It’s Time to Profit from the Loonie’s Rise

12/13/2010 4:15 pm EST

Focus: ETFS

Rob Carrick

Columnist, The Globe and Mail

Parity is a rarity for the Canadian and US dollars, so be sure you take advantage as an investor, says Rob Carrick, columnist for The Globe and Mail.
A Buy American strategy is what’s called for here. If you want exposure to the US stock market, buy exchange traded funds (ETFs) and individual stocks listed on the New York Stock Exchange and Nasdaq.

Most times, buying US-listed stocks puts you at risk of a rising Canadian dollar killing your returns. As our dollar moves higher, it shrinks the value of assets priced in US dollars. It’s this phenomenon that explains the proliferation in recent years of ETFs and mutual funds that use hedging to keep currency fluctuations at bay.
Avoid these hedged products today. With our dollar near parity, long-term trends suggest there’s more downside for the currency than upside. Just as a rising dollar hurt your returns, so will a falling currency add to your gains.

In this edition of the Portfolio Strategy column, we look at NYSE-listed ETFs that provide broad exposure to the US stock market. Next week, we’ll cover US stocks.

Emerson Blackman's US ETF Picks

Mr. Blackman is an adviser with Dundee Securities in Mississauga, Ont., who uses ETFs in client portfolios.

“We're saying to clients that the Canadian dollar is strong right now, so buying US assets is cheaper than it would be if the dollar were weak,” Mr. Blackman said. He likes the idea of getting exposure to the US market through dividend-focused ETFs, but he cautions that the dividend tax credit won't apply in non-registered portfolios. Mr. Blackman notes that the iShares S&P 500 Index Fund (IVV) is a traditional index ETF in that it weights stocks by size, whereas the PowerShares FTSE RAFI US 1000 Portfolio (PRF) uses a different approach that gives a higher weighting to undervalued stocks. Mr. Blackman said he will combine IVV and PRF in some cases. As for the PowerShares QQQ (QQQQ), it was wildly popular a decade ago as a way to play the US tech sector. Mr. Blackman said he has a few clients who have asked about it lately. “It's been beaten to death, but when you check out the returns of late they're starting to look OK.”

Vikash Jain's US ETF Picks

Mr. Jain is a portfolio manager with archerETF Portfolio Management

You're no doubt familiar with the S&P 500, which is a widely followed benchmark for the US stock market even though it includes only large companies. The S&P 100 index, tracked by the iShares S&P 100 Index Fund (OEF), is even more skewed to big companies, and that's why Mr. Jain likes it. “These are companies that derive a large proportion of their earnings internationally,” he notes. As such, they'll benefit from the weak US dollar in a couple of ways. One, their goods will be cheaper and thus more competitive in the global marketplace and, second, they will gain when their foreign earnings are converted back into US dollars. For exposure to small-size companies, Mr. Jain likes the low fees and low portfolio turnover of the Vanguard Small-Cap ETF (VB). Low portfolio turnover means fewer realized capital gains, which in turn means lower taxable distributions to shareholders.

Adrian Mastracci's US ETF Picks

Mr. Mastracci is a portfolio manager with KCM Wealth Management Inc. in Vancouver

Mr. Mastracci chose these ETFs on the basis of low fees and good liquidity, which means strong trading volumes that ensure investors get competitive prices when buying and selling. The SPDR S&P 500 ETF (SPY) and IVV are competitors in tracking the S&P 500, which is made up of big US companies. Vanguard Total Stock Market ETF (VTI) provides exposure to 3,000 stocks that represent the entire US market. Its fee of 0.07% is a screaming bargain, but it's not the cheapest US market ETF. The new Schwab US Broad Market ETF (SCHB) has a fee of 0.06%. There's the parity-related argument for buying US-listed ETFs, but Mr. Mastracci believes they're also right for people who are investing for the long term. “If you've got a ten to 20-year view and you don't need to touch your money, you're just as well to go that route.” Note: US-listed ETFs are often cheaper than TSX-listed funds.

Morningstar's US ETF Picks

Chicago-based Morningstar is an independent investment research firm

These ETFs are on a list of favorite long-term portfolio buillders assembled by Morningstar analysts. The funds on the list are chosen on the basis of fees, index construction, tax efficiency, and diversification. Morningstar calls VTI the quintessential core US stock market holding; IVV is said to be the best S&P 500 ETF, Vanguard Dividend Appreciation (VIG) is described as holding the highest quality US stock portfolio around, while Vanguard Mega Cap 300 (MGC) offers a cheap portfolio of large companies. The iShares mid- and small-cap ETFs have slightly higher fees than their Vanguard counterparts, but offer more precise exposure to mid- and small-size companies. If you're looking for something in health care, a sector where the Canadian market is a desert, then check out this other Morningstar pick, the iShares S&P Global Healthcare Index Fund (IXJ).

The Most Actively Traded US Market ETFs

These ETFs commonly top daily lists of ETFs generating the highest trading volumes.

Most ETF trading in both the Canadian and US markets is carried out by hedge funds, pension funds, and other institutional investors. So the ETFs on this list say more about trading opportunities in today's market than they do about sensible long-term investing. One exception is SPY, which is perennially listed among the most actively traded US market ETFs on a daily basis. Another is iShares Russell 2000 Index Fund (IWM), a standby for investors who want to buy into riskier but potentially strong-performing small stocks.

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