In Ernest Hemingway’s For Whom the Bell Tolls, there is an interesting debate between two of the main characters about whether gypsies, palm readers and other seers can really predict the future or whether their supposed ability is just a figment of selective memory – of remembering the predictions that came true, and not the ones that didn’t.
In that debate, neither proponent succeeded in winning over the other party.
It strikes me that the debate over whether one should invest actively or passively will also remain unresolved for a similar reason.
I’m an active investor, however, I don’t think that you and everyone else should be an active investor just because that’s the route I’ve chosen.
But if you decide to go the passive approach, you don’t have a lot of choice in what product you can buy.
The truly passive investor can’t look to regular mutual funds, because diversified as they are, regular mutual funds are actively managed, so that defeats the purpose. Index funds are generally too expensive in terms of MERs (management expense ratios), so they’re out.
The passive investor really has only one alternative (or is it no alternative?): exchange-traded funds (ETFs). And among Canadian ETFs, choice is extremely limited.
Now, anyone who wishes to counter my point and argue that there is huge choice among Canadian ETFs would have an easy time of it. They could, for example, prove that ETF trading volume on the TSX doubled in 2009 over 2008. The quoted market value of ETFs trading on the TSX rose to almost $33.7 billion in 2009 from about $21 billion in 2008. There are currently 161 ETF issues in the market, an increase of 41 in just the first eight months of 2010.
ETFs are obviously hugely popular, and that popularity is growing. So what do I mean by there isn’t a lot of choice?
To answer that, let me go back to the beginning. If I’m going to be a passive investor in Canada, I’m going to be drawn toward Canadian ETFs. However, I’m not going to be drawn toward “active” ETFs or leveraged, inverse or currency-hedged ETFs. I don’t want commodity-specific ETFs. As a passive investor, I want a passive, broad, stock-index-based ETF.
As a passive Canadian investor, I want passive exposure to a Canadian index such as the S&P/TSX 60. I think it’s a reasonable request, and yet when I look at what’s available, there isn’t much.
I’m going to immediately reject the Invesco Pure Canadian Equity Class Series A because its MER, load and strategy make it an active mutual fund. I will also look past the Barclays S&P/TSX 60 Index Accelerated Return S1 issue, because it’s an exchange-traded note, not a fund.
That leaves me with a choice of just three true ETF issues:
- the BMO Dow Jones Canada Titans 60 Index ETF;
- the iShares S&P/TSX 60 Index Fund; and
- the new Horizons BetaPro S&P/TSX 60 Index ETF.
Imagine that! Out of 161 ETFs, only three make my first cut as a passive Canadian investor!
From there, each of these three is very similar.
If you’re a passive Canadian investor and you aren’t going to be trading options against your passive position, I’d choose the Horizons BetaPro S&P/TSX 60 Index ETF (TSX: HXT).
You really don’t have a choice.