ETF winners

It has not been a good year for most equity-based exchange-traded funds (ETFs). With the S&P/TSX Composite Index down 13.9 per cent for 2011 (to Nov. 23), broadly-based Canadian ETFs have fallen by roughly the same amount.

The reason is obvious. Index funds are designed to closely track their benchmarks. When the index rises, you win. When it falls, you lose. It’s as simple as that.

Active fund managers can raise cash and/or move to more defensive stocks during bear markets. With ETFs, there is nowhere to hide. You have to take whatever the market gives you. If you are not comfortable with that, you have two choices: trade in and out of ETFs just as you would a single stock or stand clear of them entirely.

Personally, I have always believed that ETFs are much better trading vehicles than buy-and-hold funds. This year, despite the overall weakness in the markets, we’ve seen good performances from a handful of ETFs, several of which are in the Precious Metals category. Here are some of the 2011 winners.

Claymore Gold Bullion ETF (TSX: CGL). This is Canada’s top-performing unleveraged ETF so far in 2011 with a gain of 18.5 per cent to Nov. 23. It invests in physical gold, not mining stocks, with the bullion held in the vaults of a Canadian bank.

The fund was started in May 2009 so, as with many Canadian ETFs, we have little history to work with. For what it’s worth (which is not much) the average annual compound rate of return since inception was 22.6 per cent to Oct. 31.

All returns are hedged back to Canadian dollars to remove currency risk from the equation. The MER is 0.56 per cent. There have been no distributions so far and none are expected. Rating: $$$.

Horizons COMEX Gold ETF (TSX: HUG). This ETF aims at replicating returns from COMEX gold futures contracts. (COMEX is a division of the New York Mercantile Exchange and is the world’s largest commodities futures exchange.) To the extent possible, profits and losses are hedged back into Canadian currency.

Gold prices have been highly volatile this year but the recent rebound in bullion has boosted returns on this ETF. The gain for October was 6.2 per cent while November was down slightly, bringing the total advance for the year to 17.7 per cent as of Nov. 23. Since this ETF was launched in June 2009, the average annual compound rate of return (to Oct. 31) has been a very impressive 26.9 per cent.

We don’t have enough history to know how this ETF will perform over the long haul but risk-averse investors should be cautious given the volatility of bullion. This might be a good choice for an aggressively managed TFSA, however. The MER is 0.65 per cent. Rating: $$$.

iShares S&P/TSX Capped REIT Index Fund (TSX: XRE). This ETF invests in a portfolio of 13 Canadian real estate investment trusts (REITs). However, one security, RioCan, represents almost one-quarter of the total assets so if that top-heavy weighting is a concern then this isn’t the right choice for you.

REITs took a battering during the market downturn and this ETF lost 38.3 per cent in 2008. However, it staged a strong recovery in 2009 with a gain of 53.3 per cent and added another 20.7 per cent in 2010. So far in 2011 (to Nov. 23) it is up by 15.5 per cent. Those gains were enough to pull up the five-year average annual compound rate of return to a very respectable 6 per cent (to Oct. 31). That was well above the category average of -2.6 per cent although that is something of an apples and oranges comparison because most of the funds in this group invest in global real estate stocks, not domestic REITs.

It’s unlikely that this ETF can continue its recent torrid pace for much longer. However, the units offer good cash flow for income investors with monthly distributions currently running at around $0.06 per unit. If that rate is maintained, the yield over the next 12 months will be almost 5 per cent.

In summation, this is a decent choice for investors who want exposure to the REIT sector but don’t want to choose specific securities. The units trade on the TSX under the symbol XRE. Any broker can acquire them for you. Rating: $$$.

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Photo © Rob Friedman