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May-08-17

Easier than ACB

It’s been four years since we released our white paper, As Easy as ACB. The paper provided investors with step-by-step instructions on how to track the book value of their ETFs, using the free online resource, Adjusted Cost Base.ca. We were the first to admit that the title of our paper was misleading – tracking your ACB is about as easy as reciting the alphabet backwards.

Adjusted Cost Base.ca has further simplified the ACB tracking process by offering an upgrade to their basic features for $49 per year. The main benefit for premium subscribers is the ability to import all phantom distributions and return of capital for their ETFs, saving precious time and possibly avoiding an overpayment of taxes. 

Source:  Adjusted Cost Base.ca

 

The service allows you to import up to ten years of data (you can download any missing information from the Canadian Depository for Securities (CDS) website, using their tax breakdown service).  If there were any unit splits (such as for the iShares Core S&P/TSX Capped Composite Index ETF 4-for-1 unit split on August 8, 2008), these will also need to be inputted manually.

At a premium

After upgrading to premium subscriber status, the process for importing ETF tax information was very straight-forward. To illustrate the steps, I’ve included an example below for the iShares Core MSCI EAFE IMI Index ETF (XEF). The example assumes that 2,000 units of XEF were purchased for $53,300 on January 15, 2016.

Step 1: Click on Auto Import Tax Information for ETFs / Funds / Trusts

Source: Adjusted Cost Base.ca

 

Step 2: Search for the ETF Tax Report

After choosing the 2016 tax year from the drop-down menu, enter XEF as the ETF symbol and then click on Search. Once the search results appear, click on the fund name.

Source: Adjusted Cost Base.ca

 

Step 3: Apply the Transactions

Once you’ve reviewed the return of capital and non-cash (phantom) distribution information, click on Apply Transactions. If you held the ETF during other tax years, repeat Steps 1 through 3, changing the tax year each time in Step 2.

Source: Adjusted Cost Base.ca

 

Source: Adjusted Cost Base.ca

 

2016 results

The return of capital transactions have now been automatically included (decreasing the ACB by $2.26 and $1.06 respectively). The reinvested capital gains (phantom) distribution has also been included, increasing the ACB by $219.88. If an investor forgot to adjust their cost base for this non-cash distribution, they would eventually pay an extra $58.85 in tax (assuming an Ontario resident in the highest marginal tax bracket [$219.88 × 50% × 53.53%]). The additional cost of the premium service would have easily paid for itself in this scenario.

Is it worth the extra cost?

As always, there will be a small percentage of investors that will cringe at the thought of paying $49 annually for information that is available for free online. Based on the feedback I receive from DIY investors, most of them will find this service to be totally worth the fee. 

By: Justin Bender | 0 comments
May-04-17

Norbert’s Gambit at National Bank Direct Brokerage

Since they began offering commission-free ETF trades, National Bank Direct Brokerage (NBDB) has become the cheapest big bank to invest with (as long as you are buying or selling at least 100 shares of a Canadian-listed ETF).

This is welcome news for seasoned DIY investors who have mastered the Norbert’s gambit strategy to cheaply convert their Canadian dollars into US dollars (as they can now generally avoid the two additional trading commissions required for the transaction).

For the rest of you newbie Couch Potato investors, I’ve put together a video tutorial that will make your first gambit a successful one.  In the example, I convert about 8,000 Canadian dollars into US dollars within my RRSP account (I’ve also included step-by-step instructions below the video).

 

Step 1:  Buy DLR on the Canadian stock market in your Canadian dollar RRSP account at the current ask price.

The first step is to purchase shares of the Horizons US Dollar Currency ETF (DLR).  The fund invests in US dollar cash equivalents, but can be purchased with your Canadian dollars.

In order to determine the number of shares of DLR that you would like to purchase, just take the $8,000 CAD that you would like to convert and divide by the current ask price, which is $13.22 in our example – this equals 605 shares (just round down to the nearest whole share).

As you are purchasing at least 100 shares of a Canadian-listed ETF, the trading commission will be $0.

Stock Order Screen:  National Bank Direct Brokerage

Source:  National Bank Direct Brokerage

 

Before proceeding to the second step, you’ll need to wait four business days after purchasing DLR.  As we purchased DLR on March 31, 2017, we will need to wait until April 6, 2017 in order to proceed to the next step (Note: The investment industry is scheduled to implement a T+2 settlement cycle beginning September 5, 2017, so you will soon be able to complete the gambit in one less business day).

Step 2:  Call National Bank Direct Brokerage at 1-800-363-3511 and ask them to transfer 605 shares of DLR from the Canadian dollar RRSP account to the US dollar RRSP account.

When I called National Bank, I explained to the trader what I was trying to do, and there were no issues at all.  After the trader has completed the request, as them to include a note on the account that will allow you to sell 605 shares of the Horizons US Dollar Currency ETF (DLR.U) today (the trader also told me to wait two minutes before placing my trade).

Step 3: Sell 605 shares of DLR.U in the US dollar RRSP account on the Canadian stock market at the current bid price.

DLR.U is the exact same security as DLR.  The only difference is that DLR.U is transacted in US dollars, while DLR is transacted in Canadian dollars.  

Stock Order Screen:  National Bank Direct Brokerage

Source: National Bank Direct Brokerage

 

To verify that the trade has been completed successfully, hover over the Accounts tab at the top left of the page and click on Asset Details. 

You should now see a positive US dollar cash balance, as well as a negative quantity of DLR.U shares (these will disappear once National Bank processes your transfer request).  You are now free to purchase US-listed ETFs with the cash available in your US dollar RRSP account.

Asset Details:  National Bank Direct Brokerage

Source:  National Bank Direct Brokerage

 

By: Justin Bender | 0 comments
May-02-17

New Multifactor ETFs from Manulife

As more and more ETF providers jump on the smart-beta bandwagon, Manulife had an even better idea – why not team up with the pioneers of factor-based investing, Dimensional Fund Advisors (DFA)?

And they did just that. For years, investors could only gain entry to the exclusive Dimensional party if they hooked up with a DFA-approved advisor. Now, do-it-yourself investors have easy access to at least a portion of DFA’s secret sauce through Manulife’s Multifactor ETFs:

Regression Analysis: 2007 to 2016

Manulife ETFs Ticker Management Fee
Multifactor Canadian Large Cap Index ETF MCLC 0.40%
Multifactor U.S. Large Cap Index ETF - Hedged Units MULC 0.40%
Multifactor U.S. Large Cap Index ETF - Unhedged Units MULC.B 0.35%
Multifactor U.S. Mid Cap Index ETF - Hedged Units MUMC 0.50%
Multifactor U.S. Mid Cap Index ETF - Unhedged Units MUMC.B 0.45%
Multifactor Developed International Index ETF - Hedged Units MINT 0.55%
Multifactor Developed International Index ETF - Unhedged Units MINT.B 0.55%

Source: Manulife Investments

 

The DFA factor

Staying true to DFA’s approach, Manulife’s ETFs target factors that have historically generated higher returns (such as smaller cap, lower relative price and higher profitability).  As DFA is arguably best known for the small cap tilts in their funds, it’s interesting to note that Manulife’s ETFs generally exclude smaller companies (this is likely due to the difficulty trading smaller companies within an ETF structure).

Put your John Hancock here

Manulife’s ETFs follow the John Hancock Dimensional Indices, which are fairly new and have very little historical performance data. I did manage to scrape together over ten years of monthly returns for the US large cap index, so we can use this data to run a regression analysis for comparison purposes (basically, we are trying to determine whether the Manulife ETFs are expected to be comparable to DFA funds in terms of small cap, relative price and profitability factor tilts).

In the chart below, I’ve included the historical factor tilts for the Dimensional US Vector Equity Index (which is similar to the DFA US Vector Equity Fund), the Dimensional US Core Equity Index (which is similar to the DFA US Core Equity Fund) and the John Hancock Dimensional Large Cap Index (which is similar to the Manulife Multifactor U.S. Large Cap Index ETF).  A higher value indicates a greater exposure to each of the academic factors.

Regression Analysis: 2007 to 2016

Index Size Relative Price Profitability
Dimensional US Vector Equity Index 0.39 0.4 0.11
Dimensional US Core Equity Index 0.18 0.21 0.13
John Hancock Dimensional Large Cap Index (CAD) 0.01 0.03 0.11

Sources: AQR, Morningstar Direct, Dimensional Fund Advisors Canada ULC

 

The Dimensional US Vector and Core Equity Indices have a significant exposure to the size, relative price and profitability factors, while the John Hancock Dimensional Large Cap Index has significant exposure to only the profitability factor.  This would indicate that a DIY investor using the Manulife Multifactor ETFs is not expected to have a similar investment experience to someone using the DFA mutual funds.

As I generally recommend broad-market ETFs to DIY investors, I’ve also included a regression analysis in the chart below that compares the S&P Total Market Index (similar to the iShares Core S&P U.S. Total Market Index ETF), the CRSP US Total Market Index (similar to the Vanguard U.S. Total Market Index ETF) and the John Hancock Dimensional Large Cap Index (which is similar to the Manulife Multifactor U.S. Large Cap Index ETF).

Regression Analysis: 2007 to 2016

Index Size Relative Price Profitability
S&P Total Market Index 0.00 0.03 0.08
CRSP US Total Market Index 0.01 0.02 0.08
John Hancock Dimensional Large Cap Index (CAD) 0.01 0.03 0.11

Sources: AQR, Morningstar Direct, Dimensional Fund Advisors Canada ULC

 

Beta in disguise

The results would indicate that the John Hancock Dimensional Large Cap Index has very similar factor tilts to plain-vanilla broad-market indices.  In other words, you’re paying a steep premium to Manulife for market returns that are available for much cheaper.

Although these new Manulife ETFs have a great deal of hype behind them (thanks in part to DFA’s reputation), they don’t appear to offer anything close to the factor tilts available in DFA mutual funds.  For DIY investors, sticking to the boring Couch Potato investment philosophy is likely your best bet.

By: Justin Bender | 0 comments