All posts by Financial Independence Hub

The illusion of owing Gold through some ETFs and Funds

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Popular ETFs like GLD are perceived as providing investors ownership of gold bullion. But is this is an illusion?

By Nick Barisheff

Special to the Financial Independence Hub

Gold-backed exchange-traded funds (ETFs) and similar products account for a significant part of the gold market, with institutional and individual investors using them to implement many of their investment strategies without considering the true risk associated with many aspects of holding non-tangible assets.

Gold ETFs are units representing physical gold in paper or dematerialized form, which is very different from owning physical gold. According to the World Gold Council, global gold-backed ETFs added 298 tonnes, or US$23 billion, across all regions in the first quarter of 2020[1]. Total ETF holdings amounted to 3,296 tonnes, representing US$179 billion. The largest ETF is SPDR Gold Shares (GLD) with 1,048 tonnes.

Many investors and financial advisors may be surprised to learn that owning shares in a gold ETF is not the same as owning physical gold. As one of the largest ETFs, GLD states in its prospectus: “ … designed to track the price of gold.” Is it wise to choose convenience over holding physical gold?

Since their introduction in 2003, gold-backed ETFs have transformed the gold investment market into an illusion, diverting attention from ownership of physical gold. This is like a magician that has you focused on a distraction while they perform a trick.

When you buy a physical asset, such as real estate, a car or a boat, a great deal of effort is made to ensure that legal title to the asset is transferred to the buyer. This generally involves a specific description of the asset – the make, model, colour and serial number, in the case of a car. In addition, the seller typically warrants that they have free and clear title, that there are no encumbrances and that they have the legal right to convey title to the buyer.

Surprisingly, when it comes to acquiring gold, investors tend to ignore these basic fundamentals and instead focus on the storage costs and management fees; they don’t give a second thought to actual legal ownership. What good is it to save money on the storage costs if you don’t have legal title to the gold? Many gold transactions, such as futures contracts, certificates, and ETFs, are nothing more than paper proxies or derivatives of gold. They do not represent legal ownership of gold. These proxies may work as planned during normal market conditions but may fail under stress, when investors need the safe haven of bullion the most. I have always said that if you aren’t paying reasonable insured storage fees for allocated bullion, then in all likelihood you don’t own any gold at all.

For example, if we were to place a bet on tomorrow’s gold price, and we agreed to settle in currency, then we wouldn’t need any actual gold as long as each of us had the ability to pay if he/she lost the bet. However, this isn’t an investment, and is totally dependent on the credit worthiness of the counterparty. It defeats one of the most important attributes of allocated bullion: NO COUNTERPARTY RISK.

ETFs have significant counterparty risk on many levels

In the marketing materials of the GLD ETF, the first thing to note is that it is referred to as a “Tracking Vehicle.” There is nothing mentioned about owning gold. On the GLD website, it clearly sets out the objective of the Trust. Unlike physical gold, ETFs have counterparty risk, because there’s a possibility that the other parties, such as the Authorized Participant (AP), the trustee or others, may default or fail to uphold their part of the agreement.

I have spent many years with lawyers, drafting prospectuses and legal agreements. As everyone can appreciate, lawyers are always careful and precise with the specific language in all legal documents. As a result, it is important for each investor to carefully read all the documents associated with a transaction in order to understand the objectives of the ETF.

Pay strict attention to the wording in the Regulatory Documents

With the recent increased popularity of ETFs, many investors assume they are like open-end mutual funds, but with much lower management fees. They never question why the fees are lower; they simply assume that Wall Street has become generous and wants to provide cost savings to public investors.

In an open-end mutual fund trust, such as the BMG mutual funds, the fund manager receives the investor’s contributions and then purchases the appropriate bullion according to the mandate of the fund. Similar to a stock transaction, the Custodian (Scotiabank, in BMG’s case) issues a Trade Record Sheet, specifying the bar being transferred to the fund by refiner, serial number, exact weight and purity to three decimal places. Every month, the Custodian provides a list of bars held in custody for each fund by refiner, serial number, exact weight and purity. This monthly document is signed by an officer of the bank and is posted on the BMG Group Inc. website.

The holdings are audited annually by the BMG Funds’ independent auditors (RSM Canada LLP).

While open-end funds have to incur a number of expenses, as mandated by regulatory authorities, the investors will benefit from the economies of scale in both purchasing the bullion and storing the bullion on a fully insured basis, as well as the reduced legal and accounting costs. Continue Reading…

Is value investing still of value?

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

I’ve often posted blogs about the perils of trying to time the market or pick individual stocks. I hope these posts have helped you stay invested as planned during this year’s uncertainties. But what about the risk factors in your stock portfolio: especially the value factor?  Should you try to time these?  Or are you also maintaining a disciplined allocation to them, also according to plan?

Value-added, with a catch

First, what is the value factor? Value stocks seem undervalued compared to their growth stock counterparts, as measured by stock price vs. various valuation metrics (such as book value, earnings, or cash flow). Historically, investors who have held a heavier allocation to value stocks have earned higher returns, beyond what broad markets have delivered.

But to capture the value premium over time, investors have had to tolerate the sometimes-lengthy periods when value underperformed growth. 

The catch is, value investors have had a tough go of it during the past decade and in particular the past 3 years.  Although very short-term, some are wondering if the tide is starting to turn,  given some moderate value outperformance in the US and some significant value outperformance in Canada and non-US markets since mid-April.  Even so, the long stretch of underperformance has led some investors to question whether the value premium still exists.

Value glasses, empty and full

Without diving too deep, there are two broad ways we can view the value premium today. A “glass half empty” analysis might conclude a decade-plus pattern of underperformance means it’s gone for good. However, a “glass half full” type knows there is plenty of logic and evidence to suggest that rumors of the value premium’s demise are probably premature.

Still as risky as ever:

Ever since Nobel laureate William Sharpe came up with the capital asset pricing model in the 1960s, it’s been pretty clear that investors demand extra compensation for taking on extra investment risks. As risky as value stocks have felt lately, it’s certainly still logical to expect them to eventually pay off in higher returns.

Like a swinging pendulum:

Put another way, will returns that have swung to one extreme eventually revert or swing closer to their long-term averages?   As Dimensional Fund Advisors describes, “It’s reasonable to expect that securities with lower prices relative to fundamentals should have higher expected returns.” In other words, the riskier (lower-priced) value stocks become relative to growth stocks, the more (not less) likely a correction will eventually occur.

The bigger they are:

Some say huge tech stocks have now become the best source of expected return.   Continue Reading…

Understanding the Cost of Title Insurance – Policy Coverage & Need

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By Rebecca L. Clower

Special to the Financial Independence Hub

For a real estate deal, Title insurance plays an essential purpose: it covers sellers and investors from financial damages arising from errors or conflicts not detected before the property was sold.

If a purchaser and seller sign a sales contract for a house, the buyers appoint the title officer to conduct a research of any liabilities, duties, disputes or disagreements which are to be settled before the home is transferred from one party to the other in the local jurisdiction’s land records.

But consumers can opt to purchase title insurance from a renowned insurer as an extra measure of security.

What is a Title Insurance policy?

A title insurance policy protects you from title issues such as a poorly registered act, an overdue contractor’s lien, or an unwanted successor. After the title examiner researches, divorce decrees, court rulings, and other public documents, title insurance policy shall be provided to ensure that there are no title disputes.

The title insurance of the lender is mandatory if you fund your home with a hypothec and covers the interest of the ender for your lending life. The strategy for a lender is related to the amount of the loan (not the buying price). Furthermore, the title insurance policy of an investor covers your property for as long as you own it, and the purchase price is the basis.

How much does it cost?

When buying a lender’s and the policy of the owner together, the overall cost of title insurance policy is around 0.5 per cent to 1 per cent of the purchase price. According to December 2019, the amount of fees applies to the premium from $1,372,50 to $2,745 [US$] for a medium-priced home of $274,500. The larger your size, the more likely you will be to pay for title assurance, although tariff insurance costs differ by region.

In respect of a refinancing loan, the cost of the title policy of a new lender is closer to 0.5% of the balance. You do not need to purchase another if you refinance the title policy of an owner when buying your home, as long as your own coverage is in place.

Factors affecting the cost

In general, title insurance plans, unlike many other specific insurance plans (such as car insurance, life insurance, and household insurance), require a single, one-time payment at or before the closing date of a settlement. If the insurer agrees to break payments into more manageable monthly installments, recurring payments for the title policy are very unusual.

Insurance charges are typically classified into two general categories: premiums and service charges. The cost of title insurance may be further divided within each group, depending on the quantity and form of work needed to complete the program.

  • Premiums

To some degree, the maximum premium paid on a standard title insurance policy depends on the valuation of the underlying asset. However, since most of the costs cover pre-transfer research – title quest, testing, and cure of defects – property value is not the priority.
Continue Reading…

Which lotteries attract the most Americans, broken down by state

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By Mike Brown

Special to the Financial Independence Hub

LendEDU’s fourth annual lottery spending report analyzed the most recent U.S. Census data to see what the average American is spending on the lottery, which states spend the most, and how each state spends its yearly lottery revenue.

In the United States, the lottery offers one of the quickest routes to the American Dream; for just a few dollars, you could become a multi-millionaire in a matter of minutes.

Yet, the odds of that happening are incredibly slim, and the money spent on lottery tickets can quickly become substantial.

For the last three years, LendEDU has analyzed U.S. Census Bureau data on annual lottery spending by state to find how much the average American spends, in addition to each state’s lottery expenditure per capita.

Our fourth annual lottery spending report brings you those same statistics and some new ones. This year, we also broke down how each state spends its annual lottery revenue and what each state’s lottery expenditure per capita is as a percentage of its median household income.

Average Lottery Spending by Americans Hits Recent High

The U.S. Census Bureau releases its lottery spending data on a two-year lag, so the data that was released on January 31, 2020 reflects lottery spending data from 2018.

Since LendEDU started doing this report, lottery spending per capita in the U.S. hit a recent high in 2018.

In 2018, Americans spent a combined $76,362,627,000 on the lottery, while the most recent U.S. population estimate from the Census is 328,239,523.

This puts the lottery expenditure per capita in the U.S. at $232.64, which is up $13.10 compared to 2017’s figure.

Massachusetts spends the most on the Lottery

By taking each state’s total lottery expenditure from 2018 and dividing it by the most recent population estimate, we put together a map that breaks down state lottery spending per capita.

And once again, lottery players from Massachusetts spent the most on the lottery in 2018, $765.90. This figure is up from the state’s number from last year, $737.01. In comparison, North Dakota once again had the lowest expenditure per capita, going from $34.68 in 2017 to $30.32 in 2018.

For reference, six states do not offer a lottery: Alabama, Alaska, Hawaii, Mississippi, Nevada, and Utah. Washington D.C. does offer a lottery but does not report any official figures to the U.S. Census Bureau, therefore they have been excluded from this report.

State-by-State Lottery Expenditure Per Capita From 2016 to 2018

Below, you will see how each state’s lottery expenditure per capita has changed from 2016 to 2018 according to each state’s lottery revenue and population from each year. Continue Reading…

Advisor’s Alpha

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

One of the great debates around the investing world revolves around the extent (if any) to which advisors add value.  Many in the media say the number is either small or negative. Many advisor cheerleaders say the number is substantial.  Everyone should be skeptical.  What follows is my unscientific assessment of the pseudo-debate (two opposing factions that have a story to spin where it is difficult to ascertain or refute either position).

The people at Vanguard have long been touting their own research (complete with quantified bandwidths for varying activities) on this topic.  Their general position is that advisors add about 3% in “value” to their clients’ portfolios.  Colour me skeptical.  To begin, it is possible to drown in a river that is, on average, only two feet deep.  Averages can be deceptive, especially when the variance in the things being measured is likely to be wide.  There is really no such thing as an average advisor or an average client.  Using the word “typical” might be a bit more accurate and helpful, but frankly, I doubt it.

There are some good advisors out there – and some lousy ones, too.  When I hear people talk about the suite of services that might be offered, the usual presumption is that all advisors are doing all those things.  That’s simply not true.  In short, almost any assessment of value added (say 3%) is likely to be truest only of the very best practitioners.  Only the very best are likely to be doing all the good things that cause advisors to score highly.  Ordinary advisors don’t do those things.  Poor advisors might very well be doing the opposite.

That’s my major beef, but there are others.  Remember that advisors are not monolithic.  They’re all over the place regarding what they do, how they do it and who they do it for.  Part of that is because their clients are all over the place, too.  Some are slothful to the point of it being difficult to get them to do anything; others are hyper-sensitive to media hype and short termism.  Good advisors provide focus and discipline, but that is difficult to reliably quantify and, at any rate, likely looks different for different clients.

Two counter-narratives

Allow me to offer two counter-narratives to the idea of (most?) advisors (consistently?) adding 3% over a long-term time horizon.  The first is the annual Dalbar study, the “Quantitative Analysis of Investor Behaviour” (QAIB).  Dalbar admits that while the study purportedly shows how investors can do unnecessary harm to their return by (among other things) chasing past performance, the people at Dalbar have no way of disaggregating causation.  Continue Reading…

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