Researching Index Funds

Thanks buddy

This is not a complete list and includes only no-load index funds. The table below the charts contains information on Management Rxpense Ratios.

Doug,

So what's your point?

The Globefund list is far more comprehensive. It includes many more no-load funds (as well as load funds and seg funds.) The MERs (as well as short and long term performance data, asset size, distribution history, charts, fund company websites, and much more) are just a click away.

There are more index funds than this, although this is likely more than 90% of the ones out there. Alas, there is no category for index funds per se in any of the listings. An example of index funds that don't have the word index in their name are the "Growth" funds at Canada Trust. AmeriGrowth tracks the S&P500, EuroGrowth tracks Europe, GlobalGrowth tracks the World Index, AsiaGrowth, etc.

There are likely other companies that did not put "index" in the name.

H

Bylo Selhi:

So what's my point? Why should I provide a link to my web site when the Globefund has much more data available? My point is that the index funds on my web site, being no-load, do not require any fees to buy or sell. The table below the charts show which companies offer the lowest Management Expense Ratios. Now, it may be possible to find this information on the Globefund but but you have to hunt for it.

I believe that my site shows where the best deals are. If an investor can avoid paying front or rear end loads and select index funds with a MER of 0.5% instead of over 1%, then the investor is going to do much better over the long term. That is my point.

Doug,

the index funds on my web site, being no-load, do not require any fees to buy or sell.

Fine, but the list isn't comprehensive. Many good no-load index funds are absent, most notably CIBC's.

The table below the charts show which companies offer the lowest Management Expense Ratios.

Not so. See next point about lower MERs

If an investor can avoid paying front or rear end loads and select index funds with a MER of 0.5% instead of over 1%, then the investor is going to do much better over the long term. That is my point.

Great objective, but FE load funds are now generally available at 0% load.

The lower the MER the better, so why ignore CIBC index funds which, for accounts of more than $150K, offer a rebated MER of 30bp. That's way lower than 50bp! And both CIBC and Royal offer further rebates for even larger accounts. Further, CIBC has lower account minimums as well.

Your objective in summarising index funds is a good one. Perhaps your own account isn't large enough, but since you're making this information available to the public you might want to consider that some may have such accounts.

I notice that the funds on each graph have differing starting dates. For example, in the Can equity graph, could it be that Altamira's apparently poorer performance is primarily because its original value starts 4 months after Royal's? What am I missing?

Bylo:

"The lower the MER the better, so why ignore CIBC index funds which, for accounts of more than $150K, offer a rebated MER of 30bp."

Yes, I am aware of the CIBC deal for investors who can invest over 150K in a single fund (that lets me out). CIBC also has an interesting new fund that tracks the NASDAQ (MER slightly over 1%). I may add some more CIBC funds in the future but I won't even try to cover all the funds. I cover those that are of interest to me.

"I notice that the funds on each graph have differing starting dates."

Yes, some of the funds were started less than one year ago, hence the chart can not show the full year performance and this accounts for the apparent difference in yearly performance. If two funds track the same index, over the entire year the lines on the chart will fall almost on top of one another except that the fund with the higher MER will show a slightly lower gain over the year.

, I am aware of the CIBC deal for investors who can invest over 150K in a single fund

Not quite accurate Doug. It has to be over $150k in CIBC index funds in one account, not in a single fund. I have 4 CIBC index funds in the same RRSP account.

The resulting mer is 0.30% and it seems to me this fact is not that well advertised by CIBC. Seems almost like they want to keep it a secret.

George$:

150K per account is much more attractive than 150K for each fund. CIBC should be pushing that point. I might even get interested in that deal myself.

I recently invested with CIBC - in their intl index fund - and just exceeded the minimum for the rebate.

Strangely, the guy who took my business told me, when I asked about the rebate "I dont usually tell people about that - I just let them get a pleasnat surprise when the rebate comes". Yes they do seem to want to keep it secret. I have also asked for a statement of their policy in writing, and have never received it (though I did see it at Bylo's site). I have had some of the details explained to me verbally though - for example, the account must be above $150,000 in each SPECIFIED quarter, not just each 90 days after purchase.

The guy I spoke to also told me NOT to buy because of the rebate. I told him that was the ONLY reason I was buying his fund rather than an alternative. He said the rebate may go. I said "if it does, so will I".

But I added, " I am sure I am not alone in that, and I get the impression you want to remain the index leader in Canada."

Strange policies. Hurry up Barclays.

AS i have said before, what is the reason for a Mutual Fund that trys to momic an Index when you can buy the Index on the AMEX???

Are you not just buying another Mutual Fund.????

Are you not just buying another manager????

Bylo, help me on this one as i have a good chunk of change waiting to be directed after the next big one and I am lining up for DIA, QQQ, SPY, and WEBS.

doug,

I cover those [index funds] that are of interest to me.

Perhaps you should indicate that on your website. Otherwise folks might think the list is comprehensive.

Re the charts, by showing two similar funds with different start dates but the same original value on the same chart one might get the mistaken impression that the second fund significantly underperformed the first. Perhaps you might want to compensate for that by adjusting the starting value of the second fund to coincide with the then current market value of the first.

When comparing two index funds with the same mandate the most significant factor is the MER. Note however, that some 100% RRSP-eligible index funds hedge currencies and others do not. This can make several percentage points difference in annual returns (compare the 1998 return of the S&P 500 in US$ with CA$.) Perhaps your tables and charts should indicate this.

homewood,

The rebate info that's published on my site wasn't easily obtained. I first requested it from CIBC's general manager for mutual funds. After no response to several such requests, I got Cadsby's (CIBC Securities' president and CEO) fax number and asked him. Only then, did I finally get what's on my site. And you're right; it's not very reassuring for long term investors.

Howard:

Howard, to add to what Bylo has written above, WEBS Canada is a VERY inefficient way of getting Canadian equity exposure.

From its prospectus on the AMEX, the MER is 1.14%, on top of which one would have to pay brokerage commissions in and out (in $US). There are lots of Canadian Index Funds with an MER of less than 1%.

i like to trade, write options, and with Etrade commissions are not a concern.

i'll stick to AMEX.

Bylo, $1,000 to invest, this is not who should be buying equities?????

Howard,

Alas, not everyone has your vast wealth and/or investment knowledge. For those who do, perhaps the higher MERs of WEBs and DIAs plus the brokerage costs can be offset through the judicious day-trading of options. I really doubt it -- and numerous studies bear that out -- but perhaps you're a 6-sigma exception.

Now for the rest of us financially and intellectually challenged types who might find it a bit of a stretch to invest $1,000 a month into an IPU, let me repeat that a $30 brokerage fee works out to the equivalent of a 3% load, front and back.

And even if one has a paltry $100,000 invested in a single IPU, at the current dividend yields for the TSE and S&P, that generates barely $250 per quarter. Reinvest that and you lose at least 10% right up front.

OTOH with traditional no-load open-ended index mutual funds 100% of one's money gets invested from day one and is automatically reinvested each quarter or each year.

To each his/her own.

Bylo, As I detect the sarcasm dripping from your posting, I been poor and I been rich, and Rich is much better.

the only thing Money can't buy is Poverty.

Yes I do just fine, but the journey must start with a few steps , and to make a few mistakes along the way is part of the learning process.

A million does not just materialise, it is built over time ,judiociously.

Mutual Funds are like when you first learn to ride a bike, you have litle training wheels.

Some of us find we don't need those trainers anymore.

Perhaps the following link adds to the question of:

Howard, with all due respect, it makes no sense for a Canadian to buy WEBS Canada.

Since you mentioned that you have an account with Altamira, their index fund eats less than half the MER that you're paying at WEBS (0.5% vs. 1.14%). If you want to trade more actively than 3 months, than you can buy TIPs and/or HIPs on the TSE @ 0.05% MER, on which you can write or buy much more liquid options than the ones on WEBS.

In a month or so, you'll be able to buy the new S&P/TSE60 index shares (i60), sponsored by Barclays Global Investors, with a MER capped at 0.17% - they will be listed both on TSE and on AMEX.

AFAIK, any broker in Canada will charge you the same nominal commission amount in $US on a purchase on a US exchange. So instead of paying CA$29, one must pays US$29, one and a half times that much.

Care to explain the merits of your strategy? (E-Trade will let you buy mutual funds too)

Howard - I am certainly not trying to persuade you to buy MF's, with or without training wheels. You obviously know a lot more than I do about day trading and options, and perhaps that makes up in spades for the points made by other posters here.

But I must confess I dont understand why you would buy (or advocate buying if you dont actually do it) WEBS in non-north American countries, with their high MERs (or equivalent) and a broker's commission (as far as I know your darling E*Trade still charges a brokerage fee) when you can buy an international index at 0.5% MER, with no entry or exit cost - or presumably in your case, since you are not investing toddlers sums of $1000 a month - the 0.3% charged by CIBC on larger portfolios.

Of course, if you prefer to buy WEBS, noone here will shed a tear, least of all your broker. But you DID ask! You have what seems to me an abundance of logical responses. If you choose to ignore them, thats fine. If we are missing something, please enlighten us.

i by WEBS because i like the ability to instantly trade as necessary.

WEBS Canada, not sure why i bought that, think I was filling in one account, not much , think about 4k.

I don't analyze thses positions that much as they are generally fillers i don't pay much attention to.

my main pre occupation is the options Trading.

All this discussion of rebates on MER is great, but has anyone picked up on the fact that they are a payback on an MER already paid and Revenue Canada deems this to be "Other Income"? Check your T4 next February - SURPRISE! Great discussion, but make sure you look at your net cost after tax if you are really chasing 20 and 30 bps in extra value. This blows most of the above arguement for nonregistered accounts. Sorry.

McCallum, not sure I follow your "This blows most of the above arguement for nonregistered accounts."

Is this 60 bp rebate [for CIBC from 0.90% to 0.30%] then not the same as a cash dividend? Even if you pay your taxes on it, does it not come out in the wash in the end when you sell the fund and pay your capital gains?

It seems to me that if one looks at the mutual fund industry in the US today, in all likelihood Canada will experience the same a few years hence.

Thus the following Fortune article may well foreshadow the future here in the north:

Vanguard's total net sales of all its stock and bond funds during the first seven months of this year were an astonishing $36 billion, twice the total brought in by Fidelity over the same period.

A thriving index business, however, is exactly what the industry doesn't need. It's hard to imagine a purer commodity than a fund that strives to produce the same gross return as its competition. Indexers have no way to compete except on price, which leaves scant room for the margins the industry has grown accustomed to. Vanguard's 500 Index, for example, collects a diaphanous 0.18% a year from its shareholders, vs. 1.5% for the typical equity fund.

I think MACcallum makes a prescient observation that for top and middle marginal rate taxpayers, the taxable 60 bp rebate from CIBC makes its index fund lineup more expensive on an after-tax basis (ignoring the present value of the deferred tax liability on the rebate) than its competitors who only levy 50 bp MERs.

Mikale. I presume this observation only applies to non-RRSP accounts. [All my CIBC index funds are in RRSP accounts.] I presume your reasoning is that a 50% tax on 60 bp rebate in effect adds another 30 bp to the effective mer, making it 0.60% and not 0.30%.

I wonder why CIBC has gone the rebate route, rather than simply a different mer of 0.30% Is there anything in it for CIBC to do it this way?

For outside the RRSP if the actual CIBC mer was 0.30% [without the rebate mechanism in place] this would have the effect of adding more capital gains unto my fund [relative to the 0.90% mer folk] and I still would have to pay tax on it at some point when I cash in the fund. Granted it is a deferred tax, but I do not escape the tax.

Do I have it right?

For those with the $150K plus needed to realize the rebate outside of an RRSP, there are less expensive vehicles. SPDRs and midcap spiders (MDY) for example.

Also, with this kind of coin, it might be worth the effort to set up a US broker account that gets you access to Vanguard funds.

I dunno George as to the rebate for registered accounts. I presume that CIBC as trustee receiving a taxable rebate for the RRSP holder (beneficiary) would have to flow it through somehow.

I wonder why CIBC has gone the rebate route, rather than simply a different mer of 0.30% Is there anything in it for CIBC to do it this way?

I suspect the rebate mechanism lets them avoid setting up multiple classes of shares for the same fund. It's also easier for them to adjust (or even kill) the rebate since no changes to the prospectus are required.

it might be worth the effort to set up a US broker account that gets you access to Vanguard funds.

Unfortunately Waterhouse (and other US brokers) have reduced the number of different Vanguard funds that they offer. For example, earlier this year they abruptly stopped selling the Europe, Pacific and Emerging Markets funds. They also have not yet offered any of the new US small cap and tax-managed funds that Vanguard has introduced. One theory: this is an industry reaction to Vanguard's firm policy of refusing to pay shelf fees to fund supermarkets.

The comments regarding the taxable treatment of rebates do only apply to nonregistered accounts. Most of the investing public have probably not figured this out. The investors with the higher balances are most likely in the higher tax brackets and will not be getting the full benefit they perceive. Is tax treatment of investing not one of the most important considerations in evaluating performance drag?

Is tax treatment of investing not one of the most important considerations in evaluating performance drag?

It sure is! But we're talking about the tax treatment on a 60 bp rebate. Someone in the top tax bracket would realise only 30 bp of the rebate so their effective MER would be 30+30=60 bp at CIBC vs. 10 bp less at Altamira or Royal.

Compare that with actively-managed funds whose high turnover can generate several percent in taxable distributions (e.g. a couple of years ago Trimark fund paid out 24% in one annual distribution!)

I'll take a 10 bp drag over a 1,200 bp drag any day.

P.S. to my post of 4:23pm: Another reason for considering CIBC is they have the widest selection of index funds in Canada. For example (a) neither Altamira nor Royal offer a "regular" EAFE index fund, (b) CIBC is the only Canadian fund company that offers a US Wilshire 500 index funds, (d) they are the only ones that offer a Canadian short-term bond fund, (d) CIBC offers RRSP eligible Japanese and NASDAQ index funds, etc.

Hey, all I am saying is it would be nice for people to know what they are really getting. Why not compare apples to apples? Low turnover is one of the best advantages of index funds so a comparison to an active fund with high turnover doesn't really add a lot of value here. It would be nice for all the players in the index market to be on equal ground, and clearly they are not. The players offering 50 bps MERs are not only leading the pack, they are not pulling the wool over their unitholders eyes with gimmicks. I think the discussion above nailed that. And are there not diminishing marginal returns from multiple multiple funds? Once you get past four or five well diversified index holdings, who really cares if you hold them for the long term. Just make sure your after tax cost is as low as it can be.

Why not compare apples to apples?

I was trying to make a point, i.e. that 10bp is not all that significant, rather than argue index vs. active. I acknowledge that my example was an extreme case and that most actively managed funds (including Trimark) make smaller distributions most of the time.

The choice of index (S&P 500 vs. Wilshire 5000 vs. DJIA) can make far more than 10 bp difference in returns.

It would be nice for all the players in the index market to be on equal ground, and clearly they are not.

That's free enterprise. If CIBC's net fees are 10 bp higher in non-registered accounts then by the same logic they're 30 bp lower in RRSPs.

And are there not diminishing marginal returns from multiple multiple funds? Once you get past four or five well diversified index holdings, who really cares if you hold them for the long term.

That can be debated [e.g. by the likes of DFA -- not me :-)] but in any case most people would consider an EAFE fund to be one of those 4 or 5 core funds.

While the others offer 100% RRSP eligible EAFE funds only CIBC offers a non-hedged version. Given the disadvantageous tax treatment of RRSP funds that are held outside of RRSPs, I'd choose CIBC's regular fund any time vs. the others even if they have a somewhat lower after-tax MER.

Just make sure your after tax cost is as low as it can be.

Agreed. See previous point.

Bylo Selhi:

You mentioned in an earlier posting that the Globefund web site has information on Management Expense Ratio. I have not been able to find this. Could you give me a link to that site. Thanks.

Bylo Selhi:

Thanks for the link to information on MER's. What I actually meant to ask for was information on mutual fund distributions. If you have this handy, could you show me where that is located on the Globefund site. Thanks.

Just click on the fund name in the list (see hotlink above) and scroll down the fund summary until you get to something like:

Distribution Report (18 Months Up To September 29, 1999)

Bylo:

Thanks again for the help in locating this information.

MaCcallum & Bylo:

Let me prove that an MER of 0.9% with a rebate of 0.6%, taxable annualy (CIBC), is better that an MER of 0.5%.

Assumptions:

- total market return = 10%

- gross market dividend rate = 2%

- start with $10,000 and take distributions in cash.

For the fund with an MER of 0.5%, you'll get a dividend distribution of 1.5%, i.e. $150. On this you pay tax, say at 35%, net income for you = $97.50. Your fund has grown at 8%, so you'll also have $10,800 in fund units.

For the CIBC fund with an MER of 0.9%, you'll get a dividend distribution of 1.1%, i.e. $110. In addition to this you get the MER rebate distribution of 0.6%, i.e. $60. Assuming it is taxed as interest at 50%, your total net income is $101.50. Your fund has grown at the same 8%, so you'll also have $10,800 in fund units.

Bottom line: at the end of the year, in both cases you'll own units valued at $10,800. With the CIBC fund, you've also got an after tax income of $101.50, in the other case your income is $4 less.

One side note for Bylo. One can easily build a "regular" (non-derivatives) EAFE index fund at Altamira, by buying their Pacific & European Index funds, in a 30% / 70% split. For accounts less than $150,000, it is a more attractive MER (0.7%) than the CIBC offer (0.9%).

adrain,

Thanks for the analysis. I suppose that for those in the top tax bracket the difference is, er, marginal :-)

Good point about Altamira. That's actually an advantage for those who prefer to hold those two asset classes separately and then rebalance periodically.

Adrian, have you not oversimplified the MER calculations? You have based the MER amount on the initial amount invested, which I'm sure is not how it's done (i.e. $50 on $10,000). It's usually based on some sort of formula using the average closing unit price each quarter or something of that nature.

This will have the effect of decreasing the dividend distribution in both cases (but more so on the higher MER fund) and increasing the higher taxed MER rebate. I believe this will swing the balance in favor of the low MER fund (e.g. do your calculations with a MER based on an average fund value of $10,400 and see what happens).

You can't simply deduct the MER from the dividend yield, as the dividend yield will be dropping as the share values increase, especially if you are not re-investing distributions.

Because of the tax situation, the lower MER fund is better than the rebate approach for non RRSP investments.

Chuck M - Good points on the MER analysis. A few more questions for Adian - Calculations for a rebate would likely be based on a rolling average of daily closing values would they not? In addition, markets don't always go up. What if it's flat over a quarter. What if it goes down?

Chuck & MaCcallum:

The dividend yield does not need to drop as the share values increase - dividends tend to rise over time. Calculation of MER & the rebate is done daily - but it does not really matter. Neither is it important, for this analysis at least ;-) , if the market goes up. down or sideways.

The bottom line is that both funds will have distributions equal to the gross dividend yield minus the final (in one case discounted) MER. With the CIBC rebate, you get more income than with the 0.5% MER. If indeed the rebate is treated as interest (I would guess that it should be capital gains), than you are comparing 0.6% in the form of interest with 0.2% (0.5-0.3) in the form of dividends.

At most all levels of income, the CIBC fund will win. Don't forget that for the comparison to be possible, you need to have 150k invested in CIBC index funds - so you probably are not in the lowest tax bracket.

Last paragraph should start with: "At most levels of income"

I'm sorry if I switch modes just breifly, but with all this talk about index funds, WEBs etc I pulled up some info on the 17 or so WEBs currently available. One in particular caught my attention :WEBS BELGIUM (AMEX:EWK). The dividend on this is 4.23 which amounts to about a 27% dividend. Why wouldn't you buy this WEB and hold it for a couple of days prior to the EX-DIV date of Aug 25 and then sell it. I know there must be more to it but I don't know what ? Can someone please explain.

a side note:

I love watching how threads develop, evolve, transform, degenerate and revive....its soooo organic and Darwinian.

SC

I guess I'm a revivalist. It seems more efficient to have a few long threads on a generic topic than a large number of short ones scatterted hither and yon.

Or is this being Darwinian? But this off-topic, another mutation I fear, thanks to you.

SC

I guess I'm a revivalist. It seems more efficient to have a few long threads on a generic topic than a large number of short ones scatterted hither and yon.

Or is this being Darwinian? But this off-topic, another mutation I fear, thanks to you.

The s&P/TSE 60 units are now available for purchase on the TSE. There is more information available at their web site