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Author: larmstro One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3296  
Subject: More CDN index funds Date: 7/12/2001 4:54 PM
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Well, whaddya know?  Here I am minding my own business taking The Fool's 
beginning investing seminar, and lessons 3+4 are all about index investing.  
One of the on-line instructors directed me over to this board, but only 
AFTER I'd done all my homework.  (Was that fair?)  He thought I should 
share some of my results with some fellow canucks, and so here goes.  I 
apologize if some of this is old news, but I have not had time to peruse 
many of the posts here.  Actually, since I'm kind of wordy, I will split 
my homework into two posts.  I'd appreciate any and all comments/corrections
/feedback regarding the following.  Thx.	
_______________________________________________________________________
Assgnt. A: Decide which index investment best suits your situation.

The following table compares the TSE indices available, against the S&P500.
The TSE35 and TSE60 seem comparable to the S&P500, in terms of returns.  
Unfortunately, I was not able to find 15-year, 20-year, or 25-year returns 
for these.  Nor was I able to get answers for my questions (see following) 
from either the TSE, or S&P, the latter who I found out does all the 
administration for the TSE indices.

A lot of data here, but in trying to compare apples to apples, I zeroed 
in on the returns of May 31/01.  And the winner is.... [drum roll, please]
   >>the S&P500 (based on a ten-year return of 14.84%)!!  The TSE35 and 
TSE60 seem comparable, but a couple of key points.  The TSE35's 10-yr 
return of 13.77% as of May 31 looks impressive, until you consider they 
have a 1-yr return of 12.12%, vs. the S&P500's 1-yr return of -10.55%.
As a contrarian investment, then, does the TSE35 make sense?  The 1-yr 
return of 12.12% boosts the ten-year return by approx. 1.2% annually, 
so, stripping out this 'contrarian' boost, the adjusted ten-yr return 
would be 12.57%.

The second catch in the returns is the exchange rate between the Canadian 
and U.S. dollars.  The returns for the TSE indices are returns in Canadian 
dollars, and those for the S&P500 are in U.S. dollars.  In 1991, the 
Canadian dollar was worth approx. 80¢U.S.  In 2001, it is worth 65-66¢ U.S.
(For example, on June 19/01, the canuck $ was trading at 65¢U.S.; today 
(July 3), it was trading at 66¢U.S.)  This represents a decline of 18.75% 
over ten years, or an annual decline of 2.05%!  So, all the TSE returns 
need to be reduced by this 2%!  The real questions is, of course, as an 
investor does one feel the Canadian dollar will continue this decline, 
stabilize, or recover back to the 80¢ level.
  
I just don't know, so, maybe to hedge my bets, I should split my investment 
between the S&P500 and the TSE35 or TSE60 (how do they get 10-year returns 
for an index that has only been around for 2½ years?).  But remember, this is
based on ten-year returns only.

Questions: of what significance, if any, are the PE ratios?
_______________________________________________________________________________________________
	Year		Returns/PE					Returns
Index	started	Source	   as of	PE	1-year	3-year	5-year	10-year	15-year	25-year
_______________________________________________________________________________________________
TSE300	1977	TSE	May 31/01	26.9	-10.67	3.93	10.96	11.06	n/a	n/a
		Review	Apr. 30/01	23.5	-13.94	2.66	10.81	11.04	n/a	n/a
			Mar. 31/01	19.7	-18.61	1.66	10.62	10.49	n/a	n/a
			Feb. 28/01	20.5	-10.47	5.93	12.14	11.29	n/a	n/a


TSE35	1987	TSE	May 31/01	20.50	12.12	12.00	17.53	13.77	n/a	n/a
		Rvw.	Apr. 30/01	18.5	8.55	10.82	17.35	13.73	n/a	n/a
			Mar. 31/01	15.6	0.14	9.06	16.68	13.04	n/a	n/a
			Feb. 28/01	16.3	13.70	14.21	18.58	13.92	n/a	n/a


TSE100	1993	TSE	May 31/01	24.20	-12.29	3.57	11.11	10.93	n/a	n/a
		Rvw.	Apr. 30/01	21.6	-15.67	2.66	11.05	10.98	n/a	n/a
			Mar. 31/01	18.3	-20.24	1.73	10.84	10.48	n/a	n/a
			Feb. 28/01	19.3	-10.56	6.22	12.46	11.28	n/a	n/a


TSE200	1993	TSE	May 31/01	>99	2.98	11.44	12.48	8.83	n/a	n/a
		Rvw.	Apr. 30/01	60.9	0.76	4.07	10.76	12.07	n/a	n/a
			Mar. 31/01	46.2	-4.82	2.43	10.42	11.14	n/a	n/a
			Feb. 28/01	37.2	-7.88	5.2	11.12	11.84	n/a	n/a


TSE60	1999	TSE	May 31/01	n/a	-14.16	3.89	13.14	12.63	n/a	n/a
		Rvw.	Apr. 30/01	n/a	-16.91	3.05	13.11	12.68	n/a	n/a
			Mar. 31/01	n/a	-21.08	8.37	16.99	14.23	n/a	n/a
			Feb. 28/01	n/a	-7.94	6.83	14.96	13.98	n/a	n/a

S&P500	?	S&P	May 31/01	22.9	-10.55	n/a	15.13	14.84	n/a	n/a
		TMF	Dec. 31/00(?)	-	-10.02	11.91	18.13	17.35	15.93	15.29

Notes:
-TSE Review/Rvw. = Toronto Stock Exchange Review (monthly publication)
-TSE200 index: base level was set to 250 as of August 31, 1993.
-Standard & Poor's Index returns for May 2001 (http://www.spglobal.com/
specialdata.html).
-PE for S&P500, as of June 19/01 (http://www.spglobal.com/earnings.html).
-TMF returns, as shown in lesson 3 notes, Dec.  31/00(?)
-how can they get ten-year returns on indices that are less than ten 
years old?
-looks like the TSE35 and TSE60, in the longer term, are about equal 
(slight edge to TSE35, but don't forget the boost this index gets from 
its stellar 1-yr. return), as well as coming close to matching S&P500 
returns (without taking into account exchange rate)
-approx. exchange rates for Jan./91, and Jan./01...	1991 approx. 
80¢(?); 2001, approx.  66¢(?), an approx. 17.5% decline over ten years 
(about -1.9% annual decline - .98110 return compounded for ten years = .82545).
>June 20/01: buy 1 U.S.$/ 64.259¢, sell 1 U.S.$/65.946¢, spread 
	= 1.687¢, or 2.56%(!)  (Royal 	Bank).  
	Yahoo!  quote 1 Cdn$ = 0.6517 U.S.$
>July 3/01: Yahoo! quote 1 Cdn$ = 0.6619 U.S.$

-pepi
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Author: larmstro One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1396 of 3296
Subject: Re: More CDN index funds Date: 7/12/2001 5:38 PM
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________________________________________________________________________
Assgnt. B: The homework states: "...if you feel a fund is the best 
choice for you, use the information you gained in the last two home-
work assignments to select the fund you prefer."

I don't feel a fund is the best choice for me at this time, but rather 
something like Spiders or iShares.  Does this mean my homework is over, 
or should I try to select which ETF is better for me?  However, I appre-
ciate that if I were contributing regularly (as I do in my pension plan), 
a fund would probably be a better choice.  Spiders have a mer of .12%, 
iShares a MER .09%.

Being a Canadian, there is one little wrinkle that I need to address.  
I need to choose a 'Canadian-content' investment (for reasons stated 
following), as well as what I term a 'universal' investment.  My 
choices are as follows.
-for the 'Canadian content' investment - iUnits S&P 500 RSP E.T.F., 
traded on the Toronto Stock Exchange (TSE), ticker symbol XSP, with a 
MER of 0.30%, and
-for the universal investment - iShares S&P 500 Index Fund, traded on 
Amex (IVV), with a MER of 0.09%.

What follows is pretty boring and irrelevant stuff, unless you're a 
Canadian who has to jump through all the Canadian-content rules imposed 
by the Canadian government.  Canadians can buy and invest in U.S. stocks, 
including ETF's.  However, Canadians cannot buy nor invest in U.S. mutual 
funds at all, whether for retirement purposes or for just general invest-
ment.  This is to make sure Canadians can only buy mutual funds with fees 
three to ten times higher than the average U.S. funds, well, you now, 
we don't really want to be richer than our yankee friends, now do we?  
According to globefund (www.globefund.com, a Canadian web site similar 
to Morningstar), there are 184 index funds available in Canada.  Of 
these, this is the range of mer's:
-10 have a mer of	-53  2.5-2%, 		- 42     1-.5%, and 
    3% or more,		-9   2-1.5%, 		- 22     with a MER of  
-34  3-2.5%, 		-14  1.5-1%,	 	 _____ 	 .50% or less .
						 184  Total
Of these last 22, 10 are U.S. equity funds, 7 of which track the S&P500 
(see table following).  There are a total of 14 ETF's traded on the TSE.  
Only one of these tracks the S&P500: iUnits S&P 500 RSP E.T.F.  However, 
the two S&P500 ETF's traded on Amex can be purchased by Canadians, for 
retirement (subject to the 70-30 rule - see following), or other purposes.

If I were to choose a fund rather than an ETF, I don't really have many 
good choices, as the Canadian government says it is illegal for Canadians 
to invest in U.S. mutual funds; only funds made and administered in Canada 
will do for us canucks (aren't we lucky).  The two best choices (Imperial 
Life Pool US Index-Plus 1 (mer=.18%), and Quebec Professionals American 
Index (mer=.10%)) are restricted to special groups, and not available to 
the general public.  The next best Canadian-content fund is the TD U.S. 
RSP Index-e (mer=.48%), 60% more expensive than the iUnits (mer=.30%).  
The next best 'universal' funds, Royal Premium U.S. Index (mer=.30%) 
and TD U.S. Index (US$)-e (mer=.31%), have a mer more than three times 
(read 233% higher!) that of the 'universal' iShares S&P500 IndexFund 
(IVV, mer=.09%).  Additionally, the Royal Premium fund requires a 
minimum investment of $250,000 (Canadian dollars) (for this you pay a 
lot extra)!  However, in their favour, all these funds are no load, 
and can be purchased without any commission charge.

I'm selecting the ETF's over the funds not just because of the difference 
in mer's.  I tend to make one investment/contribution a year, of about 
$3000-5000 (Canadian).  At current prices (XSP=$18CDA, IVV=$118U.S.), 
my commission is about $35/trade, representing a cost of 1.0-0.7%/trade.  
Over a ten-year period, ten trades X $35 = $350 cost, spread out over 
an average portfolio of $20,000 (10 X $4,000/2), amounts to a total 
cost of 1.75%, or .175%/year.  This .175% needs to be added to the mer, 
bumping the cost of XSP up to.475%, and the cost if IVV up to .265%. 
[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 $35 annual trade-commission shrinking in 
percentage terms.

Seventy percent of my investments in my retirement account (RRSP, 
the Canadian equivalent to a 401(k)) must be in Canadian investments 
(hey, that makes sense, Canada represents about 3% of the total world 
economy, so the Canadian government forces Canadians to invest 3%, 
oops, sorry, I mean 70%, of their retirement savings in 3% of the 
world's economy - once again, screwed by those clowns in Ottawa).

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	0.475	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	0.265	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)

-pepi


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Author: guin2 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1397 of 3296
Subject: Re: More CDN index funds Date: 7/12/2001 9:02 PM
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larmstro,

Great work on the who indexing section of the Canadian market. I think I can put some light on the backtesting of index values before they existed. Since the S&P has a rules based method for picking companies they can go back and select what would have made up that index to calculate the return. The returns for the TSE35 should be accurate if they are from a reputable source even if I can't seem to get the values with distributions taken into consideration.

One thing to add to your confusion of choosing a S&P 500 index fund in Canada. Some RSP funds will not expose investors to the USD fx rate as they have a natural hedge (by investing in Canadian money market). As you mentioned above this would have had an effect on returns over the past ten years (it may go the opposite way in the future). So keep this in mind when choosing a fund. You may not want to have exposure to the fx rate and that choice would reduce the number of funds you are looking at.

The costs that most don't take into consideration when buying a fund are quite large. Every day people question how close ETF's trade to the NAV. Now most people don't even consider that when they place an order for a mutual fund they get a price that is calculated hours later. Imagine today for example in buying a fund expecting this mornings price and then the market goes up a few percent. Being able to purchase mid day can allow for investors to get a price much closer to NAV then through traditional means.

If anyone on this forum has Canadian ETF questions that the www.iunits.com doesn't answer just send me a message.

Glad to see that ETF's are getting attention from long term buy and hold investors.

Guin... looking forward to the next installment of larmstro's analysis.


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Author: Sox100 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1398 of 3296
Subject: Re: More CDN index funds Date: 7/13/2001 1:45 AM
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larmstro: (that's not Lance Armstrong, is it?)
You certainly have put the work into your posts. I'm sure by now you have read back to the discussion of ETFs earlier on this board. Here are a couple of points for you to ponder about your US investments.

If you own shares of something for which you paid US dollars, and the Cdn dollar drops, your investment becomes worth more in $Cd terms. As an over-simplification, if you bought $1US, and you only had to pay $1Cd, and the Cd dollar dropped to 50c US, you could sell your US dollar for $2Cd.

If you buy XSP (or anything else for which you pay Canadian dollars), you don't have to worry about the exchange rates. Just watch the change in % in whatever you bought to see how your investment is doing in $C.

If you buy XSP, you can buy as much as you want, and own pieces of 500 of the biggest, most liquid American corporations, and not even have to worry about puzzling taxation questions, let alone foreign investment limits.

On a social note, Canada was named by the UN as the best country in the world in which to live for 7 years running (until this year, when we dropped to third). If you live your whole life in Canada you have the opportunity to use literally millions of dollars of Health Care and other services FOR FREE, which most Americans do not. This use will likely increase when you retire. I find it quite understandable that the Canadian government expects those of us with money to invest to do so in Canada, for the most part. That creates jobs in Canada, and pays taxes in Canada. Easy on the bashing please.

David

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Author: larmstro One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1399 of 3296
Subject: Re: More CDN index funds Date: 7/17/2001 10:06 PM
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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


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