Some ETFs to help you catch the bull

ROB CARRICK
May 17, 2008

For rank and file investors, this bull market's a drag.

The S&P/TSX composite index reached new highs this week, but many investors have had barely a taste of it. Popular equity funds have been lagging the index badly of late and, anyway, lots of investors have been avoiding the markets altogether. Last week, CIBC World Markets said investors are using bank accounts and money market funds to park $45-billion that would normally be in the stock market.

Really, it's almost fraud to say the stock market is soaring. In truth, energy, mining and fertilizer stocks are carrying the S&P/TSX composite. Think you'll jump on that train? There's talk of oil prices rising to $200 (U.S.) per barrel from today's $125 or so, and strategists see more room for metals to rise, too. Then again, Toronto-Dominion Bank chief executive officer Ed Clark said this week that the bank is factoring dramatically lower commodity prices into its lending decisions in Western Canada.

So where do you invest at this confusing time? Let's apply the tried-and-true principle of buying low and see what we come up with.

We start by focusing on Canadian market indexes and sub-indexes that are down this year. Globeinvestor.com tells us there are a dozen of these, including five that investors can easily buy into using exchange-traded funds (ETFs), which are index funds that trade like a stock. Here are the five lagging indexes.

S&P/TSX completion index

Overview: The completion index is the dumb new name for what used to be called the mid-cap index. It includes mid-sized stocks that slot in between big blue chips and more speculative small-capitalization stocks.

The strange thing about this index is that it has underperformed the S&P/TSX 60 index of large-cap stocks and the broader S&P/TSX composite index, even though it has a similarly heavy weighting of commodity stocks. What the completion index lacks is superstar names like Research In Motion and Potash Corp., which have surged 24 per cent and 39 per cent, respectively, for the year through midweek.

Investment premise: Think of the completion index as a commodity-heavy way to play the Canadian market, but with stocks that haven't enjoyed the same hot streak as their bigger brethren. Note that the largest names in the completion index are certified blue chips that happen to be out of favour right now, including Power Corp. of Canada and its Power Financial subsidiary, as well as RioCan Real Estate Investment Trust.

How to buy in: iShares Cdn Completion Index Fund.

S&P/TSX capped REIT index

Overview: Real estate investment trusts are showing signs of a rebound from a severe slump linked to the financial market turbulence that began in the subprime mortgage crisis last summer. But while the REIT index has risen about 4.5 per cent in the past month, most of its constituents still yield a very solid 6 to 7.5 per cent.

The number of REITs listed on the TSX has grown a lot in recent years and there are now some highly speculative names with less than sterling property portfolios. The capped REIT index keeps you away from these names, however. Its biggest holdings are RioCan, H&R and Boardwalk, each of which is among the biggest names in the sector.

Investment premise: Blue-chip REITs offer conservative exposure to real estate, which is an inflation hedge, and they also offer yields that are close to what 10-year government bonds are paying these days. Also, the REIT index is way off the high of February, 2007, and could be poised to regain some of its lost ground.

How to buy in: iShares Cdn REIT Sector Index Fund.

STP/TSX small-cap index

Overview: This index is made up of small-size companies listed on the Toronto Stock Exchange. Investors shunned small-cap stocks as part of the risk-aversion trend of the past year, but things may be looking up. In the past month, the small-cap index was up close to 3 per cent.

Commodities account for about 56 per cent of this index, but through less prominent stocks that have not enjoyed the same runup as the big boys. Income trusts account for five of the top 10 holdings and help generate a small flow of quarterly cash distributions.

Investment premise: Small-cap stocks have shown the ability to generate superior returns than large-cap stocks over the long term, although the higher risk level makes them more volatile.

How to buy in: iShares Cdn SmallCap Index Fund.

S&P/TSX capped financials

Overview: Bank stocks in Canada have made a small, partial recovery from a pounding related to their exposure to the subprime mortgage mess in the United States and related securities. But one look at bank dividend yields will tell you these stocks are still trading at depressed prices.

The outlook for financial stocks is marred by the potential for continuing writedowns related to the subprime situation, and by a slowdown in economic growth that could cause loan losses to rise. Note that insurance companies have also slumped lately, and fund companies as well.

Investment premise: The hefty dividend yields offered by financial stocks provide incentive for awaiting a rebound in the sector.

How to buy in: iShares Cdn Financial Sector Index Fund.

S&P/TSX preferred share

Overview: Preferred shares have been left out of the stock market's rally from its January lows. In fact, you could argue that preferred shares are in a bear market all their own and as out of favour as they can get. Oh, wait. The potential for rising interest rates next year could make them even more unlovable.

The irony here is that preferred shares are supposed to be much more stable than the common shares everybody thinks of when they envisage the stock market. Today, however, several of the biggest preferred share issuers in the country are experiencing difficulties or in disfavour with investors. Examples include a wide range of banks and insurance companies.

Investment premise: The reason to consider preferreds is that their dividend yields are high in comparison to bonds and guaranteed investment certificates, especially on an after-tax basis. For example, preferred share issues from several of the big banks are trading at levels that provide a dividend yield in the mid- to high 5-per-cent range. Also, there's the potential for capital gains down the road as preferred share prices recover from current depressed levels.

How to buy in: Claymore S&P/TSX Cdn preferred share ETF.

BEHIND THE BULL

The S&P/TSX composite index reached record heights this week, but many areas of the market have not benefited from the current rally. Looking to invest some money in something that hasn't soared in price? Here are some areas of the market that have lagged lately, and some exchange-traded funds that you can use to buy into them.

	12-month		ETF
Sector	price change	Relevant ETF	symbol
Financials	- 13.1	iShares Cdn. Financial Sector Index Fund	XFN-T
S&P/TSX Capped Financials Index
Mid-cap stocks	- 7.8	iShares Cdn. Completion Index Fund	XMD-T
S&P/TSX Completion Index
Preferred shares	- 10.4	Claymore S&P/TSX Cdn. Preferred Share ETF	CPD-T
S&P/TSX Preferred Share Index
Small caps	- 12.9	iShares Cdn. SmallCap Index Fund	XCS-T
S&P/TSX SmallCap Index
REITs	- 19.7	iShares Cdn. REIT Sector Index Fund	XRE-T
S&P/TSX Capped REIT Index
SOURCES: GLOBEINVESTOR.COM

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