Buy and Hold...And Tweak and Modify

04/11/2011 12:21 pm EST


Rob Carrick

Columnist, The Globe and Mail

That’s the investing approach taken by a pair of money managers who recently updated some simple portfolios they created a little over a year ago using exchange-traded funds, reports Rob Carrick, reporter and columnist for The Globe and Mail.

Buy-and-hold investing is a sound approach for most investors, because of the risks of over-handling a portfolio. Among them: Buying and selling at the wrong time, and wasting money on fees and commissions (read my argument in favor of buy and hold online here).

But there’s an evolved form of buy and hold that you’ll see in the modifications made by our two managers to the conservative, middle-of-the-road, and aggressive portfolios they created last year.

The broad details are the same in each portfolio, but adjustments have been made to reflect changing market conditions and new products in the ETF world.

These tweaks aren’t necessarily right for your own portfolio, but they do give you a sense of the way the pros fine-tune their approach.

Ioulia Tretiakova
Vice President, PUR Investing, Toronto
Several of the changes made in Tretiakova's portfolios are to prepare for rising interest rates.

Instead of using a well diversified bond ETF with a mix of short- and longer-term bonds and government and corporate bonds, she has gone with short-term corporate bonds for each portfolio.

The corporates will hold up comparatively well when rates rise (though they could still lose value), and they help maximize the thin yields available from short-term bonds.

Tretiakova sees stocks offering less long-term volatility than they did last year, so she's ramping up risk levels in each of the portfolios. For example, the iShares Russell 2000 Index Fund, CAD-Hedged (Toronto: XSU) an ETF tracking the small companies of the Russell 2000 index, has been substituted for one tracking the big companies of the S&P 500.

In terms of new products, Tretiakova has added an ETF that covers the entire global stock market in a single fund—the iShares MSCI World Index Fund (Toronto: XWD

Other new additions include the ultra-low-cost Horizons S&P/TSX 60 ETF (Toronto: HXT), which she describes as “an unbeatable deal for Canadian equity holders at a 0.07% management-expense ratio.”

One final addition is the BMO Covered Call Canadian Banks ETF (Toronto: ZWB), which uses an option strategy to emphasize high levels of income over capital gains. Tretiakova has included this ETF in the safety-first portfolio because she believes it will dampen risk and generate tax-efficient income in non-registered accounts.

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Adrian Mastracci
Portfolio Manager, KCM Wealth Management, Vancouver
Mastracci continues to use guaranteed investment certificates (GICs) for fixed income, but he has also mixed in some exposure to short-term provincial bonds.

He regards these holdings as a comparatively safe parking spot for money until rates have risen, and investors are able to get higher yields from bonds and GICs. Once yields have risen to the 4% to 5% range, he will start switching into longer-term bond ETFs.

Notice how Mastracci is using a variety of ETFs to cover exposure to the Canadian stock market. His reasoning is that each of these ETFs tracks an index with different characteristics.

“This gives you some diversification in the portfolio,” he said. “If one does better than the other, so be it.”

Like Tretiakova, Mastracci has found the new BMO covered-call ETF to his liking. “I'm looking to add a little income without taking on a lot of risk,” he said. “I see the risk level as being low with this kind of strategy.”

He’s also placed that ETF in his aggressive portfolio, while Tretiakova used it in her conservative portfolio. “I'm looking to add a little income without taking on a lot of risk,” he said.

While Tretiakova is using US-listed ETFs for US and international exposure, Mastracci goes with TSX-listed funds that use currency hedging to screen out the impact of a fluctuating Canadian dollar.

Hedging adds to the cost of these ETFs, and it's an imprecise tool that can lead to discrepancies between actual index returns and your returns.

But Mastracci likes the way hedging reduces currency risk, which would be an issue if the Canadian dollar keeps rising. One prediction this week called for the dollar to rise to US$1.09 by late 2012.

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