FTSE RAFI Canadian Index ETF to launch 22Feb06

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Postby tidal » 16 Aug 2006 11:43

Shakespeare wrote:ISTM that the really big change for some of the proponents is the acceptance that the market is not perfectly efficient.


I don't think that is much of change at all. I think that almost all of the "proponents" allow that markets aren't perfectly efficient, and have for some time.

For instance, here is Eugene Fama Sr. on the subject in 1991: "the extreme version of the market efficiency hypothesis is surely false." (Fama, Eugene F. 1991. Efficient capital markets: II. Journal of Finance 46:1575-1617.)

And here is the conclusion from a paper at DFA's site (home of Fama, French, Sinquefield, amongst other "proponents"...): "Do pricing errors occur in financial markets? By now it is clear that they do." ( The Informational Efficiency of Stock Prices: A Review, James L. Davis, March 2006 )

Heck, the jury is still out as to whether the Fama/French "value factor" is efficiency or inefficiency...

I think they know they need to relax a little bit...
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Postby yielder » 16 Aug 2006 11:55

tidal wrote:And here is the conclusion from a paper at DFA's site (home of Fama, French, Sinquefield, amongst other "proponents"...): "Do pricing errors occur in financial markets? By now it is clear that they do." ( The Informational Efficiency of Stock Prices: A Review, James L. Davis, March 2006 )


Hehehe. What a hoot!! These guys have known this for years and years. They built the DFA mousetrap on that basis. They just didn't talk about it much until the behavioural finance guys came along and started giving them no end of grief on the anomalies. Interesting that the article refuses to acknowledge behavioural finance.
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Postby Bylo Selhi » 16 Aug 2006 12:19

yielder wrote:What a hoot!!

Let's not forget that indexing "works", not because markets are (in)efficient, but because costs matter.

From The Relentless Rules of Humble Arithmetic:
Efficient Markets Hypothesis
• Strong Evidence
• Sound Explanation
• Mostly True

Cost Matters Hypothesis
• Overwhelming Evidence
• Obvious Explanation
• Tautologically True


P.S. By saying that indexing "works" I mean in the sense of Cadsby's "Successful investing, based on indexing, depends on trading off the low possibility of doing better than the index, for the high probability of doing better than most other funds." (That book really needs to be republished in a second edition.)
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Postby yielder » 16 Aug 2006 12:26

Bylo Selhi wrote:Let's not forget that indexing "works", not because markets are (in)efficient, but because costs matter.


Different subject. :wink:
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new iShares Paper: MktCap v Fund v EqWt Indx

Postby tidal » 22 Aug 2006 13:19

Insights on Market Capitalization and Fundamental-Weighted Indexes

Granted, BGI/iShares has a vested interest in the debate (although nothing is preventing them from introducing their own fundamental or eq-wt indices and other than the dividend products, they seem to be in no rush...)... Nevertheless, this is a good synopsis of the three competing ideas in the ETF indexing market now... Each is reviewed for "Macro consistency", "Turnover", "Objectivity"...

Then they discuss:
Performance of Non-Capitalization-Weighted Indexes

The use of inappropriate benchmarks for ascertaining true manager skill has long plagued the investment management industry. BGI has long been a proponent of objectivity and transparency in index construction and believes that clearly defined rules are necessary to utilize indexes as benchmarks. The measurement of fund performance and, in turn, manager success requires an objective benchmark relevant to the manager under the microscope. If, for example, a small-cap index was used to evaluate a large-cap traditional active manager, then performance will be dominated by the size bias inherent in the benchmark rather than the stock- picking skills of the manager.

Most alternative-weighted indexes have exhibited periods of better performance relative to some capitalization-weighted indexes. As noted in Chart 1, this is fairly easy to understand and predict. The nature of the indexes' construction methodologies drives this performance, primarily because non-capitalization- weighting schemes merely introduce different beta or style exposures. A cursory examination of the constituents of a fundamental constructed index will lead to the conclusion that it has both a mid- to small-cap bias and a bias toward value stocks. The first bias is a direct result of not employing a market capitalization methodology, meaning a fundamental-weighted index will, generally, overweight smaller capitalization names relative to a market capitalization-based index. The value tilt arises simply because companies with smaller valuation multiples have relatively larger fundamentals compared to their market capitalization."


Nothing earth-shattering, but again, a decent synopsis of the issues... Appears to have been posted to iShares.ca site yesterday or today...
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Postby SSeif » 08 Sep 2006 22:18

Hello Bloggers,

My name is Som Seif and I am President and CEO of Claymore Investments. I recently was made aware of your discussion panel and have had a chance to read through the different comments. Let me start off by saying what you are doing is great, you are providing much needed information to the investing public, in an informative and thought provoking manner.

What I have been reading has been very interesting but I would like to offer some more information so that your discussions will be accurate.

Claymore Investments is an investment company that strives to make the best products available both for the investor and the advisor. We believe ETF’s are the best investment vehicle out there and we also believe that research based indexes, deeply rooted in quantitative market approaches offer investors more choice as well as the ability to potentially outperform the traditional benchmark indexes.

We are not Barclay’s and we choose not to be. Barclay’s offer ETF’s that provide traditional market-cap weighted indexes and market exposure with a low fee (0.17% MER XIU’s, but between 0.50% – 0.55% MER for other Canadian ETF’s); and they are good at what they do!

Claymore ETFs look to provide strategy driven ETFs and look to add value on traditional indexes by actively choosing the factors that a passive index is created from, hence Fundamental indexes. That is why we have partnered with Rob Arnott, and Research Affiliates, they are providing a value add over traditional indexes. Rob’s reasoning is sound, but no one can predict the future performance.

Now from what I can see there is a very healthy discussion on what Fundamental Indexing is about and why it works/doesn't work. Fundamental Indexing is based on the theory of severing the tie of a stocks market price and the weight the stock has on the index. It is designed to try and avoid the main issue with market cap indexing which is overweighting 100% of the overvalued stocks and underweighting 100% of the undervalued stocks in an index. Fundamental Indexing does not claim to make active decisions or know what is overvalued or undervalued, only that by randomizing the errors (and not directly tieing price and weight) then you are taking the first step to avoid the problem. I think we can all agree that the traditional market cap indexes have these issues (it's a well accepted academic view). Also, that a market cap index is a "growth biased" index (or a momentum index). Fundamental Indexes are designed to be have more of a neutral bias (more value than market cap, but more growth than value). BTW, Equal Weighted Indexes also solve some of this problem severing tie of weight and price, and it works. The problem is, and I think you would all agree, it's a very "crude" way of solving the problem (assumes the smallest company should have the same weight as the largest company), and it introduces signficantly higher turnover.

The results are great. Fundamental Indexing in US, Canada and around the world have outperformed the traditional index benchmarks. Now that does not mean they outperform every year (in fact they outperform generally 7 out of every 10 years). And the outperformance is in the 2%-3% range, on average across all the markets (EAFE markets, North America).

However, Fundamental Indexes will likely underperform in strong growth oriented markets, as would be expected. In fact, we are seeing that in Canada right now. We have been in a growth dominated market by 2 sectors: Energy and Materials. And the FTSE RAFI Canada Index is slightly underperforming S&P/TSX 60. Thats because RAFI is 15% underweight the Energy and Materials sectors (BTW, in case you haven't noticed, S&P/TSX 60 is 50% weighted to these 2 sectors). But over longer periods of time, going back to 1984, RAFI has significantly outperformed.
I appologize, I would love to attach all the supporting documents to this, I just don't know how. So if you want, please email me and I would be happy to forward them to you directly. Also, you can visit our website (http://www.claymoreinvestments.ca), which has historical performance statistics on the site (for both Canada and US Fundamental Index).

In reading some of the comments, I wanted to respond specifically to a few questions:
1) Higher Turnover and Costs - There are several public comments about Fundamental Indexing having higher turnover and costs. This is not true. Market cap indexes generally have turnover of ~6%...Fundamental Indexing is ~10%, which is insignificant. In addition, because of ETF structure, all rebalancing is done "in-kind" meaning no capital gains are realized in the fund. Therefore all the gains are deferred till the investor sells their Shares.
2) Small Cap Bias - this is something that is absolutely incorrect. In US, the RAFI 1000 has avg. market cap of $90B vs. S&P 500 of $85B and Russell of $90B. Not much of a small cap bias. Likewise in Canada.
3) RAFI Application in Canada - I think there was just some question about the application of RAFI in Canada. Once again, I appologize for lack of documents, but please do email me and I will forward info. But a few interesting points:
- RAFI Canada has 58 stocks in the index, and is overweight Financials (+5%), Telecom (+1.5%), Cosumer Disc. (+3%) and Cons. Staples (+3%) and underweight Energy (-5%), Materials (-7%),
- The companies in the list are not indifferent than those on the S&P/TSX 60, but the weights are. RAFI Canada is overweight Power Corp & Financial, Thomson, Alcan, BCE, IMO, CU (to name a few) and underweight RIM, Suncor, Teck, Barrick (to name a few). It doesn't include Income Trusts, nor companies like Kinross, ATI, Agnico, Domtar, Goldcorp.
- The common underlying issues of market cap indexing exist in Canada as they do everywhere in the world. As a result, RAFI has outperformed traditional market cap indexing all developed markets globally.
- The indexes have been created and tested in each of these markets by FTSE, RA and Nomura Securities. Each with similar independent results.
4)"Just Another Value Index?" - lots of people say that RAFI is just another value index. But, RAFI actually outperforms value indexes. It is value tilted vs a market cap index (we would suggest its actually the market cap index that is growth tilted). But RAFI is not just another value index, in fact it doesnt look at valuations in any way to weight companies. It works by randomizing the errors
5) RAFI Indexes rebalance annually in March.
6) Higher fee of 65 bps vs. XIU of 17 bps - the fee is higher because the licensing fees are much greater. Also, the underlying RAFI Indexes have outperformed by 2-3% long term relative to mkt cap indexes. In addition, standard index ETFs like XIU should be low, in fact 17 bps is high relative to US standard ETFs like SPY and Vanguard (you're getting market return, less fees, never better). Finally (and a very important observation), the div yield on RAFI Canada is 50 bps greater than S&P/TSX 60. As a result, the MER difference made up with a net yield which is the same for investors. This is the same in US as well.
7) Liquidity of the ETF - as you know, an ETF has Designated Brokers that make markets and keep spreads tight. They maintain the price trading at or close to NAV at all points during the day. The spread they utilize depends mainly on the liquidity of the underlying stocks in the index. The more liquid, the tighter the spread. CRQ has a very tight Bid/Ask spread, so there is very good liquidity around these goal posts. Of course, being a new provider of ETFs, we are building awareness, and this takes times. But the strategy is sound and the ETF is liquid.
8) Tax Efficiency - as mentioned above, any rebalances are done "in-kind" so we would anticipate defering all gains in the fund until the investor sells their shares.

As a final note, we are very committed to bringing the best products to Canada. We think Claymore being an ETF player is important for the market and for Canadian investors. We are going to help bring innovation and alternatives to the standard market ETFs. We also are highly committed to the ETF business in Canada (unlike several predecesors). We have just launched 3 more ETFs today (US RAFI, BRIC and Dividend & Income) and are planning several more for the end of September (Global RAFI, Japan RAFI, and Oil Sands).

Please feel free to email me or call me if you have any questions. Always willing to discuss ETFs, our products and the market.

Cheers
Som Seif
President, Claymore Investments
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Postby Norbert Schlenker » 09 Sep 2006 03:04

Welcome to the forum, SSeif. Let me ask a few questions.

Rob’s reasoning is sound, but no one can predict the future performance.

Rob's reasoning is interesting but what grounds do you have for claiming that it is sound?

Fundamental Indexing does not claim to make active decisions or know what is overvalued or undervalued, only that by randomizing the errors (and not directly tieing price and weight) then you are taking the first step to avoid the problem.

If the purpose is to randomize errors, then wouldn't it be simpler to just assign random weights?

BTW, Equal Weighted Indexes also solve some of this problem severing tie of weight and price, and it works. The problem is, and I think you would all agree, it's a very "crude" way of solving the problem (assumes the smallest company should have the same weight as the largest company), and it introduces signficantly higher turnover.

"Crude" is not "worse". Let me leave turnover until a bit later.

The results are great. Fundamental Indexing in US, Canada and around the world have outperformed the traditional index benchmarks. Now that does not mean they outperform every year (in fact they outperform generally 7 out of every 10 years). And the outperformance is in the 2%-3% range, on average across all the markets (EAFE markets, North America).

Yet your prospectus disclaims this entirely by repeating standard warnings re past performance. Are you suggesting that such warnings are unnecessary when it comes to RAFI?

1) Higher Turnover and Costs - There are several public comments about Fundamental Indexing having higher turnover and costs. This is not true. Market cap indexes generally have turnover of ~6%...Fundamental Indexing is ~10%, which is insignificant. In addition, because of ETF structure, all rebalancing is done "in-kind" meaning no capital gains are realized in the fund. Therefore all the gains are deferred till the investor sells their Shares. ... 6) Higher fee of 65 bps vs. XIU of 17 bps - the fee is higher because the licensing fees are much greater.

Let's go back to the issue of turnover and bring in the fees too. Earlier, I suggested assigning random weights. An argument against that is that it would cause high turnover but you seem to believe that an ETF structure solves the problem of turnover with RAFI, so it should be able to do the same thing for random weighting. (BTW, I would be interested in the details of how a Canadian ETF can rebalance in kind. Fill us in.) Random weights have no license fees. Have you considered using random rather than RAFI and cutting your fees?

Also, the underlying RAFI Indexes have outperformed by 2-3% long term relative to mkt cap indexes.

Past performance. Are you suggesting that I can get that 2-3% extra in future with your product?

Finally (and a very important observation), the div yield on RAFI Canada is 50 bps greater than S&P/TSX 60. As a result, the MER difference made up with a net yield which is the same for investors. This is the same in US as well.

I'm stunned, SSeif. Are you really suggesting that a higher dividend yield on the underlying portfolio justifies you charging a higher fee?
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Postby randomwalker » 09 Sep 2006 07:39

I've been trying to find out just what are the divdend yields on the Clamore products. Also will the market price of these ETFs closely track their NAV or will illiquidity lead a discount to NAV like somany CEFs?
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Postby uhoh » 09 Sep 2006 17:56

Here's the Toronto Star's take:

Claymore aims to set mutual fund investing on ear
New ETFs more than just passive
Low fees expected to up competition
Sep. 9, 2006. 01:00 AM
GARY NORRIS
CANADIAN PRESS

Canada's mutual fund operators are about to face an onslaught of new competition from low-fee exchange-traded funds that will do almost everything actively managed mutual funds do, says the head of Claymore Investments Inc.

The ETF unit of Chicago-based Claymore Group Inc. introduced three new products on the Toronto Stock Exchange yesterday that president Som Seif characterized as "semi-active," meaning some fundamentals are taken into account.

Instead of passively reflecting standardized indices, as do other ETFs in Canada, the new Claymore Canadian Dividend and Achievers, U.S. Fundamental Index and BRIC funds determine their stock holdings on the basis of the revenues, cash flow, dividends and book value of companies in their sectors: respectively, Canadian dividend-paying issues, Canadian-dollar-hedged American stocks and equities in Brazil, Russia, India and China.

Another innovation is Claymore is marketing its funds through financial advisers. Until now, ETFs, which are baskets of securities that trade like stocks, have been available only through brokerage accounts.

The new products will carry basic management expense fees capped at 0.60 to 0.65 per cent, Seif told reporters, but Claymore also will distribute adviser-class units that charge an additional 0.75 per cent to compensate financial advisers who sell the units to retail clients.

He noted most Canadian investors rely on commission-based advisers who are paid by the funds instead of directly by clients, and the new class of units is aimed at this channel.

And Seif predicted new ETFs in coming months will forsake mindless indexing to increasingly mimic stock-picking mutual funds, providing radically lower management expense ratios, or MERs, and all the advantages of regular mutual funds except the ability to make small regular investments rather than lump-sum purchases.

"We don't believe that ETF equals index," said Seif, outlining what he characterized as the fundamental approach taken by Claymore, a five-year-old firm managing $14 billion (U.S.) in assets, including almost $1 billion (Canadian) in nine TSX-listed products.

Claymore's 0.65 per cent maximum management expense ratio compares with 0.55 per cent or less for the market-tracking IShares index funds run by Barclays Global Investors, which dominates the ETF segment in Canada.

The expense ratio on the new funds compares with a median MER of 2.53 per cent among Canadian equity mutual funds, as calculated by Morningstar Canada.

"We think the Canadian marketplace has very high MERs for mutual funds, and what we're trying to do is bring low-MER product to the broader masses," Seif declared.

"What Claymore is doing is using the ETF structure, but not doing exactly the same thing as Barclays," commented Rudy Luukko, investment funds editor at Morningstar.

Luukko described Claymore's approach as a hybrid between active and passive styles of investing, "where you use the index as your starting point, and beyond that you apply quantitative criteria to hopefully get a subset of that index that will outperform the broader market benchmark."

Seif stressed that Claymore applies clearly defined ``rules-based" criteria in its new ETFs, including three other TSX-listed funds to be launched in the coming weeks that will invest in Canadian oil sands companies, global blue-chip stocks and Japanese equities.

But more ETFs are on the way, he predicted.


From TSX.com, here is more info, with the symbols:

Friday, September 8 - Claymore Investments Opens the Markets

Som Seif, CEO of Claymore Investments opened the markets today to celebrate the launch of four new Claymore ETFs. These will be diverse products reflecting investment in everything from international blue-chip companies and indices to exposure to the Brazil, Russia, India and China economies. As well, Claymore will offer a new advisor class unit ETF. The new ETFs are Claymore BRIC ETF (CBQ, CBQ.A), Claymore CDN Dividend & Income Achievers ETF (CDZ, CDZ.A), Claymore US Fundamental Index ETF C$ hedged (CLU, CLU.A) and Claymore Canadian Fundamental Index ETF (CRQ.A).
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Postby randomwalker » 10 Sep 2006 07:56

When I think of it and I don't believe it has been mentioned here yet but the whole Wisdom Tree, Claymore "fundamental index" style of running a stock portfolio really just sounds like what Jim O'Shaughnessy has been doing for years with his "Strategy Index" approach.

I believe O'Shaughnessy's screens various markets to find stocks that meet a predetermined "quantitative" criteria then buys the top 50 in an equal dollar amount re-screening and rebalancing once or twice a year.

The new "fundamental"/ managed index ETFs will have and advantage of considerably lower MERs. Unitl now O'Shaughnessy's US and Canadian funds have been run with a relatively low MER of about 1.5% though on his new international fund the 2.32% MER seems uncharacteristically high. It will be interesting to see if "fundamental" indexing gives "strategy" indexing a run for its money here in Canada.

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Postby tidal » 10 Sep 2006 14:27

randomwalker wrote:the Clamore products. Also will the market price of these ETFs closely track their NAV or will illiquidity lead a discount to NAV like somany CEFs?

Because of the redemption/creation process of ETF's, and the designation of market participants to provide this arbitrage, you should not see significant discounts (or premiums) to NAV's. It is very important to understand the creation/redemption process... What it nets out to is that the liquidity of the ETF is effectively dependent on the liquidity of its underlying portfolio, not the liquidity of the outstanding ETF shares themselves... This is entirely dislike the liquidity of a CEF, which is determined almost solely by the liquidity of the outstanding CEF shares... There is a good article describing this at www.ishares.com if you hunt around...

In the case of the Claymore Canadian ETF's, liquidity should not be an issue - but you might find yourself "orphaned" if they don't get market penetration - a la the TD ETFs which folded up a year or so ago (probably a year or so too early!)...

Again on the Claymore Canadian ETF's and liquidity, I do have one curiousity about the liquidity and the "regular" versus "advisor" versions of the same ETF's... In a frictionless world, you could theoretically short the advisor class fund and use the proceeds to purchase the regular fund, and effectively pocket the 0.75% difference in yield risk-free... Just layer that on top of existing assets used as collateral for the short... the 0.75% is essentially "ported alpha" on top of whatever assets you own... Of course, it is not frictionless, so the opportunity is diminished, but vaguely curious to see if market players with the least frictions (typically the proprietary desks) do exploit this and we get a world where the regular ETF trades at a very slight premium and the advisor-channel ETF trades at a similar (but still small) discount....

Anyway, Claymore should be commended for committing to the Canadian ETF space - competition is a good thing!!! Barclays/BGI/iShares, for better AND worse, has basically locked up the market place for traditional mkt-cap indexing ETF's - there is ample evidence in the US that first-mover advantage in "basic" ETF's is huge - e.g. GLD vs. IAU - Barclays is second out the gate with a gold ETF is a serious laggard... they are first out the gate with a Silver ETF and it is game over for second-to-the-party... So Claymore has to come with something other than a me-too strategy, and good on them for being innovative... And, although I too have my skepticism about "fundamental indexing", the reality is that the critics who champion mkt-cap also do not, and cannot, know which approach will deliver higher returns going forward... just to keep it civil...
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Postby parvus » 10 Sep 2006 15:13

tidal wrote:
the 0.75% is essentially "ported alpha" on top of whatever assets you own... Of course, it is not frictionless, so the opportunity is diminished, but vaguely curious to see if market players with the least frictions (typically the proprietary desks) do exploit this and we get a world where the regular ETF trades at a very slight premium and the advisor-channel ETF trades at a similar (but still small) discount....

Or is it "exotic beta," i.e., the return for just showing up in a little-traded niche and providing liquidity? For a nickel a trade for 200 shares rather than $29.95? Anyway, thanks for the interesting insight, tidal.
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Postby tidal » 10 Sep 2006 15:35

parvus wrote:tidal wrote:
the 0.75% is essentially "ported alpha" on top of whatever assets you own... Of course, it is not frictionless, so the opportunity is diminished, but vaguely curious to see if market players with the least frictions (typically the proprietary desks) do exploit this and we get a world where the regular ETF trades at a very slight premium and the advisor-channel ETF trades at a similar (but still small) discount....

Or is it "exotic beta," i.e., the return for just showing up in a little-traded niche and providing liquidity? For a nickel a trade for 200 shares rather than $29.95? Anyway, thanks for the interesting insight, tidal.


I am not quite sure I am following you, but what I am saying is that if you shorted $1million of the advisor series and used the proceeds to buy the regular series, you would pocket $7500 per annum (= difference in the net distributions), year after year, and be perfectly hedged... And it is not like you have to "put up" the million - you just lay the strategy on top of an existing portfolio... Your "cost" would be the upfront commissions, and the borrow cost for the short... So not likely of interest/economic to private investors, but the desks could do it...
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Postby parvus » 10 Sep 2006 16:41

tidal wrote:

I am not quite sure I am following you,


I just wondered whether it's actually portable alpha. What for some is alpha (skill) is in reality a systematic but hitherto unexploited beta (risk premium) — something that can be captured mechanically without any measurable skill (although the prop desks would still require discipline — just as they do with fair-value arbitrage at the beginning of the trading day, when they choose between the futures market and the cash market of stocks).

In my own (quite preliminary) reading, portable alphaseems to involve a futures contract on an index, with a skilled manager's returns "ported" via the 90% or so that is not invested in the contract placed with the skilled manager.

There are other variations that involve shorting an index in order to achieve market neutrality, and expunge the alpha manager of any beta, but I haven't done a lot of reading on them.

That said, 'portable alpha" is a hot topic in beta-heavy pension circles.
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Postby AltaRed » 10 Sep 2006 19:57

tidal wrote:Anyway, Claymore should be commended for committing to the Canadian ETF space - competition is a good thing!!! Barclays/BGI/iShares, for better AND worse, has basically locked up the market place for traditional mkt-cap indexing ETF's - there is ample evidence in the US that first-mover advantage in "basic" ETF's is huge - e.g. GLD vs. IAU - Barclays is second out the gate with a gold ETF is a serious laggard... they are first out the gate with a Silver ETF and it is game over for second-to-the-party... So Claymore has to come with something other than a me-too strategy, and good on them for being innovative... And, although I too have my skepticism about "fundamental indexing", the reality is that the critics who champion mkt-cap also do not, and cannot, know which approach will deliver higher returns going forward... just to keep it civil...


I too welcome Claymore to provide an alternative to Barclays. Competition is good. I just hope they have staying power for at least a few years for traction to build. I guess we will find out depending on how many additional shares are brought to market over the next year. It is just too bad they couldn't have started with MERs another 20bps lower, e.g. to best the 0.50% of iShares XDV as an example.
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