Lower gas prices can mean really big TFSA savings!

Many Canadians have grown accustomed to low mortgage rates and strong residential pricing, and now the price of gasoline is leaving a few more bucks in our pockets.  Don’t get too comfortable, because history teaches us that none of this is sustainable.  It is circumstances like the present that make seasoned money managers anxious.  While neophytes are happy to carelessly bathe in the sunshine, experts are usually getting ready for the next storm.  What can you do?  With lower gasoline prices providing some extra cash flow why not use the cash to bolster your savings?

One cloud on the horizon has been getting some attention of late.  The massive global financial stimulus that has caused interest rates to remain low for so long has had a predictable impact on our collective behaviour.  Canadians have borrowed money like there’s no tomorrow.

Household Debt vs Disponable IncomeAccording to data from Statistics Canada, our total borrowing has been on a steady incline since 1990, while servicing the debt has been eating away at our disposable income.  Sure, we tightened our belts some during the financial crisis, but the temptation to borrow at low rates has just been too much to overcome.

It is difficult to save money, when so little of one’s income is disposable.  And most financial advisers would recommend that it doesn’t make a whole bunch of sense to save money at all when you owe money.  It makes far more financial sense to pay down your debt.  Based on numbers alone, this is sound advice.  But our behaviour is seldom governed by numbers alone – we are indeed a complex species.

For example, contributing to your RRSP provides a tax savings in the same year your contribute right?  So where does it go?  A strictly numbers analysis espousing the merits of RRSPs would certainly factor in those savings to illustrate how effective they are at growing your wealth, but I am inclined to agree with the Wealthy Barber (David Chilton) who frequently points out (and I am paraphrasing here) that those dollars you supposedly ‘saved’ were most probably squandered, not saved.  If the tax savings were indeed invested, then it is true that one’s net worth might grow.  However the iPhone, piece of furniture or other consumer good bought with that tax refund hardly qualifies as savings now does it?

Does it make any sense at all to save when wallowing in debt?  I would argue most emphatically YES!  According to an IPSOS Reid poll published in October:  “The average working Canadian believes they would need $45,609 in savings to sustain themselves for a year should they be off work due to illness.”  Where would this money come from?  In real life, a portion of it would be required for food and lodging yet some of it will be needed just to pay the mortgage or rent.  I’d bet that the average Canadian polled would no doubt have seriously underestimated the amount needed to live on while not working (for whatever reason).  In the same poll roughly 68% admitted to having some or lots of debt – suggesting that 1/3rd of Canadians have none?  Pardon me if I suspect that a good percentage of those polled might also have been too embarrassed to answer candidly even if their responses remained anonymous – we are Canadians after all and loathe to taint our conservative image.

Now is an ideal time to bump up your savings!

Where will the extra cash come from to begin a more aggressive savings program?  Let’s start at the gas pump.  We all feel a bit of relief simply watching the price of gasoline come down when fueling, but has anyone really considered how much they might now be pocketing because of lower energy prices?  In April of 2014 Canadians were paying a near-record $1.50 per litre.  Just 6 months ago the price of gasoline in Toronto was 139.9 cents a litre and today (I am writing this on December 10) it is 103.9 cents.  That’s a whopping 25% decrease.  Say a motorist was spending $50 in after-tax dollars a week.  If they price of gas simply stays at 103.9 the cost savings are $12.50 a week which is equivalent to $650 of annual savings requiring about $1000 of your pre-tax income.  If there is more than one vehicle in a family? Let’s keep it simple and assume $1000 in annual family savings simply from the lower gasoline price.  Never mind that other energy costs (heating) and transportation costs (flights) will also create savings.  What if you simply invested that amount every year and earned a rate of return on it?  It will grow to a handsome sum.  Unfortunately, you will have to pay taxes on those returns but more about that later.

Growth in $1000 annually

 

Of course it’s unreasonable to expect gas prices to remain at these levels or fall lower.  It is also not wise to anticipate more generous rates of return.  In point of fact, it is foolhardy to expect or anticipate anything at all.  Returns will be what they will be, and gas prices are determined by market forces that the experts have trouble understanding.

Does the uncertainty we must live with mean that savings might just as well be spent on the fly?  As I tell students studying to be financial planners; one must start somewhere and there are two things worth acknowledging up front:

1)  The power of compounding (letting money earn money by investing it) is very real, as evidenced by the table.

2)  It makes sense to have a cushion in the event of a loss of income, the desire to pay down some debt, make a purchase or just retire.

Yes it makes more financial sense to have no debt at all, but the majority of Canadians will borrow for those things they want now rather than later, like a home or car.  If you must borrow, why not save as well?  Fortunately we have been gifted the perfect savings vehicle.  The Tax Free Savings Account introduced in 2009 has advantages that make it an ideal place to park money you are saving at the gas pump.  The returns you earn in the account are tax-free.  With GIC rates as low as they are, you might be inclined to say ‘so big deal?’ But any financial adviser over 45 years of age (I admit, there aren’t many) can tell you that low interest rates are temporary, and besides you can and will earn better returns over the longer term in equity mutual funds just as an example.

TFSA Contribution LimitsOf course there are limits (see table) to what you are allowed to contribute, but best of all they are cumulative.  In other words, if you haven’t contributed your limit since 2009, you can ‘catch up’ at any time.  Including 2014, you have a right to have put up to $31,000 into the account.   Also the contribution limit rises (is indexed) over time with the rate of inflation.  Perhaps most important, you can withdraw money from the account tax-free.  Your contributions were already taxed (there’s no tax deduction when contributing like when you put funds into an RRSP), and the investment returns are all yours to keep.  Using your TFSA means that won’t have to pay those taxes and the effects of compounding aren’t diminished.  To top it off, you are allowed to replace any money you’ve withdrawn in following years.

The seasoned money manager will want some flexibility in the event that he is blindsided.  With your TFSA savings you too will enjoy more flexibility.  If interest rates are higher when you renegotiate your mortgage, taking money out of your TFSA to reduce the principal amount might help reduce your monthly payments to affordable levels.  Should the economy take a turn for the worse over the next several years and you lose your job, then you’ll have some extra cash available to retire debt and help with living expenses.  For younger Canadians saving money at the gas pump? Investing the extra cash flow in your TFSA account will certainly help towards building a healthy deposit for your first home.

  • Don’t squander the cash you are saving thanks to low energy prices.
  • Your TSFA if you have one, allows you to invest those savings and the returns you earn are tax free.
  • If you don’t have a TFSA, then get one.
  • Be sure to use only qualified investments and do not over-contribute. The penalties are severe.
  • Money earned on your investments is tax-free.
  • Take out cash when you need it, and put it back when you can.
  • When you retire, money withdrawn from your TFSA does not count as taxable income.

 

Mal Spooner is a veteran fund manager and currently teaches at the Humber College School of Business.
Mal Spooner is a veteran fund manager and currently teaches at the Humber College School of Business.

 

 

 

 

 

 

 

 

 

 

 

 

 

The Investment Gods Created Volatility… and it was good

Have you noticed how paranoid people are getting about market “volatility”.

OMG, cries the DOL, we’re going to fine employers if their 401k plan participants don’t grow their balances as fast as the average plan around the country… thus making the Federal Government a participant in roughly half the 401k plans in every audit time frame.

Employers use investment plans (401ks) as an employee retention benefit… but by what stretch of the imagination are employers responsible for the financial ignorance/naiveté/ laziness/poor judgment of their employees?

Isn’t this just another overreach by regulators who seem focused on making it as hard as possible for private businesses to remain viable? Why not require unbiased investment education instead and create some productive jobs for a change… most adults are willing to accept responsibility for their own mistakes.

Since the dawn of investment time, market value change has been the lifeblood of investing and speculating… a distinction that “Modern Portfolio Theory” (itself a long-con of great imagination) has hypothetically correlated out of existence.

Without market volatility , there would be no chance of profit and no risk of loss. The absurd “Major Prediction Theater” proposes that past correlations and relationships will be repeated in the future, and that risk can be minimized by gaming with the numbers….

The investor need only select the right mix of speculations. But even if the mumbo jumbo is solid, theoretically, market value volatility remains the reality, and some funds, products, methodologies, and hypotheses outperform others… it’s the performance parameters that require adjusting, not the employer’s fiduciary responsibility.

So instead of relying on Wall Street’s most self-serving hypothesis ever, why not embrace the investment god’s gift of market volatility… as many of us have done effectively since investment puberty?

Regulators only appear to be stupid… they know that neither employers nor employees have the inclination to become proficient investors. They know that businesses fear the pox of a compliance audit… making compliance job designations the fastest growing, non-productive, industry in the economy.

And here’s the kind of decision-making the regulatory Gestapo produce:

“Mr. Jones, we’re fining you a gazillion dollars because your retired participants’ 401ks grew only 2% over the last 3 years and the markets were up 15%; clearly you failed in your fiduciary responsibility”.

“But these people are retired, your lordship.”

Their portfolios are producing over 6% in spending money, less insane federal income taxes (light bulb moment: think how a no tax on retirement income rule would benefit everyone), while the best of the best Target Date Funds pay around 2% before taxes .”

“Not my problem sucker, since when did income become the objective of a retirement program”.

Custom-built Equity- or Index-linked GICs

No doubt you have heard or read about Equity- or Index-linked GICs. Many financial institutions market variations of these products. The intention is to provide the guaranteed return of your principal and give you the potential of higher returns based on some external equity fund or market index. The options for early withdrawal are virtually none – except your death! Sarah and Lee are frustrated with the choices available for several other reasons too.

This product is not always available. Many institutions only offer these products during “RRSP Season”. In addition, sales of new issues are sometimes suspended because of periods of poor market performance.

Limited choice of terms. Usually these products are only offered for a 3 or 5 year term. If Lee and Sarah want a different term, they are out of luck.

Limited choice of equity or index links. The company offering the product makes the investment choice. All issues have a maximum rate of return that they will pay – a cap on returns. Clients are in a take-it or leave-it position.

Lee and Sarah are looking for greater choice and control over their investment, both in duration and the investment linked to the GIC. They are looking for a better way to invest and get the best of both worlds. There is good news for them – it can be done and without the restrictions of the other products.

Lee and Sarah, together with their financial advisor designed their own personalised equity-linked GIC with no restrictions, full flexibility and no cap on returns.

First, they choose their own term. In most cases, a long term – say 5 to 7 years at least, is preferable. Time is their friend since it gives the equity portion of their investment a higher probability of good returns. A term of 10 years or more is even better!

Next, they buy a plain, regular, off-the-shelf redeemable GIC to guarantee their full principal. After discussing things, they decide a 7-year term is appropriate and they have $75,000 to invest. After pushing a few buttons on a financial calculator and knowing the 7-year rate is 4%, they need to deposit $56,993 today so it will be worth $75,000 in 7 years.

Finally, they choose their equity investment. With just over $18,000 left to invest in equities, they now consult their advisor for an appropriate solution. They can use mutual funds, segregated funds, Index funds, ETFs or individual stocks. Their advisor will have them complete a Risk Tolerance questionnaire to determine appropriate choices. This will be their profit with no cap!

Sarah and Lee are happy to have control of their investment with no upside limits and no restrictions on liquidity or withdrawal. Shouldn’t you take control of your choices?

Lifting the veil on ETFs – Part 4 of 4

Warning about the fees and costs of ETFs
The expense ratio is not the only cost of investing in exchange traded funds. ETF shares must be purchased through a regular stock brokerage account. There will be commissions to both buy and sell ETFs. The commissions on buying and selling ETFs are the same as for buying and selling individual stocks. An investor who does a lot of trading in and out of ETFs will see a greater impact from brokerage commissions than from the expense ratios of the funds.

Unfortunately, the costs of Canadian ETFs are not as straightforward as one might think. Most investors don’t realize that iShares, Claymore and BMO (to name a few), disclose their fees in different ways, making apples-to-apples comparisons difficult.

The first point to understand is that Claymore, BMO and others only list their ETFs’ management fee on their websites. iShares, on the other hand, lists each ETF’s management expense ratio, or MER. The two terms are not synonymous. The management fee is only part of a fund’s overall MER. It’s usually the largest part, for sure, but it’s not the whole picture.

The management fee typically covers all of the administrative costs, the manager’s compensation, index licensing fees, all fees paid to the custodian (the investment firm that holds the securities), the registrar and transfer agent (the firm responsible for keeping shareholder records). These make up the vast majority of an ETF’s expenses. However, the management expense ratio or management fee also includes some additional costs, such as GST and the fees payable to the fund’s independent review committee (IRC), a legal requirement designed to protect investors from conflicts of interest. Read the Prospectus carefully to avoid unpleasant surprises!

There is also a Transaction Expense Ratio or Trading Expense Ratio (TER) that is not quoted in the Prospectus as it is only determined in arrears. Most Prospectus’ provide an estimate of this cost – but you only learn the exact amount at the end of the year and it reduces the value of your investment. This could add up to an additional 1% or so to your costs. These expenses are primarily the costs involved with trading commissions paid by the managers of an ETF as they shuffle the portfolio to keep it in line with a target index. It is important to add the TER to the MER for a more accurate picture of the fund’s costs.

Other fund expenses may not be included in the management fee, something you may only learn if you scour the funds’ regulatory filings and Prospectus. These may not add up to much, but ETF providers trumpet their low fees as a selling point and four or five basis points is enough to make a competitive difference and cost is cost. Remember, NOTHING is free!

Visit with me again in future issues of Money Magazine and this blog as I explore many of these issues in more detail including the difference between an INDEX FUND and an ETF.

With courtesy to:

Wikipedia, The Wall Street Journal, Morgan Stanley, iShares, Claymore, BMO, The Vanguard Group and the International Monetary Fund.

Lifting the veil on ETFs – Part 2 of 4

Stock ETFs
The first and most popular ETFs track stocks. Many funds track national indexes.

Bond ETFs
Exchange-traded funds that invest in bonds are known as Bond ETFs. They thrive during economic recessions because investors pull their money out of the stock market and move into bonds (for example, government treasury bonds or those issued by companies regarded as financially stable). Because of this cause and effect relationship, the performance of bond ETFs may be indicative of broader economic conditions. There are several advantages to bond ETFs such as the reasonable trading commissions, but this benefit can be negatively offset by other fees and costs.

Actively managed ETFs
Most ETFs are index funds and as such, there is no “management” involved. Some ETFs, however, do have active management as a means to hopefully out-perform the nominal bench-mark index. Actively managed ETFs are at risk from arbitrage activities by market participants who might choose to front run its trades as daily reports of the ETF’s holdings reveals its manager’s trading strategy. The actively managed ETF market has largely been seen as more favorable to bond funds, because concerns about disclosing bond holdings are less pronounced, there are fewer product choices and there is increased appetite for bond products.

Leveraged exchange-traded funds (LETFs), or simply leveraged ETFs, are a special type of ETF that attempt to achieve returns that are more sensitive to market movements than non-leveraged ETFs. Leveraged index ETFs are often marketed as bull or bear funds and because of the leveraging involved, returns and losses are magnified!

ETFs compared to mutual funds

Costs
The first rule to remember – NOTHING is free! Since ETFs trade on an exchange, each transaction is generally subject to a brokerage commission. Commissions depend on the brokerage and which plan is chosen by the customer. Full-service brokers typically charge a percentage commission on both the purchase and sale and may be negotiable depending on the dollar value involved. A typical flat fee schedule from an online brokerage firm $10 to $20, but it can be as low as $0 with certain discount brokers with minimum account values. Due to this commission cost, the amount invested has great impact on costs. Someone who wishes to invest $100 per month may have a significant percentage of their investment destroyed immediately, while for someone making a $200,000 investment, the commission cost may be negligible.

ETFs generally have lower expense ratios than comparable mutual funds. Not only does an ETF have lower shareholder-related expenses, but because it does not have to invest cash contributions or fund cash redemptions these costs are eliminated. Mutual funds may charge 1% to 3%, or more. Index fund (which by the way are NOT the same as ETFs – see future edition of Money Magazine) expense ratios are generally lower, while ETFs are normally in the 0.1% to 1% range.

The cost difference is more evident when compared with mutual funds that charge a front-end or contingent back-end load as ETFs do not have any additional loads at all. Potential redemption and short-term trading fees are examples of other costs that may be associated with mutual funds that do not exist with ETFs. Traders should be very cautious if they plan to trade inverse and leveraged ETFs for short periods of time. Close attention should be paid to transaction costs and daily performance rates as the potential combined compound loss can sometimes go unrecognized and offset potential gains over a longer period of time.

Lifting the veil on ETFs – Part 1 of 4

Recently, one of the big 5 banks did a customer survey on ETFs and one of the questions was: “What do the letters ETF mean?” The responses shared were interesting to say the least! Most thought they stood for Emergency Task Force! Another group though it was an abbreviation for Energy Transfer Fund (like a carbon offset trading scheme I presume), some said it was an Environmental Trust and still others suggested Electronic Transfer of Funds. Apparently, less than 5% correctly identified the letters as meaning Exchange Traded Funds! Interesting to say the least since ETFs are attracting lots of attention these days, for various reasons – some accurate and others not.

They’re still quite new and would-be investors are bound to have lots of questions. In this article, I am only going to touch on the generalities of ETFs and some of the more common versions. Future issues of Money Magazine and this blog will delve more deeply into each area discussed here.

An (ETF) is an investment fund traded on a stock exchange much like a stock. It holds assets such as stocks, commodities or bonds and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their apparent lower costs, potential tax efficiency and stock-like features.

What is an index?
You probably know terms such as the S&P/TSX Total Return Index (the most quoted Canadian index) or the S&P 500 Index in the US on the news. Those are indexes. An index is a selection of stocks or bonds that represents a given market. Each index has rules about how many securities are included and how they are weighted. Indexes are mainly used to measure changes in the market they represent. Remember, an Industrial Average (such as the Dow Jones Industrial Average {DJIA} is NOT an index, but that is a subject for another review!).

An ETF combines the valuation features of a mutual fund which is bought or sold at the end of each trading day for its net asset value, with the tradability features of a stock or bond which trades throughout the trading day at varying.

Structure
ETFs offer investors an undivided interest in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds except that shares in an ETF are bought and sold throughout the day through a broker-dealer. Unlike traditional mutual funds, ETFs do not sell or redeem their individual shares at net asset value, or NAV. Instead, brokers purchase and redeem ETF shares directly from the ETF.

Index ETFs
Most ETFs are index funds that attempt to replicate the performance of a specific index. They may be based on stocks, bonds, commodities or currencies. An index fund seeks to track the performance of an index by holding in its portfolio either the contents or a representative sample of the securities in the index. Some index ETFs, known as leveraged ETFs or inverse ETFs, use investments in derivatives to seek a return that corresponds to a multiple of, or the inverse (opposite) of, the performance of the index.

Some index ETFs invest 100% of their assets proportionately in the securities underlying an index, a manner of investing called “replication”. Other index ETFs use “representative sampling”, investing perhaps 80% to 90% of their assets in the securities of an underlying index and investing the remaining 10% to 20% of their assets in other holdings such as futures, option and swap contracts and securities not in the underlying index. There are various ways the ETF can be weighted, such as equal weighting or revenue weighting.

Close Talkers

 

I was watching a Seinfeld the other day. If there’s been a funnier show on TV, I can’t think of one. One of my favorite episodes is the one where Elaine starts dating a “close talker”. It’s a riot.

Thinking about the #1 benefit of the exempt market, I can say, without a doubt, that the industry is full of close talkers. Almost all investments in the exempt market have close talkers.

Does that mean that they all talk awkwardly close to you and invade your private space? No. I’ve met a lot of industry participants and I can assure you that most of them give you enough space to talk.

What I mean is that the people that ultimately make decisions about how your money is invested, are very close to you. Most issuers allow you as the investor to talk to the CEO, managing director, president, etc. about decisions that will impact your money.

Let me give you an example. William Santor is President and CEO of Productivity Media (disclosure: He signs my pay cheque). His fund provides senior loans to the media industry. The fund collects investment capital from institutions and retail clients in the exempt market.

Will leads the loan origination process and ultimately decides which project to provide financing for and which to decline. He has a number of partners and advisors who will provide advice on loan selection as well. As an investor, you may have questions about why a decision is made to finance a project. No problem. You can easily speak to Will about it. In fact, some investors have.

Now by contrast, try to do that with your mutual funds. You will need to speak to your financial rep, who talks to the mutual fund wholesaler, who speaks to the mutual fund head office, who speaks to the head advisor, who speaks to the sub advisor, who speaks to the analyst who ultimately did the research to determine that stock was the one they should buy. Reminds me of the elementary school game where students pass along a set message through the whole class.

Along with losing the message in translation, the costs of those layers add up. In fact, the Ontario Securities Commission has put out a study to analyze the mutual fund fees in Canada. We all know whose pocket those fees come out of.

So along with all the strengths of the industry, I think one most pronounced is being able to be closer to your money. I like what Jason Fried said:

“The closer you are to your money, the better off you’ll be.”

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. To contact Marty, please email marty (at) idealeader.ca

Change For The Better

 

“Know what’s weird? Day by day, nothing seems to change, but pretty soon…everything’s different.” – Calvin from Calvin and Hobbes

I was just speaking to a loyal reader (read: Mom), about the change in the financial industry. Without getting too Presidential speech on you, I’m going to make a statement that will likely cause a polarizing effect.

The exempt market right now is where the mutual fund market was 20 years ago.

 

There I said it. This isn’t a guess like my super bowl picks of previous years. This is based on the following observation:

Mutual Funds: Everyone has them, but wonders why they have them
Exempt Market Products: Nobody knows about them, but will want to learn more about them.

There will be people who will fight this trend, to protect their self-interest. This battle reminds me of the CEO of Blockbuster who said downloading movies would have NO impact on their business. RIP Blockbuster.

Look to the Exempt Market for further product innovation that will increase the investor’s return, while minimizing risk. It can’t happen soon enough.

 

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. He is the founder of www.BetterReturns.ca, a site that highlights a few quality exempt market offerings. To contact Marty, please email marty (at) idealeader.ca

Real Diversification

 

When I purchased my first vehicle, I wanted something unique, manly, and most importantly, something that would attract the female gender. With those conditions in my mind, the obvious vehicle for me was a… Lada Niva. Here’s my conversation with the car salesman about choosing a colour:

 

 

Car salesman: What colour would you like?

Me: What are my options?

Car salesman: They come in many colours, the colours of the rainbow.

Me: Wow! I’ll take red. (Thought it was fitting)

Car salesman: Actually, you can only get white. We don’t bring in any other colours.

Me: I guess it’s white then.

I couldn’t ever figure out the conversation, but because I was so starry eyed with my new vehicle, I just went with it. Interestingly, it turned out to be a pretty good vehicle

I suspect the same sort of conversations have been going on with financial advisors all across North America.

When a mutual sales person presents a “diversified portfolio”, there appears to be many companies, types, and asset classes. Lots of colours. Perhaps you have a balanced fund from bank A, a bond fund from bank B, and an equity fund from bank C.

The thing is though, if you look at the underlying holdings, you really could be holding a redundantly “white” portfolio.  My observation over the past years in the financial industry is that this is a chronic issue.

I believe, however, the tide is shifting. There have been a number of media reports showing an increased use of non-conventional investment types, like the ones I spoke about in my Toolbox article.

An article in a US based magazine catering to financial advisors, quoted a US study that found that an overwhelming majority of financial advisors are looking at expanding their use of alternative investments for their clients.

Closer to home, Mr. David Pett writes in the Financial Post about the new portfolio. This new portfolio pie, or asset allocation includes private equity, real estate, real assets and alternatives, all of which can be found in the exempt market.

When you are considering the advice of your financial advisor, take a look at their toolbox. Does your financial advisor have the proper tools to help you reach your financial goals?

 

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. He is the founder of www.BetterReturns.ca, a site that highlights a few quality exempt market offerings.  To contact Marty, please email marty (at) idealeader.ca

 

 

 

Life After Mutual Funds?

 

Ahhh, the 90’s!

It was the days of MC Hammer, Nelson Mandela and “Irrational Exuberance”. It was also the time that an obscure, little known type of investment called a mutual fund started to become a household name. With the interest rates hovering at historic lows, many “GIC refugees” started flooding in to these investments that promised higher returns. The amount of money that went into the mutual fund industry was staggering.

That was 20 years ago. Clearly things have changed… music, locations of sports teams, and my waistline. But there’s one thing that hasn’t changed, Canadian’s infatuation with mutual funds. Have mutual funds deserved all the love we’ve given them? Well, that’s for you to decide, but many people question the long-term performance of their mutual funds.

Maybe that’s part of our identity as Canadians. We all have mutual funds but wonder WHY we have mutual funds.

Let’s fast-forward to today and we find another burgeoning financial phenomenon. Enter the Exempt Market. Now just to be clear, the exempt market is NOT a specific product like a mutual fund. It’s actually named for HOW the products are purchased. Just like mutual funds, which are sold through a mutual fund dealer, these exempt or private investments are purchased through an exempt market dealer. Some more popular investment structures in the exempt market are real estate investment trusts, flow through shares, mortgage investment corporations and limited partnerships.

It’s understandable that you may not have heard of the exempt market, given the distribution of these products only formalized into the exempt market within the last 3 years. Before that, outside of Ontario, there were really no registered dealers who were approved by the securities regulators. Ontario had Limited Market Dealers until the forced transition to an exempt market dealership required by the National Instrument 31-103.

Just how popular is the exempt market? Well, it’s growing and growing fast. Last year, the people placed about $140 Billion into the exempt market, as reported by the EMDA. To put that in perspective, in the same period, net sales of mutual funds was about $21.2 Billion, as reported by IFIC.

In the coming weeks, I’ll write about the exempt market as it relates to raising capital for businesses as well as participating in unconventional investments for qualified investors.

 

Marty Gunderson is a self proclaimed Exempt Market geek.  He has served in a variety of leadership positions in the industry, from sales to issuer to dealer.  He is the founder of www.BetterReturns.ca, a site that highlights a few quality exempt market offerings.  Contact him at marty (at) idealeader.ca