Why Buying an Index Fund ETF Must be for the Long Term Not for a “One Year Wonder”

Back in 2014, I had some RRSP cash to invest in the equities side of my portfolio but I didn’t have any particular companies in mind. Instead, I gradually bought $24 295 worth of XIC an, ETF that tries to reflect the entire S&P TSX Composite index. Looking back on how it performed in 2015, I decided yet again that Index Fund ETFs are most suited to someone investing for the long-term, such as a distant retirement, rather than for the short term or just one year.

Whether Markets Rise or Fall, Dividends Still Get Paid by Most Companies

Many of the companies on the TSX S&P Composite Index list pay dividends. These include Canada’s big banks, telecoms like Bell and Telus, and old established utilities like Fortis and Canadian Utilities. An ETF that mirrors holding those companies, like XIC, usually will pay distributions to unit holders based on the dividends and other income it receives.

What Was My (Quick and Dirty) Yield on Investment for XIC in 2015?

In 2015, my actual distribution payments totaled $674.64.

While it’s not a particularly accurate way to calculate my return on investment, if I just divide my distributions by the amount I spent on XIC units in 2014, I get a percentage of 2.78%.

This is a bit different than today’s (January 6, 2016) quote for XIC on RBC Direct Investing, which says I will get 3.24%.

Why is my number lower? Because I spent more to get the same distribution.

What Happened to the Unit Value of XIC During 2015?

You see, the TSX had a difficult year in 2015. Its overall value dropped, at least on paper. I bought my units of XIC in 2014 at a rough average cost of $23.14 each.

Today, at this moment, on January 6 2016 they are worth 20.20 each.

Sigh. They’ve dropped in value by $2.94 each. And that’s not even factoring in any inflation and what not for the year between when I bought them and today.

If I Needed That Money In One Year, What Alternative Investment Might Have Been Better?

It doesn’t matter much to me that on paper my XIC units are worth less today than when I bought them. That’s because I don’t need the cash today so I don’t need to sell them and make that paper loss a real loss.

But what if I had been investing for the short term? What if I did need the cash today?

Well, I likely would have invested the same $24 295 in 2014 in some one-year GICs. I did buy quite a few GICs that year so I can find an average rate for 1-year certificates. On average, I invested at a rate of 1.91% for 1-year GICs in 2014.

So if I had put my money in GICs, on January 1 2016, I would have had all of my principal returned to me ($24 295) and I would have received $464 in interest.

You can see that the GIC interest is $210.61 less than the XIC distributions.

But the XIC loss of principal if I had sold the units today would be $3 087.

Ouch!

The lesson is obvious to me. Don’t invest in an index fund ETF for the very short term unless you are prepared to accept the possibility of a large, real drop in value. I wouldn’t risk $3 087 to gain $211 in interest/dividend distributions over a one-year period.

That said, my XIC investment is supposed to be needed in 20 or more years. So I’ll let it putter along, paying the 0.10% expense ratio and hopefully over that length of time, the capital value of the units will have increased at least enough to cover inflation and even better enough to generate a capital gain and profit.

Just Out of Curiosity, How Much Did Bell Do Better than a GIC and than XIC Over 2015?

I noticed when I looked at this particular account, that in 2014, I also bought about $25 000 of BCE stock. It was paying dividends to yield about 4.92% at my purchase price. The actual dividend per share has increased since then, so it’s still yielding about 4.77% today, January 6 2016.

The shares were bought at $50.25 in mid-2014. They are trading for $54.50 right now, today, January 6 2016. So they have appreciated in value by $4.25 each.

Too bad there was no way to know that in advance, or to be sure that that trend would continue (which it probably won’t) or I would have been very happy to have invested the full $50 000 in BCE and left XIC on the shelf!

Ah well, that’s why we’re supposed to invest in a variety of assets with a variety of risks and volatilities. I’m satisfied with having some BCE, some XIC and some GICs as part of my overall blend. Between them, it was a reasonable 2015.


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