Gyroscopic Investing

Hello, I searched and found a few threads on this, but I'd like some help/critique if possible on my Canadian permanent portfolio arrangement. I am pretty new to this and don't consider myself an especially experienced or skilled investor.

One of the constraints I'm working with is that because I don't have a lot of money in my accounts, I am really trying to minimize transaction costs and commissions. This means I might be bending the rules a bit to avoid the $20 ETF commissions.

Without further adieu... 

Bonds: ZFL (BMO Long Federal Bond Index ETF) has been discussed as a viable Canadian alternative to TLT. However, at my discount broker (Qtrade) this is not one of the commission free ETF options. Instead I have been using PGL (Powershares Ultra DLUX Government Bond ETF): http://quote.morningstar.ca/quicktakes/ ... ture=en-CA

I looked into purchasing bonds directly but the minimum amount is too high for me as a small-fry investor (more on that below in the cash section).

These funds look very similar to me:

PGL: Average effective duration 14.02 years, yield 3.79%
ZFL: Average effective duration 13.84 years, yield 3.61%

The holdings are slightly different:

PGL: holds some province-level debt (Quebec and Ontario bonds)
ZFL: holds some Canada Post debt and a very small amount (<1%) of Canada Housing Trust (which is scary if you know about the housing bubble here)

ZFL is more "pure" federal debt but PGL is completely commission free. Would appreciate some feedback on the tradeoff between these. Because I add money every few months, a $20 commission each time eats into my returns considerably since I a low five-figure balance.

Gold: Again I have picked

Cash: This is the category I've been having the toughest time with...

Currently my cash is in Ishares Premium Money Market (CMR). This is commission free but it's basically a no-return situation... the MER is 0.28%, the yield is 0.63% and the fund has actually lost a very small amount of money since I purchased it. I would like to improve on this. Based on what I read on this forum I know some people use either very short-term treasury bonds or 3 month GICs.

Unfortunately at my broker I ran into these minimums:

3 month GIC: $120,000
Short-term (<6 month) government t-bills: $500,000

Not practical for me (YET!).

Currently I'm looking at investment savings accounts as an alternative. For example Altamira High-Interest CashPerformer: http://www.nbc.ca/bnc/cda/feeds5/0,2726 ... 54,00.html

It pays 1.25%, has no fees to purchase, minimum amount $1k and the money is insured by the CDIC (equivalent of US FDIC). If that seems ridiculously low, the rate in late 2009 was 0.55%!

Am I take on any additional risk here? This seems like a huge improvement over the money-market fund - twice the interest and no management fee. Is there a catch?

Part II on the ever more confusing world of stocks and gold coming soon!

Thanks in advance for your help and insight.

Here's a list of the commission-free ETFs with my broker if that's helpful: http://www.qtrade.ca/investor/en/aboutu ... /etfs2.jsp

Welcome!

Is your entire portfolio in an RRSP and TFSA?  If so you could use the free ETFs for monthly contributions, then once you have sufficient funds you can switch over to the "better" ETFs.  Although make sure the bid/ask spread is low enough to justify this.  I just checked the spread on PGL and it looks reasonable ($0.06 on $21.00).  So on $10,000 the spread would cost you $30.

PGL is likely okay, but it would be better to hold ZFL.

As for cash, that is tough.  Most short bond ETFs are loaded with Housing Trust Bonds and/or provincial bonds.  Other than directly holding government bonds I think GICs are the best option.  Your bank should offer them for free at whatever amount you want.  I also use savings accounts and switch the funds around to take advantage of promotions.  For the past three months I was in ING and now have moved to CIBC.  Also make sure you have less than $100,000 at any bank to ensure CDIC coverage.

Check out this thread at Financial Webring for where the best cash options are.

Yes it's all registered accounts (for now).

Re: PGL vs ZFL, they have also the exact same MER as well. Bid/ask is similar too.

Given that I'm a small investor, buying quarterly and paying 4x$20 = $80 in commission is a pretty serious drag on my return.

I looked at XSB (IShares Short Term Bond Index) for cash but as you say it's full of non-standard, quasi-government stuff and the Housing Trust is about the last thing I would consider safe right now.

Do you see any downside to these investment savings accounts? They are liquid, insured and pay more interest than the money market... there must be some catch?

Thanks for your help.

Part II of my questions:

Gold: I know that the simplest way is physical gold, and this isn't particularly hard in Canada. However for a number of reasons I don't own any physical gold...

• It makes rebalancing difficult
• There is a big/ask spread that is considerably worse for physical bullion than ETFs/bonds
• There are not-insignificant commissions to buying physical gold at banks]
• it's hard to buy small amount when 1 ounce is still >$1k...
• I rent a home in the kind of neighborhood where I'm not interested in having a lot of valuable, easily transportable stuff on hand

For that reason I have gone with "paper gold" even though I am aware of the problems with it. I currently have my money in HUG - Horizons COMEX Gold ETF: http://www.horizonsetfs.com/pub/en/etfs ... b=overview

Unlike Sprott Physical Trust or Ishares IGT, which actually have gold sitting somewhere (or so they say...) this ETF just tracks the price of gold futures contracts. Again, I am aware that this is riskier than owning physical gold but it works for me right now. This is also a commission free option with my broker which helps.

My question is about the currency side... the Comex price is determined in US dollars, but the ETF hedges currency back into CDN$. Is this exposing me to additional risks?

Also the MER is 0.65% which seems a little high for this kind of vehicle, are there any better alternatives?

Stocks:

I currently have my stocks split half and half between US S&P 500 (HXS) and TSX 60 (HXT).

My issue with Canadian stocks is that the TSX 60 is basically banks and mining, so I am feeling over-exposed in the gold side especially. In Canada there is no Oracle, GE, IBM, Apple, Johnson and Johnson, Ford, 3M, etc... except for Blackberry and few grocery/consumer staples stocks, the TSX 60 is financial services and energy (>50% of the whole portfolio according to Morningstar). Both are pretty boom/bust heavy. I don't want to get too creative here and I believe in indexing as a philosophy... but I'm wondering about some creative alternatives in Canada.

The other problem in Canada is that every specialty fund (fundamental index, dividend aristocratics, large cap) is basically the same big firms. Look at a Canadian Dividend ETF... it's almost exactly the same companies as the TSX 60, big banks and resource companies, just with slightly different weights.

Also the US and Canada isn't really diversifying that much given the available rest-of-the-world ETF options.

Some options I am considering adding for diversity:

XEM - ishares MCSI Emerging Markets index
CIE - ishares international fundamental index
HAZ - Horizons Global Dividend

HXS is Canadian dollar hedged, it would be helpful if someone could elaborate whether that's desirable or not... I think it's discussed in the Craig's book but I can't remember the details.

Thank you!

TorontoSkeptic wrote: Do you see any downside to these investment savings accounts? They are liquid, insured and pay more interest than the money market... there must be some catch?

The risk would be a Cyprus type event.  However, if things get that bad then Canadian Government bonds could take a haircut as well (ie Greek bonds took a 50% haircut while bank accounts remained unaffected).  But this should be irrelevant since Canada has its own independent central bank and issues debt its own currency, so it can just "print" the problem away.  The real risk would be politicians doing something stupid (IMO it would politically more difficult to confiscate CDIC protected accounts).  Also, if Canada's credit rating begins to fall then I'd worry more about this and begin moving into USD.

I would switch HUG over to IGT, GTU.UN or CGL.C.  Also keep in mind that Sprott trades in USD so you'll need USD or pay the forex.  Once your account size is large enough I'd recommend getting a few physical coins and placing them in a safety deposit box.  You can hold some paper gold for rebalancing.

As for stocks you seem to be on the right track.  A 50/50 split between Canada and US (or a World index, such as XWD) should be fine.  Here is a fun backtesting tool that will show you that mixing US and Canada equities has helped increase the Sharpe Ratio:

http://www.ndir.com/cgi-bin/downside_adv.cgi

Hedging protects from a strengthening domestic currency, and hurts during a falling domestic currency (the opposite of being unhedged).  Since I don't know which direction the currency is going it is essentially no better than being unhedged.  Plus during a crisis the USD will increase in value and compensate for a falling stock market.  Hedging can also create drag, especially doing volatile markets (check out XSP vs SPY in Google Finance, and you will see significant drag through 2007-2009).

Thanks, holding physical gold and rebalancing with paper isn't something I had thought of...

I checked the Financial webring link... amazing the lengths people are going to for 0.1% more yield. I don't really have enough money or time to chase those temporary offers that banks through up. I think I'll go for one of the high-interest investment savings accounts mentioned here (Altamira or similar): http://www.canadiancapitalist.com/high- ... t-brokers/

Ha ha don't worry I definitely have less than $100k in my cash account, no problem there.

I'm still a little unclear on the hedging side... since the US dollar is gaining vis-a-vis the Canadian dollar (up almost 6% YTD) I'm doing worse with a CDN$ Hedged ETF? I could switch this to an unhedged one, again I select it partly because it's on the list of commission-free ETFs with my broker and I'm trying to minimize fees as much as possible.

The other possibility which may be getting too cute is to hold DLR (Horizons US Dollar Currency ETF) which generates returns as the US dollar rises (and is also commission-free). Or am I complicating things too much? DLR is not really a stock per se so maybe it's more of a variable portfolio position.

Thanks again!