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Mutual Fund News

Competitive index funds are tough to beat

rcarrick@globeandmail.com

WHAT WE'RE UP TO

Sizing up the options investors have if they want an index fund that tracks the Canadian market.

TODAY'S SEARCH

Index funds are mutual funds that mirror the returns of a particular stock index rather than a portfolio of stocks chosen by a money manager. Index funds cost less to own than conventional funds, and this helps make their returns highly competitive. But index funds vary a lot from company to company. Let's see which are tops by comparing fees and returns over the past three years. Funds are ranked by assets.

SO WHAT DID WE TURN UP?

First off, lots of evidence in support of indexing. Notice how all but two of the funds on the list here are first or second quartile? That means that if you divided all Canadian equity and Canadian-focused equity funds into four groups by their three-year returns, almost all index funds would be above the midline that separates the top two quartiles from the bottom two.

This highlights the fact that conventional mutual funds, with their heftier fees, often have trouble matching index returns. The S&P/TSX composite index averaged 16.8 per cent annual returns over the three years to April 30 including dividends. If we subtract 0.6 of a percentage point from that to account for the average fee on the five largest index funds on our list, we're left with net returns of 16.2 per cent. How many non-index funds in the Canadian equity category beat this? Just 43 out of 138, or a touch less than one in three.

Both index mutual funds and exchange-traded funds with three-year track records were included on our list. ETFs are stocks that provide index returns and you need a brokerage account to buy them. Index mutual funds can be purchased most anywhere you buy funds.

Which is better? Let's just say that ETFs (they're listed as iShares on our chart) highlight the benefits of striving for the lowest fees possible when indexing. ETF fees are lower than index funds, and returns are higher. An exception is the iShares Cdn MidCap Index Fund, which tracks medium-sized companies and doesn't include the heavyweight companies that are driving the market right now.

Note that a few funds on this list, National Bank Canadian Index Plus, Middlefield Equity Index and Creststreet Managed Equity Index, are hybrids that mix index tracking with a bit of active stock selection. Let's call this an unproven approach.

Canadian index funds

Fund nameAs of April/08 Assets (000s)Last reported MER dateMERAs of April/08 3-year % return3-year quartile
iShares CDN LargeCap 60 Index8,717,8603/31/20080.1719.441
TD Canadian Index867,8864/30/20080.8515.912
CIBC Canadian Index824,42912/31/20070.9715.802
RBC Canadian Index498,8034/30/20080.7116.192
iShares CDN Composite Index486,2643/31/20080.2517.901
BMO Equity Index467,6129/28/20071.0115.792
Scotia Canadian Index202,2684/30/20081.0215.762
Altamira Precision Cdn Index199,1194/30/20080.5318.211
iShares CDN MidCap Index197,4203/31/20080.5512.973
Meritas Jantzi Social Index79,2328/31/20071.9413.873
Ethical Canadian Index24,65712/31/20071.0015.792
National Bank Canadian Index Plus23,4344/30/20081.5814.952
National Bank Canadian Index18,5144/30/20081.1317.591
Middlefield Equity Index2,4794/30/20081.8812.452
Creststreet Managed Equity Index12/4/20062.1310.832

SOURCE: GLOBEFUND

© 2007 The Globe and Mail. All rights reserved.

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