Index Funds

Tracking error in TD e-Series Funds, Part 1

March 15, 2010


TD e-Series funds are popular holdings in many low-cost portfolios because the funds’ MERs are among the lowest for index mutual funds in Canada. We too own TD e-Series funds in our kids’ RESP accounts because, as I noted in earlier posts, these mutual funds are ideal for relatively smaller portfolios. However, I’ve never paid much attention to the tracking error of e-Series funds even though how well a fund tracks its benchmark is an important criterion in picking an index fund. After a recent note from a reader, who noticed a large tracking error in the TD International Index Fund for 2009, I decided to examine the tracking error in e-Series funds.

TD e-Series Canadian Bond Index Fund (TDB909)

The TD e-Series Canadian Bond Index Fund, which tracks the DEX Universe Bond Index, is a popular pick for the fixed-income component of a portfolio. It sports a MER of 0.48% but it’s tracking error averages 0.62% over the 2004-2009 period.

 Year   Bond Index   TDB909   Difference 
2004 7.1% 6.5% 0.6%
2005 6.5% 5.7% 0.8%
2006 4.1% 3.6% 0.5%
2007 3.7% 3.2% 0.5%
2008 6.4% 5.7% 0.7%
2009 5.4% 4.6% 0.8%


TD e-Series Canadian Index Fund (TDB900)

The TD e-Series Canadian Index Fund has a MER of just 0.31%. The tracking error averages just 0.30% and the fund tracks the index fairly well as you can see from the table below.

 Year   Canadian Index   TDB900   Difference 
2004 14.5% 14.0% 0.44%
2005 24.1% 23.3% 0.64%
2006 17.3% 16.9% 0.34%
2007 9.8% 9.6% 0.18%
2008 -33.0% -32.9% -0.15%
2009 35.1% 34.6% 0.37%


Both TDB909 and TDB900 track their benchmarks reasonably well but the Canadian Bond Index does have a larger than expected tracking error. Tomorrow, we’ll take a look at the tracking error in TD e-Series US Index (TDB902) and the TD e-Series International Index (TDB911).

Note: Benchmark returns were obtained from the Libra Investments website.

Why do ETF Investors do worse than Index Mutual Fund Investors?

June 22, 2009


Jon Chevreau recently blogged (see John Bogle says investors getting killed by ETFs) on John Bogle’s analysis of returns experienced by investors in Exchange-Traded Funds (ETFs) and the results are not pretty: In 68 out of 79 ETFs, the returns experienced by investors lagged that of the ETFs themselves by an average of 4.5%. Bogle also found that investors in ETFs did much worse than investors in index mutual funds. In some categories such as large-cap stocks and small-cap stocks, the gap was particularly large — more than 7%. And the shortfall was as much as 12% in REITs! These results mirror that of the famed DALBAR study, which consistently finds mutual fund investors earning lower returns than the funds themselves (see Investors Behaving Badly).

I think the comparison of index mutual fund investors to those of ETFs is a bit simplistic. Unlike mutual funds, which are purchased by retail investors with the intention of holding for the long-term, the motivation for buying ETFs varies according to the type of investor. Some are passive investors who intend to hold ETFs in an indexed portfolio for the long-term. But most ETF buyers and sellers are traders who hope to profit from short-term movements. The popularity of ETFs with traders can be seen in the contrast in volume between Vanguard and iShares ETFs that track the same index. Despite charging less than half in fees, Vanguard ETFs such as the Emerging Markets ETF (VWO) and Europe Pacific ETF (VEA) have much lower trading volume than their corresponding iShares ETFs. Long-term investors would care more about the lower fees but traders would be primarily concerned with liquidity and low bid/ask spreads, not a MER difference of a few tenths of a basis point. Therefore, it shouldn’t be entirely surprising that, as a group, the returns from trading badly trail the overall market.

CIBC Index Mutual Funds

February 19, 2009


At first glance, index mutual funds available from CIBC sport expenses that are a bit on the high side. Unlike TD e-Series funds, which charge MERs ranging from 0.31 to 0.48, CIBC’s index funds charge MERs that are about 1%. But as a reader pointed out the other day, CIBC offers a management fee distribution discount of 0.63% for investors who hold more than $150,000 in their index mutual funds. Investors with more than $500,000 in CIBC index funds can get a discount of 0.68%. According to CIBC the discount “is calculated and accrued daily and distributed to investors as a special distribution that is reinvested in additional units of the relevant Fund on a quarterly basis”.

Apart from the MER rebate, CIBC index funds are interesting because the line up includes funds, which track indices, that are not available through TD e-Series funds or Altamira Precision Series funds:

  1. CIBC Canadian Short-Term Bond Fund (CIB489, MER 1.25%) tracks the DEX Short-Term Bond Index.
  2. CIBC Canadian Bond Index Fund (CIB503, MER 1.0%) tracks the DEX Universe Bond Index.
  3. CIBC Canadian Index Fund (CIB300, MER 1.0%) tracks the S&P/TSX Composite Index
  4. CIBC US Broad Market Index Fund (CIB484, MER 1.0%) tracks the Dow Jones Wilshire 5000 index and provides a one-stop exposure to the entire US stock market.
  5. CIBC International Index Fund (CIB510, MER 1.0%) tracks the MSCI EAFE Index, which provides exposure to Europe, Japan and Australia.
  6. CIBC Emerging Markets Index Fund (CIB519, MER 1.2%) tracks the MSCI Emerging Markets Index.

Note that the MERs were obtained from the latest prospectus and do not include discounts that may be applicable. CIBC also has index funds tracking global bonds, the S&P 500, Europe, Japan, Asia-Pacific markets and a balanced index fund. CIBC’s index funds are also available through PC Financial, which offers a rebate of 10 basis points. A comparison of no-load, low-MER index mutual funds is available on Bylo’s website.

Though CIBC’s mutual funds are interesting, passive investors can do better elsewhere. Investors with smaller portfolios will find TD e-Series funds significantly cheaper and those with larger portfolios will find ETFs far cheaper even after accounting for trading commissions.