Blogs & Comment

DIY investors need the eagle eye

You gotta be careful what you read, especially if you are a do-it-yourself investor making portfolio decisions based on what you read. Not everything in a newsletter or on a website will necessarily be true or easily interpreted.
This was brought home recently when I was doing some research on iShares exchange-traded funds (ETFs). Now, I dont mean to single out iShares in this regard. In fact, I like their ETFs and use them in my portfolio. But I find one has to be careful when gathering information from their website.
For example, some of their ETFs are shown as having tracking errors less than their management expense ratios (MER). Of note, the iShares CDN Completion Index fund (XMD) is reportedas having an annualized tracking error since inception of 0.44%, less than the MER of 0.55%.
This might be possible if the ETFs were based on optimized portfolios (i.e. use samples). But these cases are not. So, their tracking error should be larger since the MER is just one of its components.
It turns out that the ETFs underlying indexes were changed in recent years. So when one calculates an annualized tracking error since inception, its really an amalgam of two different indexes. Thats not of much use. At least there should be an warning asterisk?
Second, staying with tracking errors, the iShares CDN S&P 500 Currency-Hedged Index is shownas having an annualized tracking error of just over 1 per cent. However, as mentioned elsewhere, that figure is determined with reference to a currency-hedged version of the S&P 500 index. If the ETF is compared to the unhedged S&P 500 (which would be of more interest to many DIYers), the annual divergence averages more than 2 percentage points over the past three years.
A third challenge is trying to find out what the yield is on an ETF. This is not calculated on the site. What the visitor gets is the distribution history — so it is up to them to estimate a yield themselves. But using these tables can be a little tricky.
The novice might go to the table for 2008 and then pick the total distribution for the year to estimate the yield at current unit prices. But this total includes Reinvested distributions per unit, which is a distribution of capital gains at year end. This is a non-cash, irregular item (and doesnt result in extra units as in the case of mutual funds). A better number to use for estimating the yield would seem to be the cash distribution per unit entry on the table.
This can be significant if the index basket has changed and the ETF manager had to sell and buy securities to keep up. See, for example, the iShares CDN Large Cap Index fund ( XIU). Its total distribution in 2008 was $0.62 per unit, which at current prices would generate an estimated yield of 4%. But the reinvested distribution was $0.146 per unit, leaving a cash distribution per unit of $0.474. This generates a yield of 3.1%, a lot lower that the first estimate of 4%.