Archive for June, 2009

Happy Birthday Canada!

June 30, 2009

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No post today on account of our nation’s birthday. Happy Canada Day everyone!

Is the 5-cent Levy on Grocery Bags a Rip off?

June 30, 2009

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On Earth Day 2009, Loblaws started charging 5 cents for disposable plastic bags. Initially, I grumbled that grocery stores have found a way to make a tidy profit on an item that costs them, perhaps, 2 cents. But, paying an extra 50 cents for plastic bags has a way of changing consumer behaviour in a hurry. I wasn’t about to allow Loblaws to continue to ding me nickels, so I threw a few reusable bags in the trunk the next time I went shopping. At the checkout, I found a less publicized side to the story: Loblaws gives a bonus of 50 PC Points (worth about 5 cents) for every reusable bag. In other words, it is not a simple rip off: Loblaws penalizes customers who use plastic bags and rewards those who ditch them. The company also says that part of the proceeds goes to environmental causes but it is possible that some of the levy falls to the bottom line.

The program is a fascinating case study in how incentives influence behaviour. Loblaws had been trying to entice customers to opt for reusable bags by offering 50 PC Points with little success. But, when a 5 cent charge was instituted, the company says customers reduced the use of plastic bags by 55%. Metro, which recently instituted a 5 cent levy, also reports a 70% reduction in disposable plastic bags. I’m not surprised – we don’t buy plastic bags at Loblaws anymore.

Tracking Error in Emerging Markets ETFs

June 29, 2009

3 comments

In a comment to an earlier post (see New iShares Emerging Market and World ETFs), Henry noted that the iShares MSCI Emerging Markets ETF (EEM) seemed to track the index better than the Vanguard Emerging Markets ETF (VWO). As you can see from the Google Finance chart below, since 2007 EEM’s return is more than 2% better than VWO.

[Comparing Performance of EEM versus VWO]

Since both ETFs track the same MSCI Emerging Markets Index (VWO’s mandate was changed to track this index in August 2006), it was puzzling why there should be a significant difference in performance between the two. In fact, EEM has a significant tracking error as you can see in the table below (negative tracking error means ETF returns were higher than the index):

Index TE for EEM TE for VWO
2008 -53.33% -3.32% -0.56%
2007 39.39% 4.74% 0.31%

The difference in tracking errors is probably due to the different methods employed by the ETFs to track the index. The MSCI Emerging Markets Index has 733 stocks but VWO holds 791 (probably due to some overlap between stocks listed in emerging markets and ADRs) and EEM only 338. It seems that Vanguard tries to replicate the index as much as possible while iShares employs “representative sampling” to track the index. According to the iShares prospectus:

“Representative sampling” is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the Underlying Index.

Over a longer time-frame, EEM it appears that the iShares sampling strategy is successful. Since inception the tracking error of EEM is -0.28%.

PS: The winner of the Thrill of a Lifetime giveaway is Sam for his comment on Four Pillars. Thanks to everyone for participating.