I have been wrestling with the question of whether it is better for the retail investor to buy bonds directly or bond exchange-traded funds (ETFs). At this stage, I’m leaning toward bond ETFs as the best way to go for long-term horizons (e.g. retirement funds). Let me throw out some thoughts why. If anyone sees any flaws, let me know before I plunk some money down.

When someone opens an account at an investment firm, one of the first things they will likely be asked to do is complete a risk-tolerance questionnaire (which will then be used by the advisor to recommend an asset allocation). Some observers think these questionnaires are not the best way to determine people’s risk preferences.

Taylor Larimore offers a guide on the Investment Gems webpage to the literature on passive index investing. Here is Part III of the Quotable Guide to Passive Investing, a condensation of his work. Part I can be found here and Part II here.

Here is Part IV of the Quotable Guide to Passive Investing. Part I is here. Then follow the links at the bottom of the page to access the rest of the parts.

Many books on passive index investing have now been published and Taylor Larimore offers an excellent guide on his Investment Gems webpage. Here is Part II of the Quotable Guide to Passive Investing. Part I can be found here.

Many books on passive index investing have been published in recent years. Taylor Larimore offers an excellent bibliography on his Investment Gems webpage: Not only does he provide a comprehensive list of books, but also a collection of key excerpts from each book.

William Bernstein, author of The Four Pillars of Investing, has a new book out. It’s called The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between.

What’s it like? Here is a summary and some highlights (in “Coles Notes” fashion):

U.S. broker Charles Schwab’s launch this week of 8 new exchange traded funds (ETFs) could be a watershed event for providers and users of ETFs and mutual funds. What’s remarkable is that Schwab has fixed its management expense ratios (MERs) even lower than the Vanguard ETFs and is allowing its ETFs to be bought and sold commission-free on a permanent basis through a Schwab account. The brokerage's current and forthcoming ETFs will be the lowest-cost vehicles around for gaining exposure to key asset classes (hat tip to Preet Banerjee for bringing this to my attention by email).

Now that Burlington Northern (BNI) is up 30% on a takeover by Warren Buffett’s Berkshire Hathaway (BRK.A), some people have sent in congratulations for recommending the stock in a May 4, 2009 blog post. Thank you very much but I didn’t see the takeover coming; I was thinking it could take two or three years for Mr. Market to bid it up that high.

Rate hikes by the Reserve Bank of Australia have led some analysts to wonder if the Bank of Canada will be soon following suit. David A. Rosenberg, Chief Economist & Strategist at Gluskin Sheff, is not one of them.

Wednesday’s release of the Teranet-National Bank National Composite House Price Index shows a vigorous gain of 2% in Canadian resale house prices from July to August. The national house price index (based on six cities) has now risen four straight months (and likely will show further increases in September and October).

An International Monetary Fund (IMF) working paper released this month asks: Is the Canadian Housing Market Overvalued? The study concludes that house prices in Alberta and British Columbia are now only 8% overvalued while house prices in Ontario, Quebec, and Saskatchewan are close to equilibrium (as of end of the second quarter of 2009).

A reader sent in an email with an interesting supplementary to the claim that trailer fees represent the cost of financial advice (in Part I). As you may recall, MacKenzie Financial’s publication claimed that an apples-to-apples comparison of ETFs to mutual funds required that the ETF orange be converted into an apple by adding in the cost of financial advice (i.e. trailer fees).

An email from David K. of Toronto nudges me to post on a point I had thought to include in yesterday’s column on short selling leveraged ETFs – but left on the cutting room floor. It concerns the strategy of shorting leveraged ETFs and the distinction between historical and future volatility in markets

Here is the second part of the post on the ETF vs. mutual fund debate ….

Product integrity

Oh my! Mackenzie Financial, the biggest mutual-fund family in Canada, has fired a broadside at exchange-traded funds (ETFs). Financial columnists Ellen Roseman and Jon Chevreau have recently commented on the critique, which can be found on the website under the title ‘I thought I wanted an ETF.’ Here are some thoughts inspired by the piece.

With the Canadian dollar rocketing upward by 25% against the U.S. dollar since March, the benefits of foreign diversification are to be had with less gnashing of teeth. That is, if a long-term Canadian investor were to begin diversifying outside the country now, their U.S. assets will likely spend more time showing currency gains over the next few years; a short-term investor (horizon of up to three to five years), will more likely be in a position to take currency profits.

It’s A Bird, It’s A Plane, It’s Superman! No wait…. it’s the loonie, a.k.a. the Canadian dollar. It’s closing in on parity with the U.S. dollar and by the looks of it, might blow past this psychologically important milestone before you finish reading this post.

A previous post on bond ETFs elicited requests to explain why it is important to look at the yield-to-maturity instead of the yield quoted on financial portals like Yahoo Finance. Just why, for example, is it misleading to use Yahoo Finance’s quote of 4% on the iShares Canadian Short-Term Bond ETF [TSX:(XSB)] when iShares.ca’s website quotes the yield to maturity at 2.1%.

Another aspect of exchange-traded funds (ETFs) coming to the fore lately is front-running. That’s the practice where traders buy ahead of large orders from ETFs and short sell ahead of large sell orders. They scalp profits by flipping their newly acquired long positions back to the ETF at higher prices and closing their short position at lower prices. The ETF ends up paying more to buy securities and receiving less to sell; in effect, traders have transferred profits from the ETF to themselves.