Creating the Dogs of the TSX60

When you visit morningstar.ca, click on Portfolio.  You will have to create an account to begin adding stocks to your portfolio.  From there, you can examine the stocks in the TSX60 index in your portfolio every year to determine if it is time to rotate the dogs of the TSX60.

TMXMoney.com can also be used to create a portfolio.  They both work the same, but one may have some features you like better.

In order to figure out what companies are in the TSX60 index, you will have to go to TMXMoney.com then click on Research.  Under Indices & Constituents, you will click on TSX.  S&P/TSX 60 Index (CAD) is the one you want to click on to find the top 60 companies on the TSX.  Click on Constituents – S&P/TSX 60 Index (CAD) to show the list of companies that compromise the top 60 companies.  You can export the list to a spreadsheet or print the list so you can enter in the companies in your watchlist.

Dogs of the TSX 60

When it comes to stock picking, there is not guaranteed strategy.  Nevertheless, the purpose of purchasing stocks is to win more than you lose.  Therefore, a strategy that I would use is the dogs of the TSX.

Simply picking a few of the top dividend payers on the S&P/TSX 60 Index sounds like a winning strategy, but there are potential pitfalls.

When a trader decides to buy individual stocks, he/she must have a strategy.  When it comes to buying the Dogs of the S&P/TSX 60, a trader should look into the financials to ensure that the stock dividend is not going to get cut in the near future.  A corporation that cuts its dividend can see a sharp decline in its stock price.  Therefore, a dog of the S&P/TSX 60 can be a dog because other traders saw what you missed.

http://www.investopedia.com/university/stockpicking/

Indicators that an ETF or Stock Will Drop

When it comes to experienced traders, they will use many indicators to determine if a stock will fall.  Since an ETF is a stock that is affected by supply and demand, traders can short, bet a stock will go down in price, an ETF.  Therefore, it is a good idea to look over the top shorted equities to determine if the ETF is in this list.

 

Under Professional Market Indicators to the right, you will see Top TSX Short Positions.  Click on the Top TSX Short Positions menu item and you will get a list of the top shorted equities on the TSX.

After clicking on Top TSX Short Positions, you will see the top short positions which has an ETF, XIU.to, in position number three.  This is an indicator that many traders are betting that the ETF, XIU.to, will drop.

Shorting is a short-term strategy since in the long-term, the equity will most likely go up.  Therefore, there is a good chance that you can buy XIU.to for a cheaper price if you are patient.  Of course, the traders who shorted XIU.to can be wrong and will suffer a loss if XIU.to goes up.

Another index that is used is the TSX fear index.  The lower the number, the more calm the markets will be for the next 30 days.  The higher the number, the more volatile the equities will be for the next 30 days.

The TSX fear index can be wrong, but when combined with other indicators, it can become a useful tool in your equity investing toolbox.

XIU.to dropped from $23.50 on Feb 21 to 22.64 on Mar 21.  If the traders who shorted XIU.to are correct, XIU.to will drop some more.

There are many other indicators that analysts use.  It is a matter of watching or reading the analysts to see his/her favorite indicator(s).

What to look for in an ETF prospectus

When it comes to reading an ETF prospectus, you may have to dig into the first several pages to find the important information.  Therefore, I will list the key items I look for.

  1. MER(Management Expense Ratio) – How much the fund charges per year.
  2. TER(Trading Expense Ratio) – How much the fund charges the shareholder per year for trading fees.
  3. Trailing Commission – How much the fund charges the shareholder per year to pay the ETF advisor.  For ETFs, this seems to be 1%/year.

Morningstar.ca video – The case against ETF trailer fees

IShares lays out the information in an easy to read format.  When you click on the ETF, you will have to click on Literature to find the XIU summary document that will contain the information shown.

For other ETF companies, you will find that there maybe 6 or more documents for each ETF.  You will have to open them and see if it contains the information you want.

The summary document for all ETF providers should provide the above information.  If not, you will have to look at the other documents to see if it it buried in another document.

Websites used to show turnover rate per year.  I am unsure if this is being phased out since the websites I use no longer show turnover rate.  Turnover rate, the rate stocks get sold and bought, is important for long-term investors holding ETFs in a taxable account.  The capital gains tax from a high turnover rate ETF can offset any monetary gains in the ETF.

ETFs will rebalance to match that of the index being tracked.  The rebalancing will be done either on a monthly, quarterly, semi-annual or annual basis.  Therefore, it maybe important to see how often the ETF gets rebalanced since an ETF that rebalances yearly can move differently from the underlying index that rebalances quarerly.

For the ETF XIU.to, it rebalances every quarter, 3 months.  It can be found in the second column under Rebalance Freq.

Under Index Provider, you will see that the index being tracked is the Standard & Poors TSX 60 index and not the TSX index.  Therefore, you will have to visit the Standard & Poors website to see the history of the index over 10 years if the XIU.to does not have a 10 year history.  In the case of the S&P TSX 60 index, the average return is 1.48%/year over a 10 year period.

You will not get rich by owning the TSX 60 index, but you can be assured that this index has a history of being quite stable.  Unfortunately, the historical results does not predict future results, but I use the history to determine how volatile the ETF will be.

The problem with Smart Beta ETFs

ETFs number of units outstanding grow and shrink to meet investors demand.  Therefore, ETFs will accurately reflect, most of the time, the price of the underlying securities.

There is a time delay to calculate the NAV, so there are periods when the value of the securities will be higher or lower than the NAV, Net Asset Value, of the underlying securities.

For the ETF XDV.TO, a screenshot of the summary of what this smart beta ETF is provided.  Under Why XDV?, you will see that this ETF holds shares in 30 companies.  As you look through the details of this ETF, you will notice that there are just under 1.5 billion dollars distributed among 30 companies.

Since companies do not have an infinite number of shares in the open market, the price of the shares will go up and down depending on demand.  Therefore, the last traded price of the 30 companies that XDV.TO purchased maybe unusually high since XDV.TO purchased a big percentage of the stocks in the open market reducing supply.

If the market crashes, and all the investors sell XDV.TO to try to minimize his/her losses, XDV.TO’s price will drop to reflect on the new NAV of the underlying securities.  On the other hand, if the market crashes, and all the investors hang on to XDV.TO to ride out the crash, XDV.TO’s price will drop, but the price drop will not be as severe since the investors are holding on.

Companies that are healthy and profitable can usually ride out the bad days.  Therefore, a drop in an ETFs price is not always an indicator that the companies held within the ETF are unhealthy.  It can be an indicator that some bad news came out and the fearful investors decided to sell.

ETFs list what securities are being held within.  Therefore, look over the 30 companies to see if you feel comfortable owning them.  From there, decide on your strategy.  It is true that smart beta can overpromise on the returns, but there are no guarantees when it comes to the markets.  Therefore, diversify your investments to ensure that you do not lose all your capital in one ETF.  Furthermore, look inside the ETFs to see if any holdings overlap.  You will be surprised how two different ETFs can overweight specific securities.

As of April 27, 2017, the Canadian banks are sliding downwards.  It may have something to do with the Home Capital Group Inc. mortgage scandal that is bringing back memories of the US 2008 housing crisis.

Do the banks have a hand in the scandal?  Will the banks have some mortgage write-downs in the near future?  The drop can be a buying opportunity to buy when they are cheap, or it can drop further.  Nevertheless, high risk usually = high reward.  After all, the banks can have no write-downs and profits increase.

https://www.bloomberg.com/news/articles/2017-04-27/vanguard-s-jack-bogle-warns-smart-beta-may-be-over-promising

Using Google Finance to scan ETFs

Google Finance has the added feature of showing news articles that may be of interest since they maybe related to the ETF.  You can also put your mouse pointer over the D to see how much has been paid in dividends over the years.

For this particular ETF, there was a 4 for 1 split sometime after 2008. The green S.  A split means that if an ETF is $100/share, a 4 for 1 split will give you 4 shares at $25 each.  The purpose is to make the ETF more affordable for investors.

I chose to see the chart over 10 years.  If the ETF is new, 10 years of history may not be available.  Therefore, you will have to use another option to find the price history.

To find the index that the ETF tracks, you will have to use tmxmoney.com.  From there, put your mouse pointer over Research and look under the Indices and Constituents.

Currently, there are 6 categories of Indexes.  The main 3 are shown in the screenshots above and below.  The other 3, volatility, TSX Venture and the NGX, are to the right which got cut off with my screenshot below, but can be seen in the screenshot above.  Within these categories will be a list of all the different indexes.  You will have to find the index that the ETF tracks from the prospectus or from various websites.

Clicking on TSX, the list of all the indexes tracking the TSX is shown.

The S&P/TSX Composite Index is shown above.  Unfortunately, I have not been able to find an ETF that follows this index. You will see that I can track the history of the what the price of the ETF may be by seeing how much the index went up or down over a period of 10 years.

Analyst companies such as Morningstar.ca have their own indexes.  There is currently no way that I have found to see the history or the constituents of the index unless the ETF tracking them has a history.

High Frequency Trading aka Algorithmic trading

When it comes to trying to beat the markets, I suggest leaving this to the mathematicians with a major in quantitative science.

Computers are capable of processing data faster than any person.  Furthermore, when the bad and/or good news hit the Internet, the computers will be the first to buy and/or sell on the news.  Therefore, by the time you place your order for the security based on the news, you will either overpay or undersell.

History tells us that specific events in the world may cause the price of various securities to go up or down.  Furthermore, specific keywords or phrases can trigger a sudden wave of buying or selling when fed into a computer with specific instructions.

Therefore, ignore the stock ticker price.  Understand how the stock market works.  Stick with your conviction on your strategy.  Your strategy will change since the stock market changes all the time.  Your current strategy may need slight modifications or a complete overhaul.  By playing the stock markets, you understand that there are no perfect money-making strategy.

Hedge Fund that consistently beat the markets

Oct 11, 2015

http://www.cnbc.com/2015/10/07/hillar-clinton-to-propose-tax-on-high-frequency-trading-in-wall-st-reform.html

Revisiting an old post, I will like to add another reason why high frequency trading can be problematic for the markets.

When it comes to Canada, it is not illegal to do “wash trades”.  http://business.financialpost.com/news/fp-street/why-did-rbc-abruptly-change-its-strategy-and-settle-cftcs-wash-trading-suit.  Therefore, when it comes to technical analysts who rely on volume, the number of shares that has changed hands over a period of time, selling the security from Bob’s left hand and buying the security to Bob’s right hand is not exactly a trade.  Yet, when it comes to trading volume, this is a trade.  Therefore, a company can show a very high number of trades, but the demand can be artificially created by someone or something creating the illusion of demand.  Furthermore, with a stock broker who is working with the wash trader, the fees charged can be minimal.

On the surface, it seems that this is a losing proposition, but when one takes the profit/loss in perspective, the trades done does not make any or lose any money in the process.  For example, stock ABC last traded hands for $10 for 100 shares.  An order is made to buy 1000 stocks of ABC for $20.  Another order is made at the exact same time to sell 1000 stocks of ABC for $20.  Since the price matches, the order will go through and the latest price that the stock traded hands will now be $20.  Unfortunately, since nobody knew that ABC was sold and bought by the same entity or different entities working together, the people will assume that there the demand is growing for stock ABC and the price is rising.

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As fascinating as it may seem, computers are becoming the tool of choice for many.  For example, in order to buy premium domain names that have expired, one can create a program that will try to purchase the domain name at the exact moment that it expires.  For example, a domain name with an intrinsic value of $1000 can be sniped for $10 a year.

A computer program can be created that will look over a company’s financial statements and determine how many shares if any the computer program will buy.

As many will know, the stock price is driven by profits but also by speculation.  Therefore, when purchasing stocks one needs to look beyond the books and into the computer programs that are programmed to buy and sell stocks at any time.  In order to master the market, one will have to have a firm understanding of what the computer programs deem stocks that are sell or buy.

Therefore, when people say the stock price is driven by speculation, they are partially right.  The stock price is also driven by computer programs that are designed to automatically buy and sell stocks based on the criteria programmed into the computer program.  These computer programs most likely have some sort of artificial intelligence.  After all, many companies are leaving these computer programs running on autopilot.

High frequency trading can be read about in the Wikipedia at http://en.wikipedia.org/wiki/Algorithmic_trading

Why high frequency trading forces people to purchase at higher prices can be seen at http://market-ticker.denninger.net/archives/1259-High-Frequency-Trading-Is-A-Scam.html.  Based on the fact that flash trading, http://www.investopedia.com/terms/f/flash-trading.asp, is allowed in some stock exchanges, computer programs can be programmed to take advantage of a sellers market.