a lifetime. It can be personalized to suit your changing needs and has a combined tax-advantage investment component that you can manage according to your risk tolerance and financial goals. Universal Life Insurance was invented by the recently deceased George R. Dinney in 1962. He explains the concept in his authorship of “Life Insurance as a Game.”

Universal Life Insurance allows you to adjust your premium payments (reasonable limits apply) as your needs or situation change. It is the ideal choice for people interested in flexible coverage. Unlike term insurance, which covers for a set number of years, universal coverage protects your family for life, as long as you keep up with the premium payments.

The policy has an investment component that gives you the opportunity to grow your wealth, so you have the option of using your life insurance while you are still alive. This means you can fund financial goals or leave more to your beneficiaries.

All the premium payments you make go into a policy fund. This fund pays for the cost of your coverage plus investments. The balance remaining after coverage costs are invested on a tax-advantaged basis. There are a variety of investment options for you to choose from, based on your risk tolerance and financial objectives.

How much your investment will grow depends on the performance of your investments and the amount of your premiums. The money in the investment portion of your account is yours. You can use it to make premium payments or a source of savings. You can use it as collateral for a loan, withdraw it outright or just let it grow for financial security for your loved ones. Don’t forget that borrowing or withdrawing funds from your policy reduces its cash value.

Pros of Universal Life Insurance

Universal Life Insurance provides many benefits, such as: Continue Reading…

Dispelling 3 myths of Tax Preparation

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By Gennaro De Luca

Special to the Financial Independence Hub

Most people pay a lot of attention to how they invest in order to build a portfolio and maximize their returns. But when it comes to doing their tax returns, things tend to be different. Many of us – entrepreneurs, business owners and managers – keep doing it the same old way. We hand over all our pertinent documents to an accountant or tax-preparation service and fork over hundreds or thousands of dollars in fees. Well, May 1st, 2017 is the tax deadline this year.

Today, 80 per cent of the 14 million plus tax returns filed every year in Canada are processed digitally and that figure is increasing. This means accountants and other professionals file digital returns on behalf of their clients or, what is also happening with more frequency, people opt for DIY (Do it Yourself) tax software and do it on their own.

As a long-time wealth-management advisor and Certified Financial Planner, I know that a few myths persist about tax returns. Here are three:

MYTH 1: If you’re self-employed or own your own business, you need an accountant to do your tax returns.

MYTH 2: Preparing tax returns is expensive, especially if you have a small business or are self-employed.

MYTH 3: DIY tax software is easy enough to use for even very complicated tax returns.

The answer is a digital return combined with the services of a tax professional. That’s what we do at TAXplan Canada and we just added a new feature that takes tax returns into the modern age. You can download our new app Sidekick to your mobile device. It allows you to take photos of all your documents and then you send them in. The tax professional does the rest. There is no other service like this in Canada. Continue Reading…

What pessimists may say about top Canadian bank stocks

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The big Canadian banks in the heart of downtown Toronto

We’ve recommended buying the five top Canadian bank stocks since the 1970s, but not everyone has agreed with that advice.

Canadian banks have gone through periodic and sometimes lengthy slumps, like any other stock group. They occasionally make costly management errors. On rare occasions, they have suffered from adverse regulatory decisions.

This is what pessimistic investors might say about top Canadian bank investments. But because these stocks have grown, paid high dividends and have generally been available at highly attractive prices, they’ve provided well-above average investment returns for decades.

Investor worry and the banks

Some investors fear the banks will lose out to “fintech” (upstart financial technologies, comparable perhaps to Uber or AirBnB). Or they wonder if the banks will get caught unawares when interest rates make their long-awaited upward move.

Our view is that the banks had a long time to prepare for the inevitable rise in interest rates, and the inevitable coming of fintech competition. In fact, they will probably wind up prospering in fintech, if not dominating it, as they did in stock brokerage, insurance and other financial areas that they have entered in the past few decades.

On the whole, investors have underestimated top Canadian bank investments for as long as I’ve been in the investment business. As a result, these stocks have often traded at attractive share prices. Because they were growing, and cheaper in many respects than other stocks, they gave conservative Canadian investors a near-ideal combination of pluses: above-average dividend yields and records; low-to-moderate ratios of per share price-to-earnings; and above-average long-term capital gains.

Look for top Canadian bank stocks with consistent dividends

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The “Work Optional” stage: Work because you WANT to, not because you HAVE to

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Nice to see the phrase “Work because you want to, not because you have to”  used by NestWealth.com in its just-posted Retirement blog that looks at Victory Lap Retirement.

VLR, as co-author Mike Drak and I call it, has in some recent weeks cracked the Globe & Mail non-fiction bestseller list.

The line “Work because you want to, not because you have to,” was originally coined by me in the prequel to VLR: Findependence Day.

Aman Raina

Meanwhile you can view a “video book report” on Victory Lap Retirement in this clip by Sage Investor’s Aman Raina, who regular Hub readers may recognize as a guest blogger who provides considerable insights into the robo-adviser space. You can also find the video book report here via iTunes.  Aman’s most recent Hub blog was this one reviewing Year 2 of his personal Robo-adviser experience and test.

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