No. of Recommendations: 7
Last week, my on-line brokerage (Schwab Canada) dropped their minimum commission from
$33 to $25 (effective July 31). So - that affects the computed mer taking into account
trading commissions. So I've redone the numbers.
At current prices (XSP=$18CDA, IVV=$118U.S.), my commission is about $25/trade (was $35/
trade), representing a cost of 0.8-0.5%/trade. (I tend to make one investment/contribution
a year, of about $3000-$5000 (Canadian).) Over a ten-year period, ten trades X $25 = $250
cost, spread out over an average portfolio of $20,000 (10X$4,000/2), amounts to a total cost
of 1.25%, or .125%/year. This .125% needs to be added to the mer, bumping the cost of XSP
up to.425%, and the cost if IVV up to .215%. [Is my arithmetic correct?] Even with these
bumped-up costs, XSP and IVV are still the best choices available to me (see table following).
And if the commissions go down, or I am able to purchase more than $4000/yr., this bumped-up
cost gets smaller (in percentage terms). And as my investment itself grows (excluding the
annual contributions), this also contributes to the $25 annual trade-commission shrinking
in percentage terms.
The following data summarize the choices of index funds/ETF's with a mer of .5%
or less, available to canucks. They are grouped into Canadian-content and universal
funds/ETF's, sorted by mer's (lowest/best to highest), within each group.
__________________________________________________________________________
YEAR
S&P500 FUNDS/ETF's TYPE MER STARTED
Ranked (within group) by MER (lowest/best to highest)
__________________________________________________________________________
Group 1: Canadian-content investments
Imperial Life Pool US Index-Plus 1 Fund 0.18 1997 (only available
to group clients)
iUnits S&P 500 RSP E.T.F. (XSP-T) ETF 0.30 2001
iUnits S&P 500 RSP E.T.F. (incl. comm) ETF 0.425 2001
TD U.S. RSP Index - e Fund 0.48 1999
Altamira Precision U.S. RSP Index Fund 0.50 1998
__________________________________________________________________________
Group 2: 'Universal' investments
iShares S&P 500 Index Fund (IVV) ETF 0.09 2000
Quebec Professionals American Index Fund 0.10 2000 (only available
to specified professionals in Quebec)
Spiders (SPDRs) (SPY) ETF 0.12 1993
iShares S&P 500 Index Fund (incl. comm.)ETF 0.215 2000
Royal Premium U.S. Index Fund 0.30 1998
TD U.S. Index (US$) - e Fund 0.31 1999
TD U.S. Index - e Fund 0.31 1999
http://www.amex.com/indexshares/index_shares_broad_based.stm (Amex ETF's - Exchange
Traded Funds (ETFs) on Broad-Based Indexes)
One further observation about the preceding table. The funds/ETF's are split into two
groups, one being deemed to be Canadian-content, i.e., your dollars are invested in
Canadian companies/securities/banks, the second considered nonCanadian (or, 'universal'),
i.e., any investment made in companies outside Canada. The question has to be asked, then,
how can a fund/ETF that tracks the S&P500 be deemed to be Canadian content. I'm not sure
of the technicalities/legalities, but this is how Barclay's explains their iUnits S&P500R
investing technique (http://www.iunits.com/english/iunitsfunds/fundprofiles/i500r/index.html).
"The i500R fund seeks to provide long term capital growth by matching to the extent
possible the return of the S&P 500 Index, while remaining fully RSP-eligible [i.e.,
qualifies as Canadian content]. To achieve this goal, the i500R Fund primarily invests
in exchange-traded futures contracts based on the S&P 500 Index and in high-quality
short-term money market instruments."
"The i500R Fund will offer investors foreign currency exposure. This means that i500R
unit values will reflect changes in the value of the Canadian dollar vis-a-vis the US
dollar. In this way the fund will replicate to the extent possible an investment in
a US-dollar denominated asset.The i500R fund will accomplish this goal by investing in
currency futures and forwards."
This means basically two things.
-iUnits qualify as Canadian content, and thus are not subject to the 30% nonCanadian
restriction. If one wanted to, one could invest 100% of one's savings in iUnits, or
any of the funds/ETF's in the first group.
-The second key point is that iUnits will reflect any fluctuation in the exchange rate
between the Canadian and U.S. dollar. For example, if on any given day the S&P500 were
to remain unchanged, but the Canadian dollar was to fall from 66¢U.S. to 65¢U.S. (a decline
of approx. 1.5%) in that same day, the value of iUnits (which are traded in Canadian
dollars on the TSE) would increase by the same percentage (1.5%), just as it would if
you held a U.S. stock that remained unchanged during a day when the Canadian dollar's value
fell.
And vice versa.
-pepi