More New ETFs on the Horizon

The ETF market just keeps on growing. A couple of new products from Horizons focus on US-dollar investments, and while neither is a core holding for index investors, they may have some niche appeal.

The Horizons U.S. Dollar Currency ETF (DLR) is bought and sold on the TSX in Canadian dollars, and it gives investors exposure to fluctuations between the loonie and the greenback. Here’s how it works: if the two currencies are at par, the ETF will trade at an even $10 per share. If the US dollar falls to CAD $0.95, then the ETF’s price will be $9.50, and so on.

The fund charges a 0.45% management fee (the full MER will be higher), and trading commissions and bid-ask spreads will also add to the cost of DLR. But because the ETF is traded in Canadian dollars, there are no forex fees when you buy or sell it. As any Canadian knows, the currency exchange costs levied by banks and online brokerages are obscene — it’s not unusual to lose 1.5% or more when you buy, and the same amount again when you sell.

DLR’s holdings are all US cash equivalents, such as T-bills, with no derivatives used. Because T-bills yield close to zero these days, the ETF does not pay any distributions.

What’s the value of an ETF like this? For a long-term passive investor, not a lot. However, if you happen to believe that the Canadian dollar’s strength can’t last forever and you want to load up on greenbacks while they’re on sale, DLR may be a cost-effective way to do that. For example, if you’re planning a trip to the States later this year, you could park some money in this ETF now (perhaps in a Tax-Free Savings Account) while the loonie is near its all-time high. Then you can convert it to USD before you leave.

As Canadian Capitalist mentioned in his recent post about this ETF, if Horizons were to introduce a USD-denominated version of DLR, retail investors could even use the two ETFs to do their own currency conversion for the cost of two trades.

Horizons has also launched a US-dollar version of its S&P/TSX 60 Index ETF (HXT.U). This fund tracks the 60 largest companies in Canada and is listed on the TSX, but it trades in US dollars. It seems likely that the ETF is aimed primarily at American investors who want exposure to our equity markets, but Canadian individuals and business with significant US cash holdings may find it useful.

Coming soon to a brokerage near you

It looks like a whole slew of new ETFs are set to launch later this year. A look through the new filings on SEDAR turned up these works in progress:

iShares JPMorgan USD Emerging Markets Bond (CAD-Hedged)
iShares NASDAQ 100 (CAD-Hedged)
iShares S&P Global Healthcare (CAD-Hedged)
iShares S&P/TSX Capped Consumer Staples
iShares S&P/TSX Capped Utilities
iShares S&P/TSX Equity Income
iShares S&P/TSX Global Base Metals

Claymore US Dividend Growers
Claymore Small-Mid Cap BRIC
Claymore 1-10 Yr Laddered Government Bond
Claymore 1-10 Yr Laddered Corporate Bond
Claymore Canadian Balanced Income CorePortfolio
Claymore Conservative CorePortfolio

Surprisingly, some of the new iShares ETFs look to be me-too versions of BMO products, including those devoted to emerging market bonds, utilities, base metals and the NASDAQ 100. It’s hard to see how there could be much demand for another NASDAQ 100 fund, especially since it is such a badly designed and poorly diversified index to begin with.

Claymore’s future offerings look more interesting, especially the 10-year bond ladder ETFs. Claymore’s popular CLF and CBO use a laddered strategy, but they cover only short-term bonds of one to five years.  These new ETFs would also include intermediate bonds, which should add to the yield and still protect investors from interest rate hikes by spreading out the maturity risk.