Archive for January, 2010

This and That: Troubles at Scotia iTrade and more…

January 8, 2010

  1. Rob Carrick wrote about the troubles that clients are having at Scotia iTrade including inability to access their accounts and errors in their investment holdings and cash balances. The trouble started when Scotia Bank started migrating old E*Trade accounts to the bank’s own system. If you have accounts with iTrade be sure to watch out for any discrepancies.
  2. For what it’s worth, in an interview with Knowledge@Wharton, Jeremy Siegel opines that 2010 will be a good year for stocks, bad for bonds and interest rates will go up.
  3. This article in Money magazine argues that the gold craze is just another asset bubble. Also check out this interesting slide show on other financial bubbles in the past five centuries.
  4. Michael James writes that mutual funds that levy a deferred sales charge (DSC) penalize regular savers.
  5. Preet finds out that ING Direct is considering launching a discount brokerage in his chat with Peter Aceto.
  6. Kathryn offered eight financial resolution ideas for the New Year.
  7. While on the topic of New Year resolutions, Thicken My Wallet blogged about why resolutions pertaining to personal finance fail.
  8. Mr. Cheap reviewed Malcolm Gladwell’s new book What the Dog Saw and found it very interesting.
  9. Larry MacDonald stumbled on to a vast aggregate of investment outlooks for 2010. Here’s my outlook: some of them are likely to come true!
  10. Gail Vaz-Oxlade asks readers if they are grasshoppers or ants.

I’m unable to highlight all the articles worth checking out in my round-up but you can check them out through my Twitter feed. Have a great weekend everyone!

Currency-neutral S&P 500 Fund Versus S&P 500 Returns in CAD

January 6, 2010


The recent post on the performance of currency-neutral S&P 500 funds seems to have confused a lot of readers. One commenter pointed out that what matters to Canadian investors is the performance of a currency-neutral fund such as XSP compared to the returns in Canadian dollars of a direct holding in a fund like IVV, not dry discussions of tracking error. So, let’s compare the performance of the iShares CDN S&P 500 Hedged to Canadian Dollars ETF (TSX: XSP) with the returns of iShares S&P 500 Index Fund (NYSE Arca: IVV) for the 2006 to 2009 time period for a Canadian investor. A minor point of clarification: XSP’s inception date is 2001 but I’m picking 2006 as the starting year because in late 2005 XSP changed its mandate from a clone fund (a fund that used derivatives to track the S&P 500 to skirt RRSP foreign content rules that were in force prior to 2005) to a currency-neutral fund.

First, let’s look at how the Canadian dollar performed against the US dollar in the 2006 to 2009 time period. The US dollar was worth C$1.17 at the start of 2006 and ended 2009 with a value of $1.05, which works out to a depreciation of 10.2%. If a Canadian investor purchased a stock trading in the US in 2006 and held it to the end of 2009 and if the stock price remained exactly the same, she would have lost 10.2% in Canadian dollar terms solely due to the depreciation of the US dollar against the loonie.

An investor who had invested $100 (US) in IVV at the start of 2006 would have ended up with $97.5 (US) at the end of 2009 (assuming dividends were reinvested). In US dollar terms, the return works out to a total loss of 2.5%. Canadian investors would have fared worse because it would have cost us C$117 to buy $100 (US) worth of IVV in 2006. At the end of 2009, $97.50 (US) would be worth C$102.38 for a loss of 12.5% in IVV for Canadian investors.

Recall that investors are under the impression that XSP will deliver the returns of IVV in USD for an extra cost of just 15 basis points because the USD exposure is hedged. That is, investors would have expected XSP to also show a loss of roughly 3.0% in the 2006 to 2009 time period. In reality though, XSP lost 13.7% in the 2006-2009 time period, which is more than the loss experienced by a Canadian investor who directly invested in the S&P 500 and did not hedge the currency fluctuations even though the US dollar depreciated 10.2% that period.

Note to Kevin O’Leary: Don’t Confuse GDP Growth with Stock Market Returns

January 5, 2010


It is painful to listen to Kevin O’Leary (to steal his own phrase) go on show after show on CBC’s The Lang & O’Leary Exchange recommending that investors focus on stock markets in emerging markets that are growing rapidly. Mr. O’Leary likes to say that he wants to put his money in countries that have high GDP growth rates such as China and India, not developed markets in North America and Europe that have anemic growth. Mr. O’Leary should stop confusing economic growth with stock market returns and brush up on the vast quantities of academic research out there that shows that, if anything, the correlation between GDP growth and equity returns is negative:

Thick as a BRIC by William Bernstein

You don’t have to go cross-eyed with regression analyses to convince yourself; a few anecdotes tell the story. During the twentieth century, England went from being the world’s number one economic and military power to an overgrown outdoor theme park, and yet it still sported some of the world’s highest equity returns between 1900 and 2000. On the other hand, during the past quarter century Malaysia, Korea, Thailand and, of course, China have simultaneously had some of the world’s highest economic growth rates and lowest stock returns.

Under the ‘Emerging’ Curtain by Jason Zweig

Based on decades of data from 53 countries, Prof. Dimson has found that the economies with the highest growth produce the lowest stock returns — by an immense margin. Stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually.

What Does a Good Economy Really Mean For Your Portfolio by Larry Swedroe

University of Florida professor Jay Ritter found that the correlation of GNP growth and stock returns for 16 countries was actually negative. He says “whether future economic growth is high or low in a given country has little to do with future equity returns in that country.”

Growth in China, India and Brazil Might Not Mean Great Investment Returns by Larry Swedroe

Dimson notes that investors chasing returns in rapidly growing countries are “paying a price that reflects the growth that everybody can see.”