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Learning Centre

New Additions to the Investment Menu

By: Heather Nageleisen, CFP

In an effort to continually add excitement to the standard financial fare, investment companies have been busily creating products to tempt consumers' fiscal palates. Here's a look at some of the alternatives to mutual funds and stocks for your investment portfolio.

Exchange Traded Funds (ETFs)

These are similar to index-mutual funds except that they trade on a recognized stock exchange. They are generally designed to follow a recognized benchmark such as the S&P 500, but may be specifically tailored to follow a certain industry (i.e. financial services).

Exchange Traded Funds have the following characteristics:

• Lower management fees than those charged by comparable index mutual funds.
• Intraday trading - This is not available with open end mutual funds, which receive an end-of-day closing price.
• Full portfolio transparency - All holdings and concentrations are easily observed, whereas the full holdings of a mutual fund are reported less frequently.
• Flexibility - Margin purchases and short selling are possible (while most mutual funds can be purchased on margin, they cannot be used for short-selling).

The following is a list of the more common ETFs as well as other important information about them:

Each unit represents an equal interest in a trust that holds the stocks within the respective index that allows an investor to acquire a diversified portfolio with one single trade.

Linked Notes

Linked Notes are designed to give investors foreign exposure through a product that is technically Canadian. To accomplish this, the issuer (i.e. a bank) will raise money by issuing a debit obligation (Note). With the proceeds, the issuer will purchase units of an underlying mutual fund. The issuer will then link the performance of the Note to the performance of the underlying fund. The investor's return will track exactly the return of the underlying fund minus an additional management fee.

Income Trusts

Some of the most popular income trusts are Real Estate Investment Trusts (REITs) and Natural Resource Trusts. The main attraction of income trusts is their ability to generate constant cash flows for investors. Each income trust has an operating risk based on its underlying business. They are especially useful for financial requirements of institutions such as pension funds. Investors supply capital to a trust, a legal entity that exists to hold assets including common shares, preferred shares or debt securities of an operating company, by purchasing trust units. The trust then uses these funds to purchase an interest in the operating company. The trust then distributes all its income to holders of the trust units. Real estate investment trusts purchase real estate properties and pass the rental incomes through to investors.

A portion of this income is treated as a return of capital and receives preferential tax treatment. Returns on these units are typically higher than current returns for fixed income products like GICs, government and provincial bonds, however, these units are an equity investment. The value of the trust units will fluctuate based on the value of the underlying asset base, prevailing interest rates and market forces.

Royalty Trust Units

Royalty Trust Units are a flow-through type of investment, similar to a limited partnership. The net cash flow (cash flow minus the administration costs) is passed on to the unit holders in the form of interest and dividends.

These units are not a suitable investment for everyone. Investors requiring stable income from their investments are not suitable investors for Royalty Trust Units.

Royalty and Income Trusts are attractive to investors because they promise high yields compared to traditional stocks and bonds. They are attractive to companies wishing to sell cash flow producing assets because they provide a much higher sale price, or proceeds, than would be possible with conventional financings.

These selections are but a few of the many choices to consider for your portfolio. To understand the risks and returns of each of these investments it is recommended to use the expertise of a Certified Financial Planner professional to look beyond the promised yield and examine the purpose and suitability of each.