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investor clinic

Investors have an endless appetite for information about exchange-traded funds, judging from the reader e-mails we get at Investor Clinic. Bonds are right up there, too.

So today we'll tackle questions on both topics. We'll also provide a tip for investors who are tired of slogging through return-of-capital calculations at tax time.

Admit it: You just can't get this kind of excitement watching the World Cup.

I'm trying to understand the risks associated with ETFs. Can an ETF investor lose all their money because the issuer goes bankrupt? - G.V.

No. ETFs are structured legally as mutual fund trusts, and all assets are held by a third-party custodian on behalf of unitholders. So, in the unlikely event the ETF company were to become insolvent, it would not affect your investment.

"The assets are yours," explained Oliver McMahon, director of product management for iShares Canada. "In the worst-case scenario, there is no way that the assets of the fund are going to get tied up in the bankruptcy proceedings."

Som Seif, chief executive officer of Claymore Investments, added: "If a manager couldn't fulfill its duties, another manager would be assigned to manage the fund, or the fund would be wound down and investors would receive the full net asset value."

For investors, the more immediate risk with ETFs is that the underlying securities, whether stocks, bonds or commodities, will decline in value.

Why is there so little transparency with corporate bonds? How does a retail investor see a good range of what is available, and at what price, just as we do with common stocks? - D.H.

You're right that the bond market, both corporate and government, is less transparent than the stock market. That's because stock and bond markets are fundamentally different.

Stocks typically trade in a centralized "auction market" where prices are posted for all to see. Brokers earn a commission for putting buyers and sellers together.

Bonds, on the other hand, trade in what's known as a dealer or principal market. Instead of acting as an agent, the dealer trades bonds out of his own inventory, earning a potential profit on the spread between what he paid for the bond and what he sells it for. Because there is no central bond exchange, prices are not as transparent.

However, there are several websites that post bond prices from various investment dealers. Globeinvestor.com publishes a limited selection of corporate, federal, provincial and municipal bonds (from the main page, click on the "markets" tab, and then "bonds.") Globeinvestorgold.com offers a broader selection of quotes.

Two other public sources for bond prices are canadianfixedincome.ca and canadianbondindices.com. Keep in mind that these are prices for wholesale transactions. If you're a retail investor buying a bond through a discount or full-service broker, you'll likely pay more because there will be a larger markup embedded in the price.

With bonds, it pays to shop around.

"I can tell you from long experience there are lots of discrepancies in prices between dealers," said Hank Cunningham, investment adviser at Odlum Brown and author of In Your Best Interest: The Ultimate Guide to the Canadian Bond Market. "It behooves you to get more than one quote."

One suggestion is to open two accounts - one with a discount broker and a second with an adviser, for example - so you can compare prices between the two, he said.

For distributions that include some return of capital, can you suggest an easy way to keep the adjusted cost base (ACB) up to date? Maintaining a spreadsheet to have a current ACB is a pain. - B.M.

You may want to check out acbtracking.com, a website that calculates the adjusted cost base for more than 700 income trusts, ETFs, closed-end funds and split shares. You enter the date, price and quantity of your buys and sells, and the website calculates your ACB and capital gain or loss.

It also gives you a detailed summary of all the cash distributions, stock splits, consolidations, "phantom" non-cash distributions and other activity in the security. A bundle of 10 calculations (the minimum you can purchase) costs $85. The more calculations you buy, the cheaper each gets.

"Working out the ACB manually is a daunting task. I think [the website]is wonderful," said Denis Laplante, a retired engineer in Montreal who has used it extensively and recommended it to friends.

According to acbtracking.com co-founder Kathy Hill, accountants and advisers make up about 90 per cent of the website's customers, with individual investors like Mr. Laplante accounting for the remaining 10 per cent.

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