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Author: FrozenCanuck Big red star, 1000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3296  
Subject: US index fund RRSP elligible Date: 12/11/1998 12:45 PM
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Fools,

I've done some research into the S&P500 index funds that are fully RRSP elligible. Most of you probably recall the earlier messages we posted questioning why the performance of these funds does not truly match the S&P 500. I called up CIBC Securities to get some info. I spoke to Mark Smith, Client Line Supervisor. He can be reached at 1-800-465-3863. Here's what I found.

First - these funds work by buying future contracts to the S&P500. For example, for every 100 dollar contribution, about 5 dollars will go towards buying the contract (on margin). The other 95 dollars will go into T-bills which pay interest. When the future contract matures, the fund is obligated to take the profit or loss, rather than an option, which you don't have to do anything with. This should help you to understand how the fund operates.

Second - why aren't the returns faithful to the S&P500? Well, this is because of a few things.

1) the MER is 0.9% on CIBC's fund.
2) CIBC's fund is not hedged against currency movements . Their fund buys contracts in $US, so if, for example, the US dollar appreciates relative to the CDN dollar, this fund will show outperformance relative to the S&P. If and when the CDN dollar corrects, this fund will lag the S&P. If you believe that in the long run there will be no significant movements, then this fund will faithfully follow the index over the long haul.
3) The fund recieves interest on the T-bills. This interest will more or less offset the interest charged to the fund on the margined purchase of the contract. Of course, the net interest is not going to be zero. If they gain from interest, it will help the fund and if they lose from interest, it will hurt the fund.

My conclusion is that this type of fund is good for Canadians because it allows them to invest in the US market without any foreign content limits. For most of us on this board, however, we are not going to invest that much in an index because we would rather do our own research. I feel that this type of fund could be used in much the same way as the Fool port (Rule Breaker Port) uses SPYders. Something to hold your cash in while looking for BETTER investments.

Does anybody have questions about this? I want to make sure we have a good understanding of how these funds work.

Later,

FrozenCanuck.
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