Index Funds

Performance of Currency-Neutral S&P 500 Index Funds

January 19, 2014

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Many investors would like to get exposure to US stocks in their portfolio even if they believe that the US dollar is in a secular decline against other major currencies. In theory, currency-neutral funds appear to offer the best of both worlds: exposure to one of the world’s most dynamic stock markets without the baggage of the risk of a depreciating currency. However, if you look at the eight year performance history of currency-neutral funds since they were first introduced in 2006, a different reality emerges.

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Sector Breakdown of Diversified Portfolios

May 15, 2012

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In a recent column, The Globe & Mail’s Rob Carrick (see Beware the limitations of buying the index, May 11, 2012) pointed out that investing in just the TSX Composite index might leave an investor with an unbalanced portfolio because of the index’s concentration in just three sectors: financials, energy and materials. The criticism is a valid one because, as you can see from the chart below, resource companies make up more than half the index and financials make up another one-third of the index. (As an aside, the sector breakdown of the S&P/TSX 60 index, which is tracked by the iShares S&P/TSX 60 ETF – TSX: XIU is pretty much the same as the broader Composite index).

Sector Breakdown of the S&P/TSX Composite Index

This limitation of the TSX Composite Index is one reason why passive investors diversify their portfolios globally. The US Total Stock Market, for instance, offers much better diversification. The three dominant sectors in the Canadian market make up less than a third of the US stock market. The US stock market also offers exposure to sectors such as Information Technology, Healthcare and Consumer goods that have a much smaller representation in the Canadian index.

Sector Breakdown of US Total Stock Market

The MSCI EAFE Index which provides exposure to developed stock markets in Europe and the Pacific region is also well diversified across sectors. Financials and resources make up just 40 percent and the index has significant allocation to stocks representing Consumer goods, Utilities and Telecommunication services.

Sector Breakdown of MSCI EAFE Index

A globally diversified index portfolio such as the Sleepy Portfolio, which is split between Canadian, US, EAFE and Emerging Markets has a much better balance between sectors when compared to the Canadian stock market. The allocation to financials and resources drops to less than half the portfolio compared to three-quarters for the Canadian-market only index investor. And the allocation to sectors such as Consumer goods, Information Technology and Healthcare is also boosted substantially.

Sector Breakdown of the Sleepy Portfolio

TD e-Series Accounts Not Very Hard to Set Up

May 10, 2011

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As someone who has invested in TD e-Series Mutual Funds both through a brokerage account at TD Waterhouse and my kids’ mutual fund RESP accounts, I’m somewhat mystified by the flak these funds sometimes receive. In a recent column, Globe & Mail columnist Rob Carrick called TD e-Series Mutual Funds “well-loved but frustratingly elusive”. Investors are apparently frustrated because they can’t simply walk into a branch and plonk some cash into an e-series Mutual Fund.

While I admit that setting up a TD e-Series account is not the simplest process in the world, my experience with establishing these accounts was very smooth. All I had to do was follow the steps outlined in the TD e-Series Mutual Funds webpage. It was no more difficult than, say, opening new brokerage accounts. The process involved a visit to a local TD Canada Trust branch to open a RESP account and one mailed-in application to have the account converted into a TD e-Series account. Hardly onerous or complicated, if you ask me. Once the initial setup is done, it is smooth sailing thereafter: it takes only a few clicks of the mouse to contribute cash or rebalance the portfolio.

I did find that fund salespeople at the local TD Canada Trust branch are not well informed about the e-Series funds. If a client walks into a branch and asks to open an e-Series account, they are likely to be met with blank stares or attempts to place them in one of the more expensive funds in the TD Mutual Fund line-up. TD Canada Trust is positioning e-Series funds as a direct-to-investor, online-only mutual fund. DIY Investors can’t complain too much if a local branch knows how to sell a 2.13% MER fund but is unaware of the existence of a 0.32% MER index fund.