An iShares primer

By now, most Canadian investors are familiar with iUnits, the exchange-traded funds (ETFs) managed by Barclays Global Investors Canada Ltd. that trade on the Toronto Stock Exchange. Although there are other ETFs available in this country, iUnits are the most widely recognized and held, with a market capitalization of $9.3 billion spread among the 12 funds.

In recent years, ETFs have enjoyed a huge surge in popularity among Canadian investors. They are still far behind traditional mutual funds in terms of market penetration, but they are growing a lot faster than the mutual funds industry which reported a year-over-year decline of 9.4 per cent in net sales for the period ending Feb. 28.

The growing interest in ETFs appears to be a result of three features that appeal to investors: simplicity, low cost, and liquidity. ETFs are easy to understand – they track the performance of a specific index or sub-index. If you know how an index works, you understand the principle of ETFs. They offer management expense ratios (MERs) that are much lower than those of mutual funds (for iUnits the range is 0.17 per cent to 0.55 per cent) and they can be quickly bought and solat any time.

More choices, potentially lower fees
What is somewhat surprising in view of all this is that most Canadians know very little about the tremendous diversity of ETFs that trade on U.S. exchanges, even though they can be acquired just as easily as iUnits. The best example is iShares, which are administered by the U.S. branch of Barclays. They are very similar to iUnits except that there are more choices, they trade on the American Stock Exchange, and in some cases the MERs are lower.

You will have to look long and hard to find an index that is not mirrored in a corresponding iShare. There are well over 100 issues from which to choose covering everything from small stock markets like Austria and South Africa to U.S. Treasury bonds of varying maturities. There are iShares that focus on value-based indexes and those that track growth-based indexes for investors seeking style diversification. You can buy iShares that track volatile, high-growth sectors such as biotechnology and units that focus on dull-as-dishwater utilities. It is a veritable smorgasbord of index securities.

Meet specialized needs
If you have a specialized investing need, chances are that iShares can provide the solution. Here’s an example. I recently received a letter from a reader who wanted to invest in euro-denominated securities. He wrote as follows:

“It appears clear that the U.S. dollar is heading much lower and, assuming it does, it will likely pull down the Canadian dollar with it relative to the rest of the world currencies. An obvious investment strategy to offset this would be to put a portion of one’s investment funds into euro-denominated funds but there appear to be hardly of these being offered.

“There are a large number of Global and Asian offerings and European equity funds with large U.K. holdings which of course are not euro-based. So now that we can put an unlimited amount of our RRSPs into foreign holdings, how should one make a euro play?”

Well, iShares to the rescue! The iShares MSCI EMU Index Fund offers a pure euro-based equity fund that tracks the performance of securities in European Monetary Union (EMU) markets as measured by the Morgan Stanley Capital EMU Index. This means that only euro zone stocks are represented. The majority of the portfolio is divided among five countries: France, Germany, Netherlands, Italy, and Spain. The fund has a low MER of 0.59 per cent and a good track record with a three-year average annual rate of return to Feb. 28 of 13.7 per cent, which is within half a point of the benchmark index. It trades on the American Stock Exchange under the symbol EZU.

This is just one example of the range of iShares products available. Of course, you can buy units that track the major indexes like the S&P 500. But where iShares excels is in the ability to provide portfolio exposure to securities that are otherwise difficult to identify on a stock-by-stock basis, such as value-based mid-cap U.S. equities.

If you want learn more check out the website at It contains detailed information about every issue they offer.