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  • Quarterly portfolio Summary

    Sample ETF Portfolio June 30, 2013 Target

    Current Investment Mix: % $ % Fixed Income: 64.95% $16,238.15 65.00%

    Growth: 35.00% $8,749.74 35.00% Cash/Cash Equivalents:* 0.05% $12.11 0.00%

    Totals: 100.00% $25,000.00 100.00%

    Estimated Annual Income: $625.01 Est. Annual Investment Costs: 0.22% $56.12

    Bond Maturities: $ Cash/Cash Equivalents: $12 2018* $1,441

    2014* $1,441 2019 $0 2015* $1,441 2020 $5,000 2016* $1,441 2021 $5,000 2017* $1,441

    *Estimated maturity in ETFs Preferred Shares: $1,587.45 % of Portfolio: 6.35%

    Stock Market Sector Weightings: $8,749.74 Invested for growth & allocated to Energy (includes pipelines) 16.380% (Horizon S&P/TSX 60 Equal Weight Index) Financial Services: 11.120% Mining & Metals: 11.345% (Horizon S&P/TSX 60 Equal Weight Index) Gold & Precious Metals: 0.000% Industrial Products: 18.000% (Horizon S&P/TSX & BMO Industrials ETFs) Communications: 3.477% Utilities: 19.407% Consumer Staples: 5.922% Transportation: 3.504% (BMO Industials Index) Consumer Discretionary: 0.000% Health Care: 2.350% Real Estate: 0.000% Forestry: 0.000% Technology: 1.380% Inverse ETFs/Short Positions: 0.000%

    Effective Market Exposure: 92.885%

    (Horizon S&P/TSX 60 Equal Weight Index)

    (Horizon S&P/TSX 60 Equal Weight Index) (BMO Utilities & Horizon S&P/TSX ETFs) (Horizon S&P/TSX 60 Equal Weight Index)

    (Horizon S&P/TSX 60 Equal Weight Index)

    (Horizon S&P/TSX 60 Equal Weight Index)

  • Sample Exchange Traded Fund Portfolio 30-Jun-2013 Credit Average Book Current Market Est. Annual

    Investment's Description Rating Cost: Value: Price: Value: Yield:* Income:

    $12 Cash Balance $1.00 $12.11 $1.00 $12.11 0.00% $0.00 Interest/Dividends Received

    Bonds and GICs:

    725 First Asset DEX 1-5 Year Laddered (BXF) $9.94 $7,206.50 $9.94 $7,206.50 n/a n/a Government Strip Bond Index

    $5,000 Transcanada Pipelines Ltd A $76.54 $3,826.80 $76.54 $3,826.80 3.66% $153.14 Discount Bond, Matures: 20-Nov-2020

    $5,000 Bell Canada A $72.35 $3,617.40 $72.35 $3,617.40 4.14% $167.96 Discount Bond, Matures: 01-Jun-2021 (low)

    Cash, Bond and GIC Totals: $14,662.81 $14,662.81 2.19% $321.10

    Preferred Shares:

    95 iShares S&P/TSX Canadian CPD $16.71 $1,587.45 $16.71 $1,587.45 4.40% $69.85 Preferred Share Index

    Fixed Income Investment Totals: $16,250.26 $16,250.26 2.41% $390.95

  • Credit Average Book Current Market Est. Annual shares Investment's Description Rating Cost: Value: Price: Value: Yield:* Income:

    Growth Investments:

    540 Horizon S&P/TSX 60 HEW $10.65 $5,751.00 $10.65 $5,751.00 2.32% $133.42 Equal Weight Index

    87 BMO S&P/TSX ZIN $17.27 $1,502.49 $17.27 $1,502.49 1.51% $22.69 Equal Weight Industrials Index

    105 BMO S&P/TSX ZUT $14.25 $1,496.25 $14.25 $1,496.25 5.21% $77.95 Equal Weight Utilities Index

    Growth Investment Totals: $8,749.74 $8,749.74 2.68% $234.07

    ETF Portfolio Totals: $25,000.00 $25,000.00 2.50% $625.01

    Est. Annual Income does not include the accrued interest earned on the discount bonds.

    * Distribution Yield = the 12-month trailing $ distributions divided by the portfolio's Average Cost - representing the portfolio's yield, not the market yield. The ETF distributions may include a Return of Capital and it may not be accurate to compare individual ETF distribution yields.

    Stock market data = closing trade on the last trading day in the period. Data provided by QuoteMedia. Bond pricing = The 'Bid' price as at the close of the last trading day in the period. Data provided by Bondview.

    Utilities Sector:

    Industrial Products Sector:

    Broad Market Index:

  • Review: ETF Portfolio

    As the ETF portfolio was started on June 28, 2013, there is no history to review.

    Thought and Concerns:

    During the fall, winter and spring, investors seemed to breath a collective sigh of relief at putting the worst of the financial crisis behind them. Stock markets rose to new highs and bond yields hit new lows – what could be better! For a while it seemed that we had no worries – that is until it suddenly became apparent to investors that better economic news might cause central banks to slow their liquidity injections - a brand new worry for investors. A few of our observations….

    The worse things get the higher stock markets go!

    It is such an odd environment for investors. It used to be that as the economy gained strength, corporate profits increased and stock markets rose. But it now seems corporate profits and stock markets are no longer connected to economic growth.

    As the following chart demonstrates, it would appear the stock markets bottomed in 2009 at approximately the same time as economic growth peaked. As economic growth began to decline, stock markets became more bullish.

  • Much of the stock market strength is attributed to increasing corporate profits. Which also seems odd – corporate profits increasing as economic growth decreases! As the chart from the St. Louis Federal Reserve Bank demonstrates corporate, after-tax, profits are at record highs.

    Much of the corporate profit growth can be attributed to declining income tax liabilities and labour cost reductions as companies try to maximize their productivity levels.

    The New York Times recently published a couple of charts, which depicts just how much corporate income tax payments have declined, further enhancing corporate profits. U.S. corporate taxation is sitting as historical lows.

    In the United States it appears employment levels are at generational lows, which seems to correlate well to a slowing economic growth scenario, but not record high profits and stock market values. Historically, when employment is low corporate revenues and profits suffer.

    Below is another St. Louis Reserve Bank chart that crystalizes the employment picture in the U.S. over the past 70 years. As you can see employment levels are back where they were in the 1980s.

  • Note: Notice how employment makes a sharp rise after each recession, but despite all of the extraordinary efforts of governments and central banks employment has not moved high this time around.

    The divergence between economic growth and stock market performance is even more pronounced in Europe where most countries are either in recession or approaching recession, as the following charts from The Economist and the European Central Bank shows.

  • European economic growth

  • Source: European Central Bank Data

    European unemployment levels, at 12.1% or 19.22 million people, has been rising for over 7 years and has reached a record high. This is happening at the same time as the European economies move into recession and their stock markets reach new highs. As the following recent chart demonstrates, European unemployment continues to rise and will probably get worse as economic growth slows.

    European unemployment rate (as a % of labour force)

  • Source: European Central Bank Data

    The weak economic growth in North America and Europe, while not very supportive for high stock market valuations, should help support the ongoing central bank liquidity operations – which suppress interest rates and provide abundant financial resources for financial systems and governments.

    But havenʼt interest rates started a new trend higher?

    Yes, interest rates have jumped over the past 6 weeks. In Canada and the United States, bond prices have dropped. For example, the yields for 10-year bonds have increased by about 84 basis points or 0.84% - from 1.63% to 2.47%. Thatʼs a big jump!

    The recent increase in interest rates has hurt the market prices for bonds, preferred shares and interest sensitive stocks.

    Why are interest rates rising?

    Well, we donʼt think the increase in rates is due to any of the following traditional influences

    • Rising inflation • Improving economic growth • Increasing demand for loans

  • • Rising credit risk In fact, the inflation rate continues to decline. As the following chart, from The Economist, shows U.S. inflation continues to decline, with the Core CPI rate hitting new lows.

    Note: Central Banks are very concerned about the continuing decline in inflation rates. They fully expected consumer inflation expectations and actual inflation rates to rise as they injected more and more liquidity into the financial systems. They are worried that if inflation turns into deflation then consumption will slow – making it harder to stimulate economic growth. For example, if prices began to fall and we thought that prices would continue to decline, then we would probably delay purchases. We might delay buying that new car, TV, computer, house, etc. We might say - Iʼll wait 6 months to buy – when prices are lower. Our decision to delay purchases would have a negative impact on economic growth. (Some writers believe the price of oil holds the key to this tug-o-war between inflation and deflation. If oil prices were to fall, the decline could push the CPI numbers into negative territory.)

    As we discussed above, economic growth is still weak so we doubt this could be a factor in the recent interest rate rise.

    Given the current employment trends and the record amount of cash held by companies, there is no evidence the demand for loans has increased sufficiently to warrant a jump in i


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