January 4th 2005 Investing in Exchange Traded Funds (ETFs): DIAMONDs, SPDRs, Qubes, HOLDRs, VIPERs, BLDRs, iShares, iUnits and Frescos

They are simple and valuable investments with strange sounding names! Exchange Traded Funds (ETFs) essentially are mutual funds that trade like a stock. They are baskets of securities held in a trust (just like mutual funds) and can be traded as a listed security on a stock exchange (just like a stock).

Differences between mutual funds and ETFs  Securities held in most mutual funds are actively managed. Securities held in ETFs track an index established by a stock exchange. Selection of securities is predetermined (i.e. passively managed). Accordingly, the cost of managing Exchange Traded Funds and their corresponding Management Expense Ratios (MERs) are significantly less than mutual funds.  Mutual funds are priced once a day based on their net asset value at the end of the trading day. ETFs are priced in the market during the trading day based on their tracking value of the index that they represent.  Mutual funds hold securities that are actively bought and sold during the year by managers who are using their expertise and experience to improve portfolio returns. ETFs, by definition, hold securities that are infrequently changed, and therefore tend to have lower capital gains distributions at the end of the year.

Differences between listed securities and ETFs  Buying a diversified portfolio of individual securities, that approximately represents the market, can be time consuming and expensive. In contrast, buying an ETF, that holds a diversified portfolio of securities representing the market, can be completed easily in one trade.  Transaction costs normally are lower for ETFs than for individual securities (particularly on broadly based ETFs) because bid/ask spreads for ETFs frequently are less.

Why the strange sounding names?

The names frequently are an acronym for an Exchange Traded Fund:  SPDRs (also called SPYDRS): Standard & Poor’s 500 index Deposit Receipts  DIAMONDS: Dow Jones Industrial Average tracking unit.  VIPERS: Vanguard Index Participation Equity Receipts  Qubes: based on symbol for the NASDAQ 100 tracking units: QQQQ.  HOLDRs: Holding Company Depositary Receipts An Example using SPYDRs

SPYDRs are an Exchange Traded Fund that tracks the S&P 500 Index. SPYDRs trade approximately at 1/10th the value of the Index. If the S&P 500 Index is trading at 1200, SPYDRs (Symbol: SPY) will trade at almost exactly $120 per unit. The cost of 100 units will be $120 x 100 = $12,000 U.S.. If the S&P 500 Index rises to 1300, the price of SPYDRs will increase to $130. The value of 100 units will improve to $13,000.

Types of Indices Tracked by ETFs

Five types are available:  ETFs on broadly based indices (e.g. S&P 500 Index, Dow Jones Industrial Average, S&P/TSX 60 Index)  ETFs on sector indices (e.g. health care, high tech, financial services)  ETFs on style indices (e.g. growth, value, small cap, medium cap)  ETFs on indices of countries or regions outside of North America (e.g. the Euro 350 Index, the EAFE Index)  ETFs on bond indices. Currently, 121 U.S. equity based ETFs, 8 bond based ETFs, 43 international Based ETFs, one commodity based ETF and 13 Canadian equity based ETFs trade on North American exchanges. A complete list is provided at the end to this report.

Reasons to own ETFs

 Easy to understand and to follow. The media frequently comments on events that influence the performance of broadly based indices such as the S&P 500 Index, the Dow Jones Industrial Average and the S&P/TSX 60 Index. Their comments also apply to performance of ETFs that track broadly based indices.  A convenient way to build a diversified portfolio. Each ETF owns a basket of securities. For example, iUnits in the S&P/TSX 60 Index holds a diversified portfolio of Canada’s top 60 companies. Risks associated with ownership of individual securities in the basket are reduced.  A low Management Expense Ratio (MER) relative to actively managed investments. The average MER on a broadly based Canadian or U.S. mutual fund actively managed by a Canadian based investment firm is 2.72%. In contrast, the MER on iUnits on the S&P/TSX 60 Index is only 0.17% and the MER on SPYDRs is only 0.10%. A list of MERs on ETFs is provided at the end of this report.  More tax efficient than actively managed investments. Capital gains distributions at year-end from U.S. traded ETFs currently are nil due to their legal structure. Capital gains distributions at year-end from Canadian traded ETFs are low and frequently are nil. The reason: changes in indices are infrequent and, therefore, chances of realizing a capital gain for tax purposes due to index changes are low. In contrast, a portfolio of actively managed investments frequently is adjusted and is more likely to distribute taxable capital gains at the end of the year.  Easily bought and sold (particularly ETFs on broadly based indices). SPYDRs were the most actively traded equity security in the world in 2004 based on value of trading. Qubes were the most actively traded security in the world in 2004 based on the number of shares that traded. Volumes in both ETFs rose in 2004. Average daily volume in i60s, Canada’s most actively traded ETF was approximately one million per day in 2004. In addition, bid/ask spreads on broadly based ETFs frequently are $0.10 per unit or less.  Better performers relative to most actively managed investments. History shows that most actively managed investments have been unable to exceed the performance of their benchmark index over an extended period of time. A 10 year study of U.S. equity mutual funds completed by Morningstar at the end of 2003 revealed the following:

Percent of U.S. Active Managers Underperforming Their Benchmark

Type Value Blend Growth After After After Tax Tax Tax

Large Cap 98% 95% 88%

Mid Cap 91 89 84 Small Cap 81 43 34

S&P recently completed a comparable study on Canadian active funds. Data to the end of September 2004 revealed the following:

Percent of Canadian Active Managers Outperforming Their Benchmark Index

Category Comparison One Year Three Years Five Years Index Canadian Equity TSX Index 17.5% 16.4% 35.4% Total Return U.S. Equity S&P Index 25.3% 27.4% 25.8% Total Return Cdn. Dollars

According to Fundata Canada, the top performing fund in Canada in 2003 among Canada’s largest 53 funds was iUnits on the S&P/TSX 60 Index (i60s) with a total return of 25.2%.

The cost of buying and selling ETFs Investors can choose between buying and selling ETFs in a transaction-based account or in a fee-based account. Costs in a transaction-based account will be the regular commission charged by your broker for completing an equity trade. Costs in a fee-based account in most cases will be zero for the transaction, but a fee based on the value of the portfolio will be assessed periodically. Investors, who make most of their own investment decisions, probably will prefer a transaction-based account. Investors, who rely on their broker to offer investment advice on a continuing basis, may prefer to complete transactions through a fee-based account. A fee of 1.5% per year for an equity account valued between $100,000 and $500,000 is approximately “the going rate” by Canadian investment dealers.

Other features of ETFs

The following information was obtained from publicly available web sites and from Howard Atkinson’s book entitled, “The New Investment Frontier II: A guide to Exchange Traded Funds for Canadians”:

 ETFs listed on the Toronto Exchange are 100% eligible as Canadian content in tax deferred accounts (e.g. RRSPs and RRIFs) including iUnits on the S&P 500 Index and iUnits on the International Index.  ETFs listed on U.S. exchanges also can be held in a tax-deferred account, but as part of the foreign content of their portfolio.  Most ETFs pay a quarterly dividend.  Dividends paid by ETFs listed on the Toronto Exchange are eligible for the Dividend Tax Credit.  Trading hours correspond with the regular trading hours of the Toronto Exchange and U.S. exchanges (normally 9:30 AM – 4:00 PM Eastern time).  All ETFs have redemption features. Holders with large positions in ETFs are allowed to exchange their units for shares that underlie the unit. Net result: units consistently trade at or near their net asset value.  Many ETFs have listed options and LEAPS. A list of optionable ETFs is provided at the end of this report.  Dividend re-investment (DRIP) programs on broadly based ETFs are available through selected brokers.  ETFs are marginable.  ETFs can be shorted. They are exempt from the “up tick” rule in the U.S. and the “last trade” rule in Canada.  ETFs are sponsored by well-known financial institutions. Barclays Global Investors is the sponsor of Canada’s actively traded ETFs.

Portfolio Strategies

Core and satellite investing. One of the more popular strategies! Investors place a large portion (i.e. the core) of their equity portfolio into Exchange Traded Funds. This portion acts as the anchor for the portfolio, ensuring that portfolio performance will approximate stock market returns. Size of the core depends upon the amount of stock market risk that the investor is willing to assume. Investors, who are satisfied with realization of returns that approximate the market, will place a larger portion of their portfolio into ETFs (say 40%-80%). Investors, who are willing to take more risk in order to improve chances of “beating the market”, will place a smaller portion into ETFs. The remainder of the portfolio is invested into “special situations” with the potential to outperform the market. Choices include attractive equities, specialty mutual funds, sector ETFs, hedge funds, etc.

Portfolio Rebalancing.

ETF positions can be adjusted easily when equity, fixed income and cash weights in a portfolio need to be rebalanced due to changing market conditions. With one trade in an ETF of a broadly based index, equity positions can be increased or reduced.

Sector Investing

Investors can choose, when timely, to over weight sectors that have better potential. Investors can choose between six Canadian sector ETFs and over 60 U.S. sector ETFs.

Seasonal Trend Investing.

North American equity markets tend to be strongest from the end of October to the end of March /April. Investors can take advantage by owning broadly based ETFs during the period of seasonal strength and by switching into treasury bills during the remainder of the year.

Sectors in equity markets also have seasonality and can be traded accordingly. See the Special Report section at www.dvtechtalk.com for background.

Risks

By definition, an investor holding an Exchange Traded Fund will never outperform the market. The investor will track the market (less a small MER).

Some ETFs have a high percent of their portfolio invested either in a sector or an individual security. Concentrations can influence the volatility and performance of the ETF. One possible solution is to own a “capped” version of the ETF where maximum weight in the portfolio is established. Several “capped” ETFs are available on the Toronto Exchange.

A small number of ETFs hold a basket of securities that are known to be volatile. Most hold high tech securities with a history of significant price swings. Monitoring ETFs through the Internet

The following web sites are useful for investors who are looking for more information about ETFs:

Sites for a quick overview and description of ETFs that trade on U.S. exchanges: www.nasdaq.com www.exchangetradedfunds.com www.indexfund.com

ETF content and weights:

Canadian units: www.iunits.com TD ETF information: www.tdassetmanagement.com IShares information: www.ishares.com Select sector SPDRs information: www.spdrindex.com StreetTracks ETF information: www.streettracks.com Merrill Lynch HOLDRs information: www.holdrs.com Vanguard ETF information: www.vipers.vanguard.com

Index providers:

S&P indices: www.standardandpoors.com Dow Jones indices: www.djindexes.com MSCI International indices: www.msci.com Russell indices: www.russell.com Wilshire indices: www.wilshire.com Exchange Traded Fund List

Equity Index Units Traded in Canada

Name SymbolMER Optionable (%) IUnits S&P/TSX 60 Index XIU 0.17 yes IUnits S&P/TSX 60 Capped Index XIC 0.17 no IUnits S&P 500 Index RSP Fund XSP 0.30 no IUnits MSCI Int’l Equity RSP Fund XIN 0.35 no IUnits S&P/TSX Canadian Capped Energy Index XEG 0.55 yes IUnits S&P/TSX Canadian Capped Financial Index XFN 0.55 yes IUnits S&P/TSX Canadian Capped Gold Index XGD 0.55 yes IUnits S&P/TSX Canadian Capped Info.Tech. XIT 0.55 yes IUnits S&P/TSX Canadian Capped Midcap Index XMD 0.55 no IUnits S&P/TSX Canadian Capped REIT Index XRE 0.55 no Merrill Lynch CP HOLDRS HCH * no TD S&P/TSX Composite Index Fund TTF 0.25 no TD S&P/TSX Capped Composite Index Fund TCF 0.25 no

Equity Index Units Traded in the U.S.

Major Market ETFs SymbolMER Optionable (%) Broad Market Total Stock Market VIPERs VTI 0.15 yes IShares Russell 3000 IWV 0.20 yes IShares DJ US Total Market IYY 0.20 no IShares S&P 1500 ISI 0.20 no Fidelity NASDAQ Composite Tracking Stock ONEQ 0.30 no Extended Market VIPERs VXF 0.20 no

Large-Cap Diamond Trust Series 1 DIA 0.18 yes NASDAQ 100 Index Tracking Stock QQQ 0.20 yes IShares S&P 100 OEF 0.20 yes IShares S&P 500 IVV 0.09 no IShares NYSE 100 NY 0.20 no IShares NYSE Composite NYC 0.25 no Standard and Poors Depository Receipts SPY 0.10 no IShares Russell 1000 IWB 0.15 yes StreetTRACKS SPDR O-Strip OOO 0.20 no StreetTRACKS Fortune 500 FFF 0.20 yes Rydex S&P Equalweight RSP 0.40 no Large Cap VIPERS VV 0.12 no Morningstar Large Core JKD 0.20 no Custom IShares Dow Jones Select Dividend DVY 0.40 no PowerShares Dynamic Market Portfolio PWC 0.60 yes PowerShares Dynamic OTC Portfolio PWO 0.60 yes Power Shares Dividend Achievers Portfolio PEY 0.50 no

Mid-Cap IShares S&P MidCap 400 IJH 0.20 yes S&P Midcap 400 Depository Receipts MDY 0.25 yes IShares Russell Midcap IWR 0.20 yes Mid-Cap VIPERS VO 0.18 no Morningstar MidCore JKG 0.25 no

Small Cap IShares S&P Small Cap 600 IJR 0.20 yes IShares Russell 2000 IWM 0.20 yes Small-cap VIPERS VB 0.18 no StreetTRACKS DJ U.S. Small Cap Growth DSG 0.20 no StreetTRACKS DJ U.S. Small Cap Value DSV 0.20 no Morningstar SmallCore JKJ 0.25 no

Style ETFs Broad Market Growth IShares Russell 3000 Growth IWZ 0.25 yes

Broad Market Value IShares Russell 3000 Value IWW 0.25 yes

Large-Cap Growth IShares S&P 500/Barra Value IVW 0.18 no IShares Russell 1000 Growth IWD 0.20 yes StreetTRACKS DJ US Large Cap Growth ELG 0.20 no Growth VIPERS VUG 0.15 no Morningstar Large Growth JKE 0.25 no

Large-Cap Value IShares S&P 500/Barra Value IVE 0.18 no IShares Russell 1000 Value IWD 0.20 yes StreetTRACKS DJ US Large Cap Value ELV 0.20 no Value VIPERS VTV 0.15 no Morningstar Large Value JKF 0.25 no

Mid-Cap Growth IShares S&P MidCap 400/Barra Growth IJK 0.25 yes IShares Russell MidCap Growth IWP 0.25 yes Morningstar Mid Growth JKH 0.30 no Mid-Cap Value IShares S&P MidCap 400/Barra Value IJJ 0.25 yes IShares Russell MidCap Value IWS 0.25 yes Morningstar Mid Value JKI 0.30 no

Small-Cap Growth IShares S&P SmallCap 600/Barra Growth IJT 0.25 yes IShares Russell 2000 Growth IWO 0.25 yes StreetTRACKS DJ SmallCap Growth DSG 0.25 no Small-Cap Growth VIPERS VBK 0.22 no Morningstar Small Growth JKK 0.30 no

Small-Cap Value IShares S&P SmallCap 600/Barra Value IJS 0.25 yes IShares Russell 2000 Value IWN 0.25 yes StreetTRACKS DJ SmallCap Value DSV 0.25 no Small-Cap Value VIPERS VBR 0.22 no Morningstar Small Value JKL 0.30 no

Sector ETFs Consumer Discretionary Consumer Discretionary Select Sector SPDR XLY 0.28 no IShares DJ US Consumer Cyclical Sector IYC 0.60 no Retail HOLDRS RTH 0* yes Consumer Discretionary VIPERS VCR 0.28 no

Consumer Staples Consumer Staples Select Sector SPDR XLP 0.28 yes IShares DJ US Consumer Non-Cyclical Sector IYK 0.60 no Consumer Staples VIPERS VDC 0.28 no

Energy Energy Select Sector SPDR XLE 0.28 yes IShares DJ US Energy Sector IYE 0.60 yes Vanguard Energy VIPERs VDE 0.28 no Oil Service HOLDRS OIH 0* yes

Financials Financial Select Sector SPDR XLF 0.28 yes IShares DJ US Financial Sector IYF 0.60 yes IShares DJ US Financial Services IYG 0.60 no Regional Bank HOLDRS RKH 0* yes Financials VIPERS VFH 0.28 no Health Care Biotech HOLDRS BBH 0* yes Health Care Select Sector SPDR XLV 0.28 yes IShares NASDAQ Biotech IBB 0.50 yes IShares DJ US Healthcare Sector IYH 0.60 yes Pharmaceutical HOLDRS PPH 0* yes Health Care VIPERS VHT 0.28 no

Industrials Industrial Select Sector SPDR XLI 0.28 yes IShares DJ Transportation Average IYT 0.60 no IShares DJ US Industrial Sector IYJ 0.60 no Vanguard Industrials VIPERs VIS 0.28 no

Information Technology – Broad Based IShares DJ US Technology Sector IYW 0.60 yes IShares Goldman Sachs Tech IGM 0.50 yes StreetTRACKS MS High-Tech 35 MTK 0.50 no Technology Select Sector SPDR XLK 0.28 yes Information Technology VIPERS VGT 0.28 no

Information Technology – Internet StreetTRACKS MS Internet MII 0.50 no Internet HOLDRS HHH 0* yes B2B Internet HOLDRS BHH 0* yes Internet Architecture HOLDRS IAH 0* yes Internet Infrastructure HOLDRS IIH 0* Yes

Information Technology – Other IShares Goldman Sachs Networking IGN 0.50 yes IShares Goldman Sachs Semiconductor IGW 0.50 yes IShares Goldman Sachs Software IGV 0.50 yes Broadband HOLDRS BDH 0* yes Semiconductor HOLDRS SMH 0* yes Software HOLDRS SWH 0* yes

Materials IShares DJ US Basic Materials Sector IYM 0.60 no Materials Select Sector SPDR XLB 0.28 yes Materials VIPERS VAW 0.28 no

Natural Resources IShares Goldman Sachs Natural Resources IGE 0.50 no Real Estate IShares DJ US Real Estate IYR 0.60 no IShares Cohen & Steers Realty Majors ICF 0.35 yes StreetTRACKS Wilshire REIT RWR 0.25 no Vanguard REIT VIPERs VNQ 0.18 no

Telecommunications IShares DJ US Telecom Sector IYZ 0.60 yes Vanguard Telecommunication Services VIPERs VOX 0.28 no Telecom HOLDRS TTH 0* yes Wireless HOLDRS WMH 0* yes

Utilities IShares DJ US Utilities Sector IDU 0.60 yes Utilities Select Sector SPDR XLU 0.28 yes Utilities HOLDRS UTH 0* yes Utilities VIPERS VPU 0.28 no

International ETFs Broad Based – International IShares MSCI EAFE EFA 0.35 Yes BLDRS Development Markets 100 ADR ADRD 0.30 No IShares MSCI Emerging Markets Free EEM 0.75 No BLDRS Emerging Markets 50 ADR ADRE 0.30 No

Regional – International BLDRS Europe 100 ADR ADRU 0.30 No Europe 2001 HOLDRS EKH 0* Yes Fresco Dow Jones STOXX 50 FEU 0.30 No IShares S&P Europe 350 IEV 0.60 No Fresco Dow Jones Euro STOXX 50 FEZ 0.30 No IShares MSCI EMU EZU 0.59 No IShares MSCI Pacific ex-Japan EPP 0.50 No BLDRS Asia 50 ADR ADRA 0.30 No IShares S&P Latin America 40 ILF 0.50 No

Asia/Pacific IShares MSCI Australia EWA 0.59 No IShares MSCI Hong Kong EWH 0.59 No IShares MSCI Japan EWJ 0.59 No IShares MSCI Malaysia (Free) EWM 0.59 No IShares MSCI Singapore EWS 0.59 No IShares MSCI South Korea EWY 0.74 No IShares MSCI Taiwan EWT 0.74 No IShares FTSE/Xinhuu China 25 FXI 0.74 No PowerShares Golden Dragon USX China Portfolio PGJ 0.60 No Europe IShares MSCI Austria EWO 0.59 No IShares MSCI Belgium EWK 0.59 No IShares MSCI France EWQ 0.59 No IShares MSCI Germany EWG 0.59 No IShares MSCI Italy EWI 0.59 No IShares MSCI Netherlands EWN 0.59 No IShares MSCI Spain EWP 0.59 No IShares MSCI Sweden EWD 0.59 No IShares MSCI Switzerland EWL 0.59 No IShares MSCI United Kingdom EWU 0.59 No

Americas IShares MSCI Brazil EWZ 0.74 No IShares MSCI Canada EWC 0.59 No IShares MSCI Mexico EWW 0.59 No

EMEA IShares MSCI South Africa EZA 0.74 No

Broad Based – Global StreetTRACKS DJ Global Titans DGT 0.50 Yes IShares S&P Global 100 IOO 0.20 No Market 2000+ HOLDRS MKH 0* Yes

Sectors – Global IShares S&P Global Energy Sector IXC O.65 No IShares S&P Global Financial Sector IXG 0.65 No IShares S&P Global Healthcare Sector IXJ 0.65 No IShares S&P Global Technology Sector IXN 0.65 No IShares S&P Global Telecommunications IXP 0.65 No

Fixed Income ETFs Fixed Income ETFs – U.S. IShares Lehman 1-3 Year Treasury SHY 0.15 Yes IShares Lehman 7-10 Year Treasury IEF 0.15 Yes IShares Lehman 20+ Year Treasury TLT 0.15 Yes Ishares GS $InvesTop Corporate LQD 0.15 Yes Ishares Lehman Aggregate AGG 0.20 Yes IShares Lehman TIPS TIP 0.20 No

Fixed Income ETFs – Canada IUnits on 5 Year GOC bond XGV 0.25 No IUnits on the Scotia Mcleod Bond Index XBB 0.30 No Commodity Based ETFs

World Gold Council Gold GLD 0.40 No

*Expenses for HOLDRS consist of a custody fee of $2 per round lot (100 shares) per quarter. However, the trustee will wave that portion of the fee, which exceeds the total cash distribution.

Comments on Exchange Traded Funds regularly appear at www.dvtechtalk.com

Disclosure: Mr. Vialoux does not own any of the securities mentioned in this report Disclaimer: Comments and opinions offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities.