Indexing In Small Cap and Emerging Markets


Date: 18-Mar-98 - 1:09 AM
Subject: Indexing In Small Cap and Emerging Markets
From: Adam

Hello again everyone.

I'll start of this latest contribution of mine with a confession: The motive for this particular post is not so much an effort to share my experiences with all of you fine people, but rather an attempt to possibly stimulate discussion concerning certain investment products currently lacking in Canada which I personally would be interested in investing in myself should the opportunity present itself.

I've noticed that there seems to be quite a number of forum participants who seem to have warmed to the idea of using indexing instruments which replicate the performance of the TSE 300, S&P 500, and MSCI-EAFE indexes. However, I have a hunch that if the topic shifts to so-called 'less-efficient' markets (small caps, emerging markets, etc.), the appeal of indexing may in fact wane considerably as many investors sense that these are areas where a 'great stock picker' can really shine and earn her keep.

After all, one might argue, there is indeed a lot information which an astute fund manager can uncover which is not 'common knowledge' regarding such off-the-beaten-track stocks as these. combine this with the fact that such issues are not followed nearly as closely as the BCEs, General Motors, and Coca-Colas are, and we see a very real potential for superior gains via the 'active-management' route. Surely globe-trotting scanvenger hunters like Mark Mobius and IPO hawks like our own David Bissett and Allan Jacobs have a much better chance of unearthing hidden 'gems' than some large cap US Equity manager who likely has the same info on a given blue-chip as thousands of other managers/analysts in the country.

Good point. However, I would like to put forth an argument in favour of indexing in so-called Inefficient Markets and let the chips fall where they may. Here goes....

While I agree that the nature of say, emerging market/small cap stocks is one where hard work and intelligent investing on the part of certain fund managers can (and has) paid off, much of the same strong arguments that favour the indexing approach still apply in these areas as well (and some, even moreso):

1) While the average MER of Canadian and US mutual funds sold in Canada is in the 2.00% - 2.20% range, Canadian small caps are around 2.40% while Emerging Markets funds hover in the 2.70s on average. Given the 'typical' Canadian/US/EAFE index mutual fund in Canada is in the 0.70% - 1.25% range, it's likely that a similar passive style applied to the Nesbitt-Burns Samll Cap index (Canadian small Cap), Russell 2000 (US small cap), or MSCI-Emerging Markets indexes could very well result in an even bigger 'gap' for active managers to make up.

2) Whether an market is deemd to be efficient or inefficient, logic would suggest that a fundamental fact of ANY given equity market is that all outstanding shares are owned by someone. Consequently, given that an index is designed to mimic the general direction of a given market, we can still expect a fund that replicates a particular index to beat approximately 1/2 of similar mutual funds in a that equity fund category before expenses are deducted. Consequently, provided that the Index fund's MER is considerably lower than that of their activley-managed competitors, second-quartile performance over the long term would be reasonable to expect.

3) One point on which I agree with fans of activley-managed funds is that, though I expect second quartile results from an index fund (as I mentioned in point 2 above), I suspect that the 'gap' between those managers who can provide substantially-superior long-term returns vis-a-vis the Index will likely be larger than for their large cap counterparts (and similarly, those who hit the bottom half of 4th quartile performance will likely have really 'stunk out the joint' moreso than their large cap bretheren). However, this still requires the investor/financial advisor of picking those chosen few managers who will pull this off long-term, along with all the possible scenarios that could come to pass along the way (manager changes jobs, retires, loses his 'magic touch', etc.). Personally, I'd prefer the dull, boring route of predicatablility re. index returns less MER, but hey, that's me.....

Date: 18-Mar-98 - 2:04 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: PK

Hello Adam -

I read with interest your posting in this thread and the "Gordon Pape" thread and I agree wholeheartly with your assessment(s). Indexing is my preferred strategy and I find it frustrating that I cannot completely implement this strategy with the products currently available in Canada. It seems to me if you believe in active management (or the wise man theory) you have ample choice, but to adequately implement a comprehensive index strategy is very difficult.

The primary difficulty lies in the virtual absence of index products for markets outside of Canada and the US. What I would like to do is implement an investment program with a very specific and fine-tuned asset mix. While the specific percentages are unimportant (they depend on my own assessment of my risk tolerance) I would like to complement my core holdings of Canadian and US equities with minor holdings of "speciality" index products. These would include a European index, a Japanese index, a far-east index and a smattering of selected emerging market indicies. In addition, I would like to purchase a Canadian small cap index. While I can implement this investment program for my core holdings (ie. HIPS, SPDRS, and PH&N Equity as a proxy for the TSE 300) the speciality components are not available to Canadian investors using a low-cost, index approach.

Hopefully, these types of products will become available to Canadian investors in the near future (once again, Vangaurd where are you?). In the meantime, i'll take solice in the fact that what little evidence exists for the merits of active management comes in the small cap and emerging market areas -- although I would move to a complete index strategy in a heartbeat if the products were available.

Once again Adam, thanx for you well thought out postings.

Date: 18-Mar-98 - 3:05 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Joe

Canadian investors are becoming increasingly sensitive about costs which greatly erode into their mutual funds. The concern at the higher MER of active managed funds & the usually large majority of such funds underperforming the S&P500 & TSE300 index funds are currently provoking mounting interest in index funds. Even the lower MER of index funds in Canada, .9% of CIBC & .8% of TD, is still too high when when compared to .2% of Vanguard index funds in US. Vanguard is famous in US for providing a big variety of index funds at super-low MER. Mutual fund investors will have a windfall if Vanguard index funds come to Canada. Refer to the thread: I e-mailed Vanguard.

Date: 18-Mar-98 - 5:55 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Zippo

Low MER Indexing in large caps is a no brainer. All you have to do is compare the indexes with the managed funds to see who wins over the long haul. Of course in Canada, we don't have large cap Value indexes, so we have to subsititue low MER managed funds to get that slice of the market.

No one yet has shown me that small cap indexes can routinly beat decent small cap managed funds. I am willing to change my attitude if shown the evidence. I am therefore willing to pay outrageous MERs for the value added by good small cap managers.

Ditto for Emerging Markets. Fortunately here, we have the venerable no load and low MER Scudder, to save the day.

Date: 18-Mar-98 - 6:54 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: thbox


I like the first point you make particularly, but generally I think the evidence is inconsistent with your view. Here are three points:

(1) I read a piece from the WSJ in February that indicated active managers have beaten the EAFE index in seven of the last ten years. The reason most commonly cited seems to be the active manager's capacity to over- or underweight particular countries in the mix, and the better success analysts have in projecting macro? economic trends in countries relative to stock picking. Investors who avoided Asia (or got out early) for example likely outperformed the index in '97.

(2) Studies on the relationship between MER and long-term performance of mutual funds indicate that low cost funds are the best performers in the most efficient markets. Mney markets, bonds (except junk) and large-caps have the highest correlation. Small caps have the lowest correlation, at least in part because the markets are less efficient.

(3) Indexing in these markets is not as simple as indesxing in the "developed' markets. Index funds based on the TSE 300 or the S&P 500 use 'replication' to match the index - that is, they simply buy the securities in the index. Bond indexes, and the MSCI and EAFE indexes use either "optimization" - which attempts to hold a 'representative sample' of the securities in the index, or "sampling" - which divides the universe of securities into 'cells' of similar securities, and chooses one (or more) securities from each cell to make up the portfolio. These latter kinds of indexing are clearly less accurate than replication, and when you combine the effects of (2) and (3), there is room for considerable error in the construction of an index, especially in the context of global and/or emerging markets.

Your thoughts?

Date: 18-Mar-98 - 7:07 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Bylo


Thanks for another thoughful discussion. You can invest in many country-specific indexes using MSCI's World Equity Benchmark Shares WEBS. These are closed-end funds that trade on the AmEx. Unlike TIPs and SPYs however these have higher MERs, in the range of 1.5%. There are a few emerging country offerings (Malaysia, Singapore.) Also, Vanguard does offer an EM index fund and is about to launch US small cap funds.

A couple of comments re emerging markets:

1. In addition to being inefficient in the developed nations sense, there is widespread corruption and little or no market regulation (e.g. Indonesia, Russia, Mexico et al.) I'd like to think that an active manager adds value at least to the extent that s/he knows their way around these markets and societies -- even before they get down to actually picking stocks. Presumably Dr. Mo earns his 3.3% MER by knowing which markets are least "dangerous". (Or maybe I've just been watching too many Templeton ads on CNBC!)

2. Is there any evidence that in the long run emerging markets outperform North America and Europe? If not then investing there is either a roll-of-the-dice or a giant leap of faith. If there is such evidence then are the returns sufficiently higher to offset the significantly greater risks? Or is the only rationale for indexing in EMs to add another uncorrelated asset class to the mix?

Date: 18-Mar-98 - 3:56 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: PK

Hi Thbox -

I'd be really interested to see the WSJ article you mentioned. The results you cited always make me want to understand the methodology used.

To show how you can have "fun with statistics" I took about 15 minutes and looked at some data in GlobeFund's website. I looked at two groups: 1) European funds and 2) international funds. The data is as follows:

European based funds were compared against Morgan Stanley's European benchmark. For 1, 3 and 5 years respectively the average fund returned 11.31%, 5.92% and 7.04% LESS THAN the benchmark. In terms of how many beat this index, for 1 year only 2 out of 37 beat the index. For 3 and 5 years the figures are 4 out of 30, and 0 out of 11.

Thinking that maybe I should give managers the whole world to play in, I looked at international funds as well. The results are equally dismal. The following data summarizes how many funds beat the MS World index:

1 Year -- 11 out of 149 beat the index

3 Year -- 8 out of 98 beat the index

5 Year -- 0 out of 59 beat the index

10 Year -- 9 out of 35 beat the index.

As you can see these admittedly crudely obtained stats do not jive very well with the WSJ results. I know that the WSJ were US based, but it is hard to believe that the results could be that different.

TO Bylo -

From my point of view the primary rational for wanting emerging markets in my portfolio is for low return correlations. As counter-intuitive as it may be, adding low correlated markets (even high risk markets) can have the effect of lowering your overall portfolio risk. The following link shows some historical world market return correlations.

Return Correlations

Date: 18-Mar-98 - 4:34 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Bylo


Thanks for the link. I've been looking for just such a chart. The entire article (as well as the rest of Ibbotson's website) looks interesting.

Date: 18-Mar-98 - 4:51 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: thbox


The article was reprinted from WSJ in the Globe and Mail, Feb 17'98 @ p.B16. I can't locate it on either WSJ or Globe ROB websites, but I'm sure you can see it at any library. (The study was conducted by InterSec Research Corp. of Stamford, Conn. While it is specifically based on pension fund analysis, "the trend held last year for mutual funds as well....."

Does this help?

Date: 19-Mar-98 - 7:09 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Bylo


I did an AltaVista search and came up with the following at InterSec's website Non-U.S. Equity Performance - Results for 1996. There are more related press releases there but they're all several months old.

(BTW, did you know that EAFE also stands for the European Association of Fisheries Economists? Neither did I.)

Date: 19-Mar-98 - 7:12 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Bylo

Oh, they also have an office in Canada
InterSec Canada
20 Queen Street West
Suite 3206, Box 8
Toronto Ontario M5H R3
Tel: (416) 595 0711
Fax: (416) 595 9895

Date: 20-Mar-98 - 12:55 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Adam

Thanks for sharing your thoughts on this topic everyone - I'm pleased to see there are people out there who have given this issue some thought besides me.

From reading the above posts, I sense that the differences in opinion/investment strategy which seem to exist among us have more to do with our respective objectives/expectations re. mutual fund investing more than anything. Allow me to elaborate.

After spending a good part of the 1990's trying to 'pick the winners' among actively-amanged funds (while at the same time having a ball educating myself on the equity markets themselves), I came to the following simple conclusions (among others) that guide my investment strategy:

1) As has been the case in the past, I believe that in the future, stocks will continue to outperform bonds which will continue to outperform the money market over the long-term (after all, that's the way capitalism is supposed to work, isn't it?).

2) Given that I'd like to maximize my return while keeping the associated risk to a minimum, a well diversified global equity portfolio is my strategy of choice.

3) Given that I'm a 'know-nothing' investor who doesn't pick his own stocks, wants global equity diversification, and is simply looking for a good overall long-term (30 year+) return given my risk tolerance, I've decided that keeping costs to a minimum while being 'the most passive of the passive investors' is by far the most appealing option available to me.

Basically, the point I'm trying to make is that, given my abbreviated 'investment philosophy' outlined above, you and I may make different decisions concerning the investment instruments we choose even though our fundamental beliefs about index funds are actually quite similar.

For example, Zippo stated that "No one has shown me that small cap indexes can beat decent small cap managed funds". Please correct me if I'm wrong Zippo, but this statement seems to imply that an index like the Nesbitt-Burns Small Cap would have to prove that it can consistenly beat most managed funds before you would consider hopping on board. Since there is no evidence that I know of to date that would suggest the contrary, let's assume that a 'decent' small cap / emerging markets fund can often beat their respective indexes.

Nonetheless, even armed with the belief that active management can potentially lead to superior returns in these two equity categories, I would STILL prefer a passive index strategy in these areas as my investment of choice. Why? Well, I'm willing to settle for a return that mimics the general direction of these markets (less a small MER) in exchange for the peace of mind that comes with knowing that I can participate in these higher risk areas without having to place a bet as to which manager(s) will be the 'superior' ones over the next 30+ years, or how much better they'll do vs. the index at the end of that period of time. Conversely, you may be the type who loves to try and 'sniff out' the long-term winners, so, armed with the same info and arriving at the same conclusions as me, you decide to hand over the reins to an active manager to manage your small cap and/or emerging markets portfolio with the hope of coming out ahead when all is said and done.

Like PK, one of the reasons I like to allocate a portion of my global equity portfolio to small caps and emerging markets is to lower my overall portfolio risk. I think 'know-nothing' investors like myself who have a long-term investment horizon would be doing themselves a disservice if they ignored such areas. If I'm investing my money for growth over the next 30+ years, I want to participate in the stock market appreciation that occurs in the global marketplace over the NEXT three decades, wherever that growth may be. Common sense tells me that, though large caps have clarly been on a roll over the past 3-5 years, small caps will get their day in the sun at some point. I suspect that the environment in what we consider to be current 'emerging market' countries will likely be markedly different in 2028 than they are today. Which countries (emerging or developed) will be the 'corrupt' ones in 20+ years? Which countries will clean up their act re. market regulation/corruption and experience a stock market boom? I don't know, but I do know that I would like to have an interest in these areas (which I intend to build up gradually via a monthly purchase plan over the years) to reduce the risk of 'market-timing' while still sharing in the success these regions /market caps may experience.

Similarly, what type of 20-30 year return will Canada, the US, England, and other current 'developed' countries post in 2028? It's anybody's guess, and the only way I know of to reduce the likelihood of betting on the wrong horse is to be prepared to share in the ups and downs of our global marketplace in its entirety while controlling the only thing I as 'Joe Investor' can control (costs). In my opinion, I consider this to be my best chance at reaching my goal of a sound average annual compound PORTFOLIO return in three decade's time.

Date: 23-Mar-98 - 11:37 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Adam

Hi again everyone.

I thought some of you may be interested in the following information comparing Vanguard's Index fund offerings in both the Emerging Markets and US Small Cap areas to the best and worst active-managed funds in their respective categories. Since we don't have Emerging Markets Index or US Small Cap Index funds available for sale in Canada, Vanguard offerings provide the only measuring stick currently available which would allow us to see how well a given index fund can compete with the actives in these so-called 'less efficient' markets. The data are for the time periods ended March 20, 1998, so it's about as current as you can get it!


Range for Top 10 funds in the US: 7.8% to 17.8%

Vanguard Emerging Markets Index fund: 6.2%

Range for Bottom 10 funds in the US: -7.5% to 3.0%


Range for Top 10 funds in the US: 23.0% to 26.2%

Vanguard US Small Cap Index fund: 18.4%

Range for Bottom 10 funds in the US: 11.9% to 13.8%

Note: The site I obtained the info from (Lipper Mutual Funds link from the CNNfn site) only provided data up to % years, and I had to use 3 year returns for emerging markets since Vanguard's Emerging Market Indes does not have 5 year numbers yet.

Unfortunately, I was unable to obtain the total number of funds in each category, or what the average fund in these two categories returned, which would have been valuable information indeed.

Nonetheless, the data does seem to suggest that index funds in these categories, like their 'effieient market' cousins, appear to shoot about par for the course. While they done come close to cracking the 'top 10' list in their peer category, they do considerably better than those funds that lay an egg. Again, to each his own!

Date: 01-Apr-98 - 9:18 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Adam

Just an FYI to indexing fans out there:

In January 1998, Morgan Stanley announced the creation of their new MSCI (Global) Small Cap Index, counsisting of a representative sample of small cap issues in 23 countries around the world. Check out their web site ( for more information.

As you can probably guess, I'd love to see a low-MER mutual fund offered in Canada which mimics this index. Thus, my 'revised' wish list for low-MER index mutual funds currently not available for sale in Canada are:

1) Canadian Small Cap Index fund (Nesbitt-Burns Small Cap Index)

2) US Mid-Cap Index fund (S&P 400 Mid-Cap Index)

3) US Small Cap Index fund (Russell 2000 Index)

3) Global Small Cap Index fund (MSCI Small Cap Index)

4) Emerging Markets Index fund (MSCI Emerging Markets Index)

In case you're wondering, yes, this is my (second) not-so-subtle attempt to see if any other Fund Library Discussion Forum participants are interested in seeing such funds offered for sale in Canada. It sure would be nice if TD, CIBC, or another bank/fund company took the lead in these areas, as these are they only funds I'd be interested in that are not currently offered for sale in this country. With such additions, the index investor could compose a true global equity portfolio which is well-diversified both geographically (developed and emerging markets) and by market capitalization (large, mid, and small cap companies).

Anyone else interested in such new index fund offerings, or am I just practicing my typing skills here? :-)

Date: 01-Apr-98 - 9:32 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Bylo

I'd love to see more low-MER index funds for sale in Canada. Rather than encouraging the complacent and greedy banks though, I think we'd be better off trying to convince Vanguard to come up here. That'll provide far more choice at far lower MERs.

BTW, another "obvious" index fund that's missing from your list is one that tracks the MSCI World Index.

Date: 01-Apr-98 - 9:48 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: brian fitzpatrick

Don't the studies show that value funds outperform the indexs. For example I did a search on Brandes[manager of agf int value] and fund data on a global fund managed by these folks for 15 years. They have beaten the Morgan Stanley int index by slighty less then 4%[PER YEAR] for that period. The trick is to make sure it is a true disciplined value fund.

Date: 01-Apr-98 - 10:07 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: thbox

Brian Fitzpatrick:

I'd be interested to know where you found your data on Brandes. Can you help me?


Date: 01-Apr-98 - 11:18 AM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: PK

Hello Brian Fitzpatrick:

You said "Don't the studies show that value funds outperform the indexs." I know we are talking primarily about global markets in this thread, but I thought you would be interested in US results regarding your statement.

I did a screen at website and pulled off the following data re US Value funds relative to the SP500. My Index comparison is Vangaurd's SP Index 500 fund. Here's the data:

1 Year Returns:

Vangaurd Index 500 = 34.84%

Number of US Value funds with a 1 year history = 384

Number of US Value funds that beat Vanguard = 20

3 Year Returns:

Vangaurd Index 500 = 31.77%

Number of US Value funds with a 1 year history = 268

Number of US Value funds that beat Vanguard = 13

5 Year Returns

Vangaurd Index 500 = 21.55%

Number of US Value funds with a 1 year history = 166

Number of US Value funds that beat Vanguard = 17

10 Year REturns:

Vangaurd Index 500 = 17.78%

Number of US Value funds with a 1 year history = 78

Number of US Value funds that beat Vanguard = 9

Vanguard also has a Value Index fund. It doesn't have a 10 year history, but it does have a five year history. Out of 166 US value funds with a 5 year track record, Vangaurd's ranked 35.

Perhaps this data will cause you to think twice about value fund's "advantages". I have often thought that part of their appeal is their name. People seem to think there is some sort of free-lunch going on with these funds (ie. lower risk and higher returns). I wonder if their appeal would be less if they were named what they really are "Distressed Stock Funds".

Date: 01-Apr-98 - 1:17 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Adam

Thanks for everyone's input so far.


Yes, I am well aware of Vanguard's existence and its reputation for offering a variety of index funds at extremely low MERs.

However, the reason I would be reluctant to invest with them (even if they did set up operations in Canada) pertains to their investment restrictions. Their apparent desire for a large initial investment ($10,000 / fund?) or the payment of additional costs for lower account balances doesn't jive with my desire to DCA small amounts frequently into a diversified portfolio of index funds. In other words, I sense that Vanguard would be great for those who wish to make large, lump sum purchases and just sit on their investment, but to 'smaller' investors who prefer to invest 'a little at a time' and/or can't invest a huge amount all at once, Vanguard is less appealing.

Conversely, banks make it very easy to DCA small amounts frequently, and the MERs of bank index products have certainly come down in recent months. However, if Vanguard was willing to cater to the DCA investor at rock-bottom MERs, I agree that they would certainly be a force to be reckoned with in this area.


Though I have no reason to doubt the points you have made, please be careful about equating the past with what is to be in the future. Your findings have a familiar ring to them, similar to that of Mr. O'Shaugnassey's (sp?...too lazy to look it up) scheme at Royal Bank re. 'Strategic' Index funds, or the Motley Fool Duo's "Dogs Of The Dow" theory. In hindsight, these strategies would likely have been most effective, but who knows if such stategies will be able to duplicate these feats in the future? For example, I read an article a while back (sorry, the source escapes me) which outlined that the 'famed' Dogs Of The Dow theory, while effective for a certain period of time, had shown (and is again showing) that such a 'strategy' doesn't leave an investor better off than simply investing in the index itself. If I recall correctly, a portion of the article alluded to the same sort of thing that PK mentioned above - just because a given stock (even a Dow stock) is 'lagging' the others doesn't necessarily mean its undervalued and thus a 'buy' candidate. The laggards could be laggards for very good reason (and possibly STILL overpriced relative to their long-term earnings growth potential), whereas the so-called 'overpriced' stocks may be worth every penny (and more?) becuause the company is very profitable and is expected to continue to succeed well into the future. Again, we are forced to come to the conclusion that such index-tinkering strategies may continue to bear fruit in the future, or may just go down in history as another temporary abberation in the quest to find that elusive 'beat the index' strategy (anyone here a psychic?).

As an aside, Warren Buffett fans may wish to consider purchasing a new book entitled "Warren Buffett Speaks" by Janet Lowe (c 1997). It is collection of quotes and short stories about the Oracle Of Omaha himself. It's a light read and I enjoyed it - check it out.

Date: 01-Apr-98 - 2:43 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Bylo


I'd like to clarify a couple things about Vanguard's "rules." The reason they have relatively high minimums (generally $3,000 per fund) and charge a modest $10 annual account maintenance fee for balances below $10,000 is that they're trying to minimise expenses for their unitholders (who are also their shareholders.) Also for certain funds (e.g. small caps and foreign) there may be a ½% to 1% purchase fee. This fee, unlike traditional front-end loads, goes directly to the fund and is intended to defray the costs of buying the underlying securities. It also serves to discourage market timers. These rules seem fair and reasonable to me, especially in view of the low MERs. (Compare Vanguard's minimums and fees to PH&N or Bissett.) And DCAers can set up regular EFT purchases for as little as $50. Now all of this applies if you deal with them directly, which of course you can't do from Canada.

If as a Canaadian you buy their funds through a US discount broker like Waterhouse, the fund minimums are still generally $3,000 but the broker charges $25 or so for every buy/sell transaction. However in this situation there are no annual account maintenance fees. Again, this seems reasonable to me but I agree that the $25 makes it impractical to DCA small amounts.

You might consider a DCA into CIBC or TD index funds until the balances get large enough, then buy the equivalent funds from Vanguard. Be careful though -- this technique could trigger capital gains that more than offset the MER savings.

Date: 01-Apr-98 - 3:29 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Jean M. Gauthier

Mr Bylo.

How do you setup an account with waterHouse if you are a Canadian.

I thought most of the US Discount brokers actively discourage canadian subscribers ?

I would really like it if you COULD EXPLAIN how I could get setup

Thanks Appreciated


Date: 01-Apr-98 - 4:09 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Bylo


It's easy to set up an account from Canada with Waterhouse. Start with Purchase of Mutual Funds in US and follow the links.

Date: 01-Apr-98 - 7:40 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: brian fitzpatrick

PK...your response has found a convert. What is the significance of this Fama/French study which apparently says that that value funds out perform over the long haul? If indexs outperform we can say good by to a lot mutual funds and a lot of vested interests. What would Gorden Pape and company be doing for a living? Once again thanks for the enlightment.

Date: 01-Apr-98 - 8:23 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: PK

Hi Brian -

The Fama/French study (I'm assuming you mean the one referenced in the efficient frontier thread) is a tough, but interesting read. These guys are very well thought of in both the academic and real worlds -- so when they say something I listen.

I was not surprised at the direction of the results, but I was surprised at the magnitude. They found a 7.68% annual higher return in non-US value stocks as opposed to growth stocks. This result matches an earlier study for US returns. The time period used was 1975-1995. BTW, the 7.68% differential was between the 10% of stocks that had the highest Book Value/Market Value (defined as high Value Stocks) vs the 10% that had the lowest ratio (defined as high growth).

The value-growth anomaly has been recognized for some time, as has the small vs large cap anomaly (ie small cap have had a higher return than large cap in the very long run). You should note that in the last 10 years, growth has beaten value and large have beaten small so there is definately no guarantee going forward.

In my mind the implication of the study goes to your asset mix decision. I try to buy low cost investments in markets where I want representation. If you are convinced by the study's results, I wouldn't go out and buy an "all Value" portfolio, but you might consider over-weighting your asset allocation along this dimension. For myself, I am slighly overweighted in small-caps, but I am not yet overweighted in value. I am considering it however.

Date: 02-Apr-98 - 8:10 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Zippo

This is a most important discussion since it gets to the heart of construction of ones portfolio. I really appreciate and agree with what has been said here.

Inside a registered plan, the efficient frontier investor has few choices with regard to cheap indexes being 100% RRSP eligible. I only hope things change in the future, but we have to work with what we have.

The broad indexes (S&P 500, EAFE, and Latin America such as Global Strategy Div. Latin) can be regarded as a balance between growth and value stocks, so it is a reasonable inclusion in ones registered plan (i.e. you are covering all the growth/value bases). If you want increased value orientation in your portfolio, you can buy cheap international managed value funds for the 20% foreign content, and can buy cheap managed Canadian value funds. The lower MERs being offered by CIBC and TD for the first 2 indexes, help counteract the lower performance due to their growth stock components!

Of course getting sufficient international small cap exposure in a RRSP is a big problem, and I would even buy MSCI international small cap indexes if they were eligible and available.

Outside of a registered plan, I feel most comfortable with cheaper, more value oriented managed funds, although I wouldn't sniff at a set of cheap large cap value indexes for the more efficient markets!

Date: 02-Apr-98 - 9:32 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: maurice

terrific thread; their has been alot of high quality input.

Date: 02-Apr-98 - 9:33 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: maurice

terrific thread; their has been alot of high quality input.

Date: 07-Apr-98 - 7:59 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Eagle

I'd be happy to see just 3 new index funds avaliable in Canada: A Canadian Small Cap Index fund (Nesbitt-Burns), A Global Small Cap Index fund (MSCI), and an Emerging Markets Index fund (MSCI). CIBC's U.S. Equity fund tracks the entire US stock market (small, mid, and large cap), so this fund is one-stop shopping for US equities.

Date: 30-Apr-98 - 2:15 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Index Watcher

Vanguard has just announced the launch of three new index funds:

1) Mid Capitalization Stock Portfolio: tracks the S&P MidCap 400 Index.

2) Small Capitalization Growth Stock Portfolio: tracks the S&P SmallCap 600/BARRA Growth Index of approximately 220 'growth' stocks.

3) Small Capitalization Value Stock Portfolio: tracks the S&P SmallCap 600/BARRA Value Index of approximately 380 'value' stocks.

The MER is expected to be around 0.25% for each of these three funds.

Vanguard offers about 20 index funds. The flagship Vanguard Index Trust - 500 Portfolio mutual fund is now the second largest mutual fund in the entire United States with almost $60 BILLION in net assets. For a firm that doesn't advertise much, these guys sure must be doing something right, and I think I know what that something is (low MERs + great performance + tax benefits of index investing = success in attracting wise investors with lots of money to invest).

Date: 30-Apr-98 - 2:23 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: PK

Thanx for the info Index Watcher. Vangaurd is a great company. For your info, alot of people don't know that there is a mid-cap SPDR available (based on S&P MidCap 400 Index) and its available to Canadians directly via any of the brokerages.

Date: 30-Apr-98 - 9:34 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Bylo

Alas the new Vanguard funds are not available (yet?) through the US brokerage channel (Waterhouse, JW&C, etc.) So for all practical purposes, unless one has a US postal address, they're not available to Canadians. (That's why I didn't mention them earlier on this thread.) Sigh!

Date: 01-May-98 - 12:08 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Market Indexer


Yes, MidCap SPDRs are an ideal way of getting exposure to the S&P 400 Index. Ironically, I believe that investing in SPDRs (S&P 500) and MidCap SPDRs (S&P 400) is superior to investing in the equivalent Vanguard funds (even if you are a U.S. citizen living in the States) given their 0.18% MERs, especially if you plan to hold such instruments for an extended period of time.

Since we have TIPs in Canada, the value I see provided via mutual funds lies in areas outside the TSE 300, S&P 500, and S&P 400 indexes. The S&P 500 covers the Dow, so DIAmonds (DJIA 30) are redundant. WEBs are conceptually a good idea, but to get true global diversification you'd have to buy at least a standard lot of each of the 17 WEB country products, and the MER's for such products (which I understand range from 1.0 - 1.5%) are quite steep compared to index products offered by Vanguard, TD, or CIBC which cover EAFE countries. Also, another consideration re. SPDR purchases is that they must be purchased and held in U.S. dollars, which could be a benefit or a drawback depending on your desire to hold instruments denominated in U.S. dollars.


I agree whole-heartedly with your statement concerning the need for a Canadian Small Cap Index fund (Nesbitt Burns Index), Global Small Cap Index fund (based on the new Morgan Stanley Global Small Cap Index), and and Emerging Markets Index fund (Morgan Stanley Emerging Markets Index). I must say I am very impressed with the strides that TD and CIBC have made over the past year in making low MER Index products available to Canadians. I wonder if Mr. Mark Wettlaufer (TD) or Mr. Ted Cadsby (CIBC) will consider adding the three index funds above to their product offerings - this would indeed allow the index investor to compose a global equity portfolio that is truly diversified in every sense of the word.


Just a guess here, but the current unavailability of the three new Vanguard index products to customers of brokerages such as Waterhouse and Jack White may be due to the fact that these three funds are currently in the midst of a 'Subscription Period' which runs from April 20 to May 20. During this period, Vanguard is apparently waiving their purchase transaction fees in an effort to accumulate enough cash to get the funds underway (and likely wishes to offer this 'early bird' deal only to those clients "in the Vanguard family", i.e., people who hold an account directly with the fund company itself). If you're interested, you may want to inquire about their availability at the end of May.

Date: 01-May-98 - 2:18 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: George

An impressive thread! [And I only discovered it yesterday.] It’s most thoughtful and educational.

I do hope it is on Bylo’s list of “keepers”.

Several times people have expressed the view that it would be great if Vanguard entered the Canadian market with its vast choice of low-MER Index Funds. I could not agree more! In 1995, after reading “Bogle on Mutual Funds” book twice, I was moved enough to write John Bogle a thank-you letter. Amongst other things I urged him to have Vanguard enter the Canadian market. I did not expect a reply but to my surprise I did get a nice personal letter back. Here is a quote from it:

“With regard to your question about Vanguard’s presence in Canada, at the moment we do not have any definite plans to begin offering shares of the Vanguard Fund directly to Canadian investors. We have been following with interest the progress that Fidelity has made in establishing a presence in Canada, but it’s still unclear at this point whether the investment will bear fruit for them. For the time being, then, the best I can tell you is that we will continue to explore and consider our opportunities for expansion into Canada.” [John Bogle in October 18, 1995 letter to George …]

Perhaps if others write John Bogle a letter [and to the new Vanguard President, John J Brennan as well] urging Vanguard’s presence in Canada, it could happen. The address is PO Box 2600, Valley Forge, PA, 19482-2600.

Even on the US mutual fund scene Vanguard is unique. Thus I think the chance that we may have a brand new Canadian, but Vanguard-like, index fund company emerge here is remote. Perhaps if I was 27 instead of 57 I might want to make it my “life-mission” to make it happen.

Please write Vanguard, we do need them here – more so than Fidelity.

Date: 01-May-98 - 2:33 PM
Subject: RE: Indexing In Small Cap and Emerging Markets
From: Bylo


Great minds think alike :-) Some of us FundLib-ers have been waging an e-mail campaign to encourage Vanguard to come to the Great White North. Here's where you can Vote Early - Vote Often without the need for paper, pen or postage.


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