ZDV aims to undercut the two largest existing dividend ETFs – the iShares Dow Jones Canada Select Dividend ETF (TSX: XDV) and the Claymore S&P/TSX Canadian Dividend ETF (TSX: CDZ) by charging a management fee of 0.35%. In comparison, XDV charges 0.50% and CDZ charges 0.60%. iShares also has the S&P/TSX Equity Income ETF (TSX: XEI) in its line up. XEI’s management fee is 0.55%. XDV, CDZ, XEI and ZDV yield 4.08%, 3.12%*, 4.1% and 4.25% respectively.

So, which one to choose? Other than the fact that CDZ belongs in the bottom of the pack, it is not clear which of these ETFs will be a suitable holding. CDZ’s yield is far too low for a “dividend” ETF considering XIU yields 2.36%. It’s not easy making a choice between the other ETFs because the holdings are wildly different owing to the different stock selection criteria their respective indices employ. Worse, apart from XDV which keeps turnover low by making it difficult for a holding to drop out of the selection set, the other dividend ETFs will have high turnover. But XDV is not without its own set of flaws either. Financials make up more than half the holdings and the big banks alone account for more than a third of the fund.

XDV – okay MER, low turnover but high concentration in financials and banks.
CDZ – high MER, high turnover, low dividend yield.
ZDV – low MER, high turnover (?), new fund
XEI – high MER, high turnover, well diversified, relatively new fund, low volume.

* – Originally, CDZ’s yield was reported as 2.78%. It was incorrect. Thanks to reader DM for pointing it out.

Related Reading:

• New Dividend ETF
• XDV versus CDZ
• New PowerShares Dividend ETFs
• Horizon AlphaPro Covered Call ETFs: Enhanced Equity ETF (HEX) and more…
• New ETFs From PowerShares

Does the BMO Canadian Dividend ETF (TSX: ZDV) change the dividend ETF landscape? is brought to you by Canadian Capitalist — Helping you to invest & prosper.

While you might think living on one income would be the hardest part of their plan, you’d be wrong.

The toughest part: dealing with the mocking he got from people who were spending money. “Pride is sometimes a hard thing to swallow,” he’s quoted as saying. But the couple persisted, doing what was right for them and living below their means.

I’ve had this experience myself. I’ll be in a store browsing around with friends and they’ll say, “Buy it, you can afford it.” I think to myself, “No I can’t.” They assume because I make a good living I can buy whatever I pick up and look at. Perhaps I could, but then I wouldn’t have a big fat FU Account that lets me sleep so peacefully at night.

Having money tomorrow means making choices today. Sometimes other people won’t understand those choices. Sometimes they’ll roll their eyes at your, “Sorry, don’t have the money for that this week.”

I’m not sure why our peer-pressure is geared to doing us more harm than good. I do know that if you’re determined to have what you really, really want, you’ll have to turn a deaf ear to the taunts and temptations.

Now that I’m older and armed with my own drivers’ licence I go hunting for sales myself. When a shopping spree is in order — like when I was headed to China for the first time and needed more “Asia-friendly” clothing — I no longer think of the Eatons Centre as my first option. If there’s enough time and the loonie’s value is strong, my trip involves stopping at New York’s Fashion Outlets of Niagara Falls and then stopping by Canada One Factory Outlets on the Canadian side of the border.

Here are some tips to make the most out of your shopping expedition.

Go with a group

On a long drive the more the merrier, but that also means more people to take a turn at the wheel or help pay the gas bill. It’s true that you’ll probably pay more for gas than you would shopping at a mall near you, but the savings you get can really trump those costs.

Withdraw U.S. cash in Canada

You can get better exchange rates if you withdraw money from your bank on the Canadian side before heading down. Typically debit and credit card issuers charge a foreign exchange fee per transaction which for some cards is 2.5%. If you frequently travel to the States you can hold onto U.S. cash in a U.S. account for a later date.

Start early

Malls notoriously get busy in the afternoon so if you don’t want to deal with crowds wake up bright and early. The weekdays are the best time to go, but if that’s not possible at least keep your hand away from the snooze button the weekend you plan to hit an outlet store.

Know where you’re going

When I travel to both outlet malls I have a choice between about 200 stores. Make sure to take a look at the outlet mall’s website for a list of stores and plan where you want to go. While you’re at it, take a peek for special offers and promotions that can make your purchases even cheaper. If you’re headed across the border, remember to bring your passport because it’d be a shame to drive for 2.5-hours and get rejected when you’re so close.

Check prices

When you compare the retail price to the sales price sometimes it can be jaw-dropping on how much cheaper the sweater is. Unfortunately there’s no assurance that the sweater you’re holding even had that retail value. Yes there are some great deals to be had at outlet stores, but remember to ask yourself, “Is that sweater really worth that price?”

Check your item’s quality

It’s tough to control the impulsive urge to purchase that gorgeous belt, but don’t forget to give it a thorough once over before putting money down. Always check any stitching, zippers or buttons because it sucks buying your item and then discovering it’s not the quality purchase you expected.

Don’t go over the limit

It’s easy to get caught up with all the cheap deals, but set yourself an approximate budget of how much you can afford to spend.

If you’re doing a road trip to the States make sure you keep a tally or you’ll be dinged with some unpleasant additional taxes on your way back. If you’re gone for 24 hours, you can purchase goods up to $50 per person without being taxed. If you’re gone for 48 hours, you can purchase goods up to $400, along with some alcohol and tobacco without being taxed. If you’re gone for 7 days, you can purchase goods up to $700, along with some alcohol and tobacco without being taxed. For exact amounts of how much alcohol and tobacco can be brought back, visit the Canada Border Services Agency website.

If you can avoid all that by hiring a lawyer to draft a will for $200 to $300, why wouldn’t you?

This post is the second of three that will look at the potential risks that ETFs may pose to the stability of financial markets. Last week I discussed synthetic ETFs, which use derivatives called swaps to get exposure to their underlying indexes. Now we’ll examine leveraged ETFs.

Leveraged ETFs are designed to provide double or triple the daily return of their underlying index. The Horizons BetaPro S&P/TSX 60 Bull+ ETF (HXU), for example, promises twice the daily return of the popular large-cap Canadian equity index. If the index goes up 2% during the day, HBP will return 4%, and if the index loses 2%, the ETF’s return will be –4%. In the US, some providers even offer triple-leveraged ETFs, such as the Direxion Daily Large Cap Bull 3x Shares (BGU), which delivers three times the daily return of the Russell 1000 index.

A related family of products, called inverse ETFs, move in an opposite direction to the market. If Canadian large caps lose 2% in one day, the Horizons BetaPro S&P/TSX 60 Inverse ETF (HIX) will gain 2%, and vice versa. Many inverse ETFs also use leverage: they may rise 4% when the their index declines 2%, for example.

The problem

Since leveraged and inverse ETFs appeared in 2006, critics (myself included) have argued that these products are potentially harmful for individual investors who may not understand their risks. For an even-handed discussion of these risks, see Dan Hallett’s comprehensive report.

But the recent concerns about leveraged ETFs do not centre around poorly informed individuals. Rather, the US Securities and Exchange Commission is investigating whether these products have played a role in creating extreme market volatility, especially the huge swings we saw in early August.

Although these concerns have been around for a while, they got a boost from an influential October 10 article by New York Times writer Andrew Ross Sorkin. The piece included an interview with hedge fund manager Douglas Kass, who argued that “at the end of every day, leveraged ETFs have to rebalance themselves by buying and selling millions of shares within minutes to remain properly weighted.” This flurry of trading, the article suggests, causes huge swings in the market during the final minutes of each trading day.

What Canadians need to know

Leveraged and inverse ETFs are primarily speculative products that have no place in a long-term investor’s portfolio. But there is simply no compelling evidence that these products pose a systemic risk—that is, that they cause market instability that affects all investors. Sorkin’s article offers nothing but vague suspicions: “Ask any hedge fund manager what their gut says,” is all we get. Let’s consider the other side of the argument:

They’re a tiny blip in the markets. Leveraged ETFs account for a mere 3% of total ETF assets in the US, while inverse ETFs make up another 2%, a market share that a Morningstar analyst called “a grain of sand on the beach.” It is hard to imagine that their rebalancing trades could be a primary cause of daily price movements. “Rather than focusing on leveraged ETFs’ supposed role in boosting market volatility, a more relevant examination would include options, futures and other financial products that increase leverage in the system, the analyst added,” says ETF Trends. “The size and scope of these markets dwarf leveraged ETFs.”

The tail doesn’t wag the dog. At the US Senate subcommittee hearing on October 19, Eric Noll of the NASDAQ presented an analysis showing that “trading in ETFs varies roughly in proportion with overall trading in the market. When news breaks and market prices move, trading volume increases in both the ETFs and the underlying stocks.” In other words, ETFs are responding to market volatility, not causing it. A Credit Suisse report echoed this argument: “We believe it’s a case of confusing correlation with causation.”

The world economy has a few other issues. Those who blame a tiny segment of the securities market for the recent market volatility seem to have forgotten that there are some serious macro issues in the world. As Eric Noll argued in his testimony: “Restricting or eliminating the [ETF] business will not solve the sovereign debt crisis in Europe, will not balance the US budget, will not restore bank balance sheets, will not add jobs, and will not repay consumer debt and get them spending again. There are very large, very real uncertainties that are driving global financial market volatility.”

If ETFs—leveraged or otherwise—are found to be contributing to market instability after a thorough investigation, I will be the first to support increased regulation. Until then, I’m inclined to echo the words of Dave Nadig of IndexUniverse. “There’s a big difference between being a niche, complex and sometimes misused product and being a threat to modern capitalism,” he writes. “Leveraged and inverse funds aren’t for everyone. In fact, they’re not for most people. They’re expensive, complex and require constant monitoring if held for more than a day…. But these funds aren’t the progenitors of some sort of global collapse.”

Old Age Security
This federal benefit pays $6,400 a year to long-time residents of Canada starting at age 65. It gets gradually clawed back at an income of $67,700, until it is eliminated at $109,600.

Guaranteed Income Supplement
This federal program for low-income seniors pays up to $8,700 a year for singles, and up to $11,500 for most couples. Roughly 50 cents is clawed back for each dollar of income (not counting OAS). GIS is fully clawed back at $16,200 for singles, and $21,400 for couples.

Pension Income Credit
This is a 15% federal tax credit on up to $2,000 in eligible pension income, which can save up to $300 in taxes for those 65 and older. Eligible income must come from a defined benefit pension from your former employer, a Registered Retirement Income Fund (RRIF), an annuity purchased with funds from an RRSP, and a few other sources. Withdrawals from an RRSP don’t count, so if you don’t have an employer pension, convert some of your RRSP money to a RRIF or annuity when you turn 65 to get the credit.

Age Credit
Once you reach 65, you’re entitled to a 15% federal tax credit on income of $6,537, for total tax savings up to $980. But the credit is gradually clawed back when your income reaches about $33,000, until it is eliminated at $76,500.

RRSP withdrawals
If you take money from an RRSP, you’re subject to a with-holding tax that starts at 10% for a withdrawal up to $5,000, with higher rates on larger amounts. Note this isn’t an additional tax, but rather a prepayment on the taxes you’ll eventually pay when you file your return.

RRIF conversions
Before age 71, you have the option of taking money directly from an RRSP or converting to a RRIF and taking the withdrawals from there. At age 71, you must convert your RRSPs into a RRIF or annuity. RRIFs are subject to mandatory minimum withdrawals every year.

Pension splitting
If you’re 65, up to 50% of pension income (including RRIF withdrawals) can be split with your spouse. This can help couples even out their incomes and save on tax. You might want to convert part of your money to a RRIF after 65 to generate regular income, earn the Pension Income Credit, and help with pension splitting.

Annuities
When you convert your RRSP to an annuity (a type of insurance product that guarantees you a fixed income for life), the payments are taxable, just like withdrawals from a RRIF. However, an annuity can provide a smoother and more predictable flow of income than a RRIF.

If you buy an annuity with non-registered funds, generally only a portion of the payments are taxable.

Behavioural Biases: Daniel Kahneman is an expert in behavioural finance. Along with Amos Tversky, Prof. Kahneman is a past winner of the Nobel Memorial Prize in Economics. He has just published a new book titled Thinking Fast and Slow. Bloomberg ran a four part series of excerpts from the book on behavioural biases and how it affects us. You can read it here, here, here and here.

How scammers work: A gold scammer who bilked investors out of tens of millions of dollars talks about how he found his victims and convinced them to invest in non-existent gold bullion.

America, the comeback kid: The Telegraph newspaper reported that due to a confluence of factors, the US may be about to reverse its economic and strategic decline.

Around the blogs

On a recent trip to China, Michael James found out that many Chinese seem to hold a dangerous belief that real estate prices never go down.

Money Smarts Blog explained how to save on calling home from a foreign country.

Million Dollar Journey shared some tips on how to save at Costco. As a regular Costco shopper, I find one could save even more by stocking up on items that are featured in the coupons.

Canadian Financial Stuff asked his bank to reduce the interest rate on his line of credit and is surprised to receive it.

Jim Yih offered some tips on how to work better with a financial advisor.

My Own Advisor shared his favourite takeaways from The Elements of Investing.

Related Reading:

• Book Review: Why We Want You To Be Rich
• This and That
• Christmas Gift Ideas for Finance Enthusiasts
• Is a Costco membership worth it?
• This and That # 111: Bailout edition

This & That: Europe, Behavioural biases and more… is brought to you by Canadian Capitalist — Helping you to invest & prosper.