iShares CDN MSCI World Index Fund (XWD)

• tracks the MSCI World Index, which covers 1,500 stocks from 23 developed markets, including Canada and the United States (but not emerging markets)
• it does this by investing in U.S-based, country-focused iShares ETFs in proportion to the weighting pattern in the MSCI World Index
• MER is 0.45%
• denominated in U.S. dollars (not hedged back to Canadian dollars)
• because invests in a large number of countries, foreign currency exposure will be broadly diversified

iShares CDN MSCI Emerging Markets Index Fund (XEM)

• tracks MSCI Emerging Markets Index, which cover stocks in emerging countries
•  does this by investing in U.S.-based iShares MSCI Emerging Markets ETF (EEM)
• MER is 0.82%
• denominated in U.S. dollars (not hedged back to Canadian dollars)
• because invests in a large number of countries, foreign currency exposure will be broadly diversified

These new ETFs join the three other foreign-equity iShares ETFs: iShares CDN MSCI EAFE Index, iShares CDN S&P 500 Index and iShares CDN Russell 2000 Index Funds. These three existing iShares foreign-equity ETFs are currency hedged (back to Canadian dollars).

Why not invest in U.S.-based ETFs instead?

Are the two new ETFs worth investing in? Why not just invest in U.S.-based ETFs tracking the same markets with lower MERs — like those in the Vanguard group? 

The main reason for investing in the iShares ETFs instead of  U.S.-based ETFs, as given in the iShares news release, is to avoid “… estate tax considerations usually associated with U.S.-listed ETFs.” This is a reference to the fact that Canadians owning U.S. assets face a U.S. estate tax on those assets in the event of their death.

However, if the value of a Canadian’s worldwide gross estate is less than $3.5 million (U.S), they are exempt in 2009. In 2010, there will be no limit.

The threshold will come down to $1.78 million (U.S.) in 2011, which includes $780,000 in credits. Another $780,000 U.S. in credits is available if your assets are willed to your spouse. This would bring the effective ceiling to $2.5 million (U.S), which still leaves most Canadians unaffected. It would appear most Canadians thus need not worry about U.S. estate taxes.

Even if one is over the threshold, there are several strategies for minimizing U.S. estate taxes. For example, one can hold U.S. assets in a corporation (as discussed in tax guides such as Tim Cestnick’s 101 Tax Secrets for Canadians (2008 edition).

Investing directly in the U.S.-based ETFs also avoids extra tax, according to posts by Canadian Capitalist blogger. As he concludes:

“If a Canadian ETF simply holds a U.S.-listed ETF, an additional tax drag is created due to withholding taxes that are not recoverable when the ETF is held within a RRSP account. It may be cheaper, instead, to simply hold the US-listed ETF directly.”

This is a breakthrough in making ETFs more convenient. Until now, index mutual funds were the only way for index investors to reinvest dividends without charge. Now they can DRiP with Claymore ETFs, which have much lower annual expense ratios.

Claymore will also be offering commission-free, dollar-cost averaging through its Pre-Authorized Cash Contribution Plan (PACC Plan), as well as commission-free, systematic withdrawals through its Systematic Withdrawal Plan (SWP). Those features will be quite convenient too.

The gain was due to the TSX 60 opening up 18% (HXU provides 2x the index return) and the ETF market makers apparently letting a 9% premium slip (in as the rush of buy orders likely overwhelmed their arbitrage operations at the open).

I knew I should have been watching the open in case there were some oversized profits to take. With world markets up 10% and more the day before, a big opening was a foregone conclusion. I even made a mental note to log on at 9:30 am.

But I got wrapped up with some work assignments and editing my wife’s course assignment (it’s her fault, I’m saying). By the time I looked at the clock, it was 10:30 am and by then HXU was down to a 20% gain. Too late, I thought. So I went back to work and did some errands. By the time trading closed today, the gain stood at 13%.

Note to readers: The HXU is in the explore part of a core & explore portfolio. I don’t recommend taking large positions on short-term trades with leveraged ETFs.

But I plan to put in a sell order for the ETF next week if and when a gain of approximately 50% is reached. The price of oil could keep falling to the marginal cost of production, which the LEX column in the Financial Times of London says is “around $70 a barrel.” But market forces rarely drive prices to their equilibrium in a straight line and if a reversal came now, it could be demoralizing to watch the gain evaporate when loses are piling up elsewhere thanks to the bear market.

Moreover, market forces are rarely left unmolested. Indeed, next week OPEC is meeting to discuss production cutbacks. And political disturbances could result in an upward spike. That would be a good time to go short again with the Horizons BetaPro NYMEX Oil Bear Plus ETF.

As such, an interesting investment to consider is the Horizons BetaPro NYMEX Oil Bear Plus exchange-traded fund (ETF). Listed on the Toronto Stock Exchange in Canada under the symbol HOD, it double shorts the price of oil, i.e. tracks “two times (200%) the inverse (opposite) of the daily performance of the NYMEX light sweet crude-oil futures contract for the next delivery month.” In the U.S., there is the UltraShort Oil & Gas ProShares ETF, which “returns 200% of the inverse of the performance of the Dow Jones U.S. Oil and Gas Index.”

The double-short oil ETFs let an investor short the oil sector without the hassle of an actual short trade on futures contracts or oil stocks (or buying put options). One can sit on the ETF position in a non-registered account or even a registered retirement account for as long as it takes, without the bother of margin calls or time decay.

That will come in handy. If oil spikes up more from here, one can just wait it out – although the paper loses could easily tally 20% to 30% given the volatility and leverage at work. Longer term, however, as the price of oil normalizes, the same volatility and leverage should erase the losses in short order and go on to provide some nice gains. Actually, as part of one’s strategy, it’s tempting to consider averaging down on the double-short oil ETFs if oil prices shoot up again from current levels. Disclosure: I own HOD (as of today).