From our Canadian Bureau: CIBC and Barclays Roll Out New Index


The pressure to lower fees on Canadian mutual funds and similar products just heated up. Over the past week, nine new index products were introduced covering unique pockets of the world markets not previously available to Canadian indexers. While this is good news on the surface, it may also be a sign of danger for the average Canadian investor.

CIBC unveiled three new index funds: CIBC Nasdaq Index, CIBC Asia Pacific, and CIBC Emerging Markets - with the latter two tracking the respective Morgan Stanley indexes. Though Canadians have had access to Nasdaq funds for some time, it was only available in derivative form (i.e. - funds using index futures) and only appropriate for Registered Retirement Savings Plans (RRSP) and other tax-deferred retirement savings plans. Additionally, the older Nasdaq offerings were in the form of segregated funds offered by life insurers and, hence, carried a hefty annual price tag of 2.00% to 2.69% annually. CIBC also offers a fully RRSP-eligible derivative version of the new Nasdaq fund. Until now, Asia Pacific and Emerging Markets were scarce to nonexistent. CIBC's three new funds are eligible for RRSP accounts up to the 25% foreign content limit and have maximum management expense ratios (MERs) of 1.20% - though most CIBC index funds charge 0.90% to 1.05% per year. CIBC's offerings truly round out their index products for foreign equity markets by giving them bragging rights to the broadest stable of index fund offerings in Canada.

Ironically, Barclays Global Investors Canada launched exclusively Canadian index exchange-traded funds (ETFs) with one broad ETF and five sector funds. While Barclays already offers an ETF tracking the S&P/TSE 60 large cap index (i60 units), it was dominated by one high-tech stock - Nortel Networks. At its peak, Nortel comprised over 45% of the index and the ETF, making for poor diversification in a product that typically boasts its broad diversification. Nortel's recent slide provided a painful reminder of the need for prudent diversification. A Canadian mutual fund can invest no more than 10% of its book value into any one issue. Hence, Canadian money managers refused to be benchmarked against an index that was neither prudent nor reflective of the regulatory environment. S&P's response was to create a capped 60-stock index to match Canadian fund regulations, with the ETF version launched on September 28, 2000.

The specialty ETFs launched by Barclays were: Canadian MidCap Index fund ("iMidCap fund"), Canadian Energy Index fund ("iEnergy fund"), Canadian Information Technology fund ("iIT fund"), Canadian Gold Index fund ("iGold fund"), and Canadian Financials Index fund ("iFin fund"). All of the new iUnits are expected to have MERs of 0.18% annually. While Barclays now boasts of its diverse lineup of iUnits in Canada, I see both recent launches as a danger to the average Canadian investor.

Let's face it, Canadian investors are star-chasers. In 1993, most Latin American and emerging markets funds returned 60% to 100%, spurring huge sales in these funds during 1994 - just in time for the Mexican Peso crisis. When the gold frenzy was prominent in the first half of 1996, investors poured billions into precious metals and resource funds during the subsequent eight months, only to find resources slump for two and a half years (with gold still languishing). There are many more examples, but the point is clear - Canadian investors have terrible timing and they typically underperform the very funds in which they are invested.

While having more diverse and cost-effective investment alternatives is a positive for all investors, specialty indexes may allow Canadians to do themselves more harm than good. Let's look at the iFin fund for instance. It's filled with Canada's largest banks, finance firms, insurers, investment management companies, and other financials. So how can Canadians have such bad timing in a relatively stable sector? Consider the AIC Advantage fund - a Canadian fund launched in 1987 with a focus on the financial services industry (and wealth management in particular). It enjoyed such tremendous success during the 1990s that AIC decided to cap its original fund in the fall of 1996 and launch its sister - AIC Advantage II. That should have been the sign for Canadians to ignore their instincts.

In September of 1999, Advantage II celebrated its third anniversary and boasted a 12.50% compound annualized return. The problem is that the fund itself outperformed its investors by about 12.50% per year. That's right, investors in the AIC Advantage II fund had, in aggregate, an annualized compound return of 0.00% per year during the fund's first three years in existence. Though updated numbers are slightly better, they're still discouraging (16.10% for the fund vs. 6.96% for investors, annualized from inception to 08/31/2000). So even relatively stable, high yielding sectors like financials have been poorly timed. Examining the average Canadian investor's experience in the areas of gold and energy stocks would show ever more startling results of poor timing and underperformance. The more diversified the portfolio, the less impact the timing of transactions will have on investors' bottom lines. The challenge with all of the new sector offerings (plus those available in the US such as sector SPDRs) will be to keep prudent balance in your portfolios.

While I'm not overly enthused about the MERs on CIBC's index products, they do provide access to areas not previously available to Canadian index investors, and they offer a MER rebate that brings the cost down to 0.30% annually if your aggregate index fund holdings are at least $150,000. (This MER rebate is taxable according to Canada's tax laws if received in respect of taxable holdings.) The best deal for indexers remains ETFs and other similar products with razor-thin fees of 0.18% and a structure that promotes liquidity. While I'm not a fan of indexing everything, the dirt-cheap fees and growing product choice are positives for all investors and will continue to force the Canadian fund industry to lower its steep MERs - which average about 2.40% for Canadian stock funds and 2.50% for US and foreign stock funds.

Dan Hallett, B.Comm., CFP is Senior Investment Analyst with Sterling Mutuals Inc. Sterling Mutuals Inc. ( is registered as a Canadian mutual fund dealer in Ontario, British Columbia and Manitoba.