Resource World Magazine

A U G U S T / S E P T E M B E R 2 0 1 9 www.resourceworld.com 27 industry discovered that investors often wanted to allocate their dollars to specific sectors and themes notwithstanding the above discussion about efficient markets and hundreds of theme and industry- based ETFs were created. But there's more. ETFs can also be cre - ated to track specific strategies such as contrarian investing, investing based on financial metrics such as revenue and profit, as well as investing based on trad- ing momentum. These are called "Smart" ETFs. They are a new trend in ETFs and a trend which means that ETFs are becom- ing more like mutual funds while mutual funds are becoming more like ETFs. What are the features of ETFs that can be used by Resource World readers? Here are a few ways resource investors can use ETFs: • Reducing the cost of investing • Rather than holding a portfolio of mutual funds and paying 2% annual management fees, investors can hold ETFs much more cheaply • Portfolio management For investors that love resource stocks, but still want a good portfolio of invest - ments for diversification, ETFs can be used in a core/satellite arrangement. With this approach, ETFs can be the core of the investor's portfolio and the resource stocks can be smaller "satellite" investments sup - plementing this core. SPECIFIC TRADING STRATEGIES Speculating on short term trends can be more precise using ETFs. My experience with investors (as an investment advisor) who target resource companies is that they like to take risks. They are not avoiding Alpha risk; they are actively looking to be rewarded in Alpha investing. ETFs can be used to hedge some risk for these investors by reducing Beta risk. So if one wishes to avoid the risk of a general market crash while betting on one sector or a specific company there are Inverse ETFs that can help with this. These Inverse ETFs go up when the market goes down. So when you buy a resource stock you can reduce the Beta risk by buying an inverse ETF. In this way you can reduce the volatility associated with investing by reducing risk. This would focus the risk to the Alpha risk of the indi - vidual stock. This is a trading strategy for a short term strategy only. SECTOR INVESTING ETFs provide a way for resource investors to invest in specific commodity sectors with some diversification benefit. This is probably the most popular use of ETFs by resource investors. CONVENIENCE If you wish to have exposure to precious metals, or some other commodity, various Exchange Traded products can make this ownership more convenient. There are Exchange Traded Receipts and Exchange Traded Trusts for holding precious metal bullion and Exchange Traded Funds for holding portfolios of companies that mine those commodities. The Bullion products simplify the purchase and holding of the commodity, which would otherwise involve physical delivery, security and other issues. SPECULATION A special class of ETFs has been designed for the speculator – the leveraged ETF. These buy futures contracts are of the underlying commodity such as gold, oil or natural gas but they enhance the price movement exposure through financial leverage. The result is an instrument which goes up or down twice or even three times as much as the price move in the underly - ing commodity. Warning: These are only useful in trading the very short-term price moves in commodities and are not suitable as medium or long-term investments, since the structure of these funds cannot track the underlying commodity over the long term and simply lose value if held for longer periods. These leveraged ETFs include both long and short versions so you can bet on a commodity going up or down. Here is a selection of ETF's that can pro - vide the benefits mentioned above. LOW COST ETFS WITH BROAD MARKET EXPOSURE: SPDR S&P 500 Index Fund [SPY-NYSE]. This is oldest and most liquid ETF in the US and it tracks the S&P Index. It has an ultra-low Expense Ratio of only 0.095% and it tracks the top 500 companies in the US on a market-weighted basis. RBC iShares TSX 60 Index Fund [XIU- TSX]. This is a Canadian Index fund based on market weighting in the TSX 60 Index and owns the top 60 companies on the TSX. The Expense ratio is 0.18%. There is a capped version of this ETF, trading as XIC, which will not exceed 20% of its value in any one company. This is impor - tant as at one time a company named Nortel gained a market value of more than 20% of the TSX 60 and then collapsed. Investing in a capped fund mitigates this "Nortel-type" risk. INVERSE ETFS For hedging market risk, in Canada, the HIX Beta Pro Daily Inverse ETF performs in the opposite direction to the daily TSX Index. HIX seeks daily investment results, before fees, expenses, distribu- tions, brokerage commissions and other transaction costs and endeavours to cor- respond to one times (100%) the inverse (opposite) of the daily performance of the S&P/TSX 60 Index. Management Fee is 1.15% In the US, there is the ProShares Short S&P 500 [SH-NYSE]. This short ProShares ETF seeks a return that is -1x the return of its underlying benchmark (target) for a single day, as measured from one NAV (Net Asset Value) calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Management Expense is 0.89%. INVESTMENT

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