Monthly Archives: December 2017

There is no place for commodities in your portfolio

In the balcony with friends

Commodities make me sick

I get sick to my stomach every time I hear an investment expert saying that we should own commodities in our portfolios.

The purpose of investing is to get a return for your money

The purpose of investing is to get a return on your money. You buy a financial product and you get a higher value when you sell, you get a dividend, you get an interest payment, you  get royalties, you get paid rent, and so on…

I am appalled when I hear financial experts suggesting that we should invest in gold and other commodities.

I wrote a blog called “Why investing in gold is a dumb idea.” The same principles apply to other commodities.

What are commodities

Let’s begin by describing what commodities are. Commodities are standardized goods and services, most of them are traded in an open market. It’s easy to explain commodities by giving you an example:

  • Agricultural products such as wheat and corn
  • Metals such as gold and silver
  • Energy such as oil and coal

These products are actively traded in the commodity market and they might have a lot of volatility.

The people who make money in the commodities market are the broker houses that facilitates all the transactions. During the The California Gold Rush (1848–1855) the people who became millionaires where the ones selling the pick and shovels, not the miners. It’s the same in the commodity market, the people who get rich are the ones who sell the dream of commodities as an investment.

Commodities don’t make babies

The truth is that when you put two bushels of corn in a barn, they don’t have sex and produce a baby bushel. They just sit there, do nothing and you have to pay insurance and storage. Commodities are  non producing assets, they are no different from any household item in your house, like a chair or a table, therefore they are not investments.

Anyone who insist that commodities are investment class, they want to sound smart, they want to make you feel as if you need their services and they are direct beneficiary of the service they are selling you.

Supply and demand

In the long run commodity prices increase at the rate of inflation. In the short run, commodity prices are influenced by the laws of supply and demand.

If there is higher demand than supply the prices go up. When prices go up consumer buy less and producers produce more, bringing the price to some equilibrium.

If there is higher supply than demand the prices go down, consumers start buying more, producers produce less and the price comes back to equilibrium.

Here is a graph of the Commodity index ETF for the past 5 years. As we have become more efficient producing commodities, supply have increase, the prices have gone down and if you were a believer of commodities as an investment, you have lost 50% of your money during the past 5 years. Show that to the person who recommended commodities for your portfolio.

Governments stop subsidizing commodities

While I am on the subject. I want to express that I dislike it when governments get involved in commodity markets. It costs million of dollars to taxpayers and to consumers. Governments all over the world subsidize all kind of agriculture products. This subsidy comes out of tax payers pockets. This is the subject for another blog.

Hire me 🙂

I am a money coach, if you would like to talk about your financial life, if you need help, write me a message….

My Favorite Canadian ETFs

There are hundreds of ETFs in Canada. Which ones are my favorites?

The evolution from Mutual Funds to ETFs

Painting an apartment with friends.

First of all, what is an ETF? ETF stands for Exchange Traded Fund. Many investors are familiarized with the term “Mutual Fund,” whereas many investors pool their money, give it to a mutual fund manager and that mutual fund manager would buy and sell stocks according to his investment style.

Mutual funds were the favorite investment vehicle for many small investors. With a small amount of money, they bought instant diversification. Imagine that your capital is only $10,000. By giving this amount to a mutual fund manager, the manager takes your money, along with the money of hundred of other investors and he buys and sells hundreds of different stocks during they year.

Other advantages of mutual fund was to have a professional making those decisions on your behalf.

The disadvantage of Mutual Funds were many. The number one was the cost. Most Canadian Mutual funds charge 2.5% to 3% management fees. This is fine if the end result is great performance, but the problem is that investors were not receiving great performance, they were receiving less than mediocre performance. When compared to a benchmark, let’s say the average return for Canadian stocks, they were under performing.

Another disadvantage of mutual funds is the compensation for financial advisors. Financial advisors would have a conflict of interest. They would feel tempted to recommend to their clients the funds which would give them the biggest commission. If there was a fund which didn’t offer a commission, the advisor simply didn’t recommend it, even if it was the best fund for their clients interest.

Index funds

And so the Index fund was invented. The index fund simply buys all the stock that have similar characteristics, lest say: All Canadian Big Companies, or All Canadian Banks, or All Canadian Oil. The index buys all those stocks, without doing any individual stock research, picking and choosing. It so happens that when you pool all those stocks together, and charge small managing fees (because you have no research staff, nor experts choosing and picking) the returns are consistently higher than the returns of managed mutual funds.

The problem with Mutual Funds and Index Funds is that you have to buy them directly from the mutual funds company. This only happened at the closing at the market.

The birth of ETFs

And so, the ETF was invented. The ETF is the same index fund, but now it can trade freely in the stock market as if it was a regular stock. This means that the process to buy an ETF which represents the whole Canadian economy is no different from buying a regular stock. You can log into your trading account and just buy it.

Another great advantage of ETF is their low management cost. Generally, a good ETF had management cost of less than 0.5%. When you compare that with the cost of Mutual Fund with a cost of 3%, the decision is a no-brainer.

This brought me to one of my most important investment philosophies: Invest in low-cost ETF costing no more than 0.5%.

 Which ones are my favorites ETFs and from which Suppliers?

I will not include bonds in this list and will not include a whole bunch of new ETFs called Smart Beta nor Sector investing. I will only include plain vanilla ETFs.

Vanguard

My favorite ETF supplier is Vanguard. Vanguard has built a reputation of low-cost ETFs and it has transformed the industry. The lowering of ETFs prices has been called “The Vanguard Effect.” Vanguard has done for the personal finance industry what Amazon.com had done to the retailing industry. It offers great products at very low prices. Either way these are my favorite funds.

  • TSXVCN – Vanguard FTSE Canada All Cap Index ETF
  • TSXVDY – Vanguard FTSE Canadian High Dividend Yield Index ETF
  • TSXVRE – Vanguard FTSE Canadian Capped REIT Index ETF
  • TSXVUN – Vanguard U.S. Total Market Index ETF
  • TSXVFV – Vanguard S&P 500 Index
  • TSXVXC – Vanguard FTSE All-World ex Canada Index ETF
  • TSXVDU – Vanguard FTSE Developed ex North America Index ETF
  • TSXVE – Vanguard FTSE Developed Europe Index ETF
  • TSXVA – Vanguard FTSE Asia Pacific Index ETF
  • TSXVEE – Vanguard FTSE Emerging Markets Index ETF

BackRock Inc.

This is the largest ETF provider in Canada.

  • TSXXIU – tracks the S&P/TSX 60 Total Return Index
  • TSXXIC – tracks the S&P/TSX Capped Composite Index
  • TSXXMD – tracks the S&P/TSX MidCap Index
  • TSXXCS – tracks the S&P/TSX SmallCap Index
  • TSXXEG – tracks the S&P/TSX Capped Energy Index
  • TSXXIT – tracks the S&P/TSX Capped Information Technology Index
  • TSXXGD – tracks the S&P/TSX Capped Gold Index
  • TSXXFN – tracks the S&P/TSX Capped Financials Index
  • TSXXMA – tracks the S&P/TSX Capped Materials Index
  • TSXXRE – tracks the S&P/TSX Capped Real Estate Investment Trust Index
  • TSXXTR – tracks the S&P/TSX Income Trust Index
  • TSXXDV – tracks the Dow Jones Canada Select Dividend Index
  • TSXXCG – tracks the Dow Jones Canada Select Growth Index
  • TSXXCV – tracks the Dow Jones Canada Select Value Index
  • TSXXEN – tracks the Jantzi Social Index
  • TSXXSP – tracks the S&P 500 Index (currency hedged)
  • TSXXSU – tracks the Russell 2000 Index (currency hedged)
  • TSXXIN – tracks the MSCI EAFE 100% Hedged to CAD Dollars Index (currency hedged)
  • TSXXEM – tracks the MSCI Emerging Markets Index Fund Index
  • TSXXWD – tracks the MSCI World Index Fund Index

All the other Canadian ETF companies

There are many other ETF providers, but they are either too expensive, or have little liquidity, or are not a great product for investors.