Comments on: Mackenzie hits back at ETFs, Part 2

By: Mackenzie hits back at ETFs, Part 1 | Canadian Capitalist

Mackenzie hits back at ETFs, Part 1 | Canadian Capitalist — Sun, 12 Sep 2010 19:57:59 +0000

[...] can find Part 2 of this post here. Post a [...]

By: williamsnewjournal | Mackenzie Hits Back At Etfs, Part 2 | Canadian Capitalist

Sat, 21 Nov 2009 12:51:26 +0000

[...] It features two tables listing the top-10 funds in the Global Equity and Canadian Equity category and shows 10 out 10 Global funds outperforming the MSCI World Index (in C$) and 7 out of 10 funds outperforming the TSX Composite index in …. The numbers are approximates rather exacts. The performance of these 10 Large Global Funds are quite poor in comparison with EEM using SMA200. I am not able to calculate volatility at this point but I believe EEM using SMA200 should …This Post [...]

By: Thicken My Wallet » Blog Archive » The problem with specialized ETFs

Thicken My Wallet » Blog Archive » The problem with specialized ETFs — Tue, 10 Nov 2009 08:50:06 +0000

[...] based with low fees. Canadian Capitalist, who is a ETF Jedi, ran an excellent series comparing global equity mutual funds with broad based indexes. But note his methodology- he used as his basis of comparison broad indexes. His approach, and [...]

By: sodium

sodium — Sun, 08 Nov 2009 04:58:10 +0000

The problem is not that the managers aren’t smart. They’re likely very above average investors. The problem is that the mutual fund model simply does not allow nor entice skilled managers to demonstrate that skill.

Chiefly the problems are the requirement for daily liquidity / no lockups, inability to use derivatives or go short, and the ratio of base / outperformance fees (ie: its all base fees). Why would anyone want to take tracking error risk when they don’t really get paid for it when they win, yet when they lose a massive rush to the door will ensue?

Mutual fund investor psychology is so asymmetric and the compensation system so broken that the rational thing for a manager to do, generally, is to just sit on the benchmark with very little tracking error and milk the base fee.

Now, jacking up the performance fees does have its issues also, but zero performance fee is not the right incentive. Imho.

By: Returns of the Top 10 Canadian Equity Funds (by assets) of 2004 | Canadian Capitalist

Wed, 04 Nov 2009 00:01:57 +0000

[...] ← Mackenzie hits back at ETFs, Part 2 [...]

By: Henry

Henry — Tue, 03 Nov 2009 17:55:38 +0000

CC: Taxes is a concern with SMA200. I believe the concern is a moderate. I will do some more calculations this evening and see how it may impact things.

By: Canadian Capitalist

Canadian Capitalist — Tue, 03 Nov 2009 17:49:19 +0000

@Sampson: I’m not an expert in mutual funds but I believe mutual funds get merged out of existence. When they merge (usually with a more successful fund), they take the performance numbers of the better fund. But I don’t think they can wipe out past records by simply changing the manager or the name.

@Henry: I’m not surprised. EEM uses sampling to track the emerging market index. Its tracking error is atrocious.

By: Henry

Henry — Tue, 03 Nov 2009 17:47:27 +0000

Correction:
The MER rebate can add up over time. Over a period of 5 years, a total of 3.20% of NAV would be calculated daily and rebated on a monthly basis based on .64% MER rebate a year.

By: Henry

Henry — Tue, 03 Nov 2009 17:44:02 +0000

There are some corrections to my previous post.

CIBC Emerging Market Index Fund using SMA200:
Return in Period 1 (July 2004 to the end of January 2008): 109.15%
Return in Period 2 (May 2009 to the end of August 2009): 15.66%
Combined Return in Period 1 & 2: 141.90%
Final Amount: 24190.28 CAD

Difference between using SMA200 on EEM and SMA200 on CIBC Emerging Market Index Fund is 5.06%. Smaller than the original calculation.

CIBC Emerging Market Index Fund has a higher MER (1.37%) vs EEM (.72%). CIBC Emerging Market Index Fund distributed .49 CAD of capital gains and .80 CAD of interest income per share price of 20.41 in 2007 and .23 CAD of capital gains per share price of 12.21 in 2008. Using SMA200 could have avoided the capital gain distribution in 2008. Things become very more favorable if one has the CIBC index fund MER rebate of .64%, paid out monthly. Over a period of 5 years, 3.20% of NAV would be rebated on a monthly basis. With MER rebate, CIBC Emerging Market Index Fund has a MER of .73%, a mere 1 basis point above EEM, 9 basis points below XEM, 8 basis points above CWO, but 46 basis points above VWO.

By: Henry

Henry — Tue, 03 Nov 2009 17:18:39 +0000

@CC: I rounded down in my calculations and I believe the rounding would have covered the transaction costs of $50 each way. I believe the historic price factors in the bid and ask spreads.

Another comparison for Canadian investors is using CIBC Emerging Market Index Fund. There is no transaction costs, everything is in CAD, and dividends are factored in with globefund.com.

Using the same timing, entry on July 2004 with 10k CAD would result in 20915 CAD at the end of January 2008 (approximately the same as beginning of February 2008). That is a return of 109.15% in the first period. Reentry in May 2009 to August 2009 results in 15.66% return in second period. The combined return is 124.92% and the resulting amount is 22148.89 CAD.

If you bought and hold CIBC Emerging Market Index Fund from July 2004 to August 2009, then 10k CAD would become 17966 CAD.

It is a surprise that buy and hold CIBC Emerging Market Index Fund outperformed buy and hold EEM for Canadian investors by large amount: 12.64%.

Using the SMA200 on EEM outperformed using SMA200 on CIBC Emerging Market Index Fund by: 14.74%. This can be explained by the 2nd entry point on May 1, 2009. The Canadian dollar was weak and it purchased less emerging market stocks than a stronger USD dollar. By the end of August 2009, the Canadian dollar was strong again and this resulted emerging market stocks valuing less in CAD.

Regarding exchange rates, the logic is simple: buy CAD when USD is strong and buy USD when CAD is strong. The purchasing power of currency is positively correlated on the strength of its currency.

As we can see, both SMA200 and exchange rates can impact returns significantly.