Why This Newsletter?

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  This is the fourth issue of Investing Today. We'd like to welcome all new subscribers and we hope that you find the information in this newsletter and the links that we provide to be interesting and useful. If you have any comments or suggestions about how we can improve this free service, please send an e-mail to me: gordon@gordonpape.com

Some people have asked me why we're offering this free newsletter since we already have two paid subscription letters. The answer is simple: we would like to make more people aware of the products and services we provide. Quite simply, we believe that in terms of quality, clarity, timeliness, objectivity, and value for money, you won't find a better source of independent financial advice anywhere in Canada. We hope this newsletter will give you a flavour of the kind of information we offer in Mutual Funds Update, the Internet Wealth Builder and our various books, and perhaps whet your appetite a bit.

Feel free to tell your friends and relatives about this service. Our subscription list has grown to almost 3,000 in less than two months, and we've set our sights on 5,000 by the end of the summer. It would be nice to get there even sooner!

So much for the brief commercial. Now, here's our latest report.

Index Funds and the Bear

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  When the stock markets were skyrocketing, index funds were all the rage. They were cheaper and on top of that they were beating the pants off the active managers. Why pay sales commissions and high MERs for inferior performance? Just buy the indexes. Many people did.

Now we're seeing the downside of that approach. As the markets tumble, index funds are going right along for the ride.

We did a detailed analysis of index funds in the issue of May 1999. At the time we noted that in rising markets, index funds tend to produce better than average returns. But over the long run, all Canadian index funds were below average performers.

U.S. index funds did much better by comparison, although the sample group was small.

In the same article, we said: "it is likely that index funds as a group will perform worse than actively managed funds in falling markets."

Almost two years later, everything we said in that article has proven to be correct.

Index funds based on the TSE are faring particularly badly at present. All are fourth-quartile performers so far in 2001. Moreover, longer-term results suggest that Canadian index funds continue to underperform. Using our unique Average Quartile Ranking (MFU Oct. and Nov. 2000), we find that Canadian index funds with a track record of three years or more come in with AQR ratings of 2.25 to 2.57. A rating of 2.00 or better is considered good.

It's also important to recognize that there is a significant difference in the performance of these funds, even when they are based on the same index. For example, the CIBC Canadian Index Fund dropped 11.4% over the year ending Feb. 28. At the other end of the scale, the Scotia Canadian Stock Index Fund fell just 7.5%. That's a difference of almost four percentage points.

CIBC says the reason is that their fund had a full Nortel weighting all the way through the year. "We didn't cheat going up, and we didn't cheat when Nortel went down," a spokesman said. "Over that same period the TSE was off 11.5%, so we were almost bang on."

The story among U.S. equity funds is more of a mixed bag. Some of them have performed quite well. For example, the CIBC U.S. Equity Index RSP Fund has an AQR of 1.50 for the four-year period 1997-2000. The Scotia American Stock Index Fund has a three-year AQR of 1.67 . But others look very weak, like the BMO RSP U.S. Equity Index Fund which has a three-year AQR of 3.00 to Dec. 31.

Results also vary tremendously depending on which U.S. index is used. Any funds based on Nasdaq obviously were clobbered in the past year. But it may come as a surprise that there was a big difference between S&P 500-based funds and those that use the Dow 30 Industrials as a reference point.

All the S&P funds were losers, to varying degrees. But the Dow funds made money in the year to Feb. 28. The National Bank American Index RSP Fund rose 9.7% during the period while the TD Dow Jones Average Index Fund gained 10.4%.

There's another wrinkle to U.S. index funds that may catch many people by surprise. The RRSP versions from some companies are producing much different results from the non-registered funds.

For example, the TD U.S. Index Fund, based on the S&P 500, recorded a loss of 3.7% for the year to Feb. 28. The TD US RSP Index Fund, also based on the S&P, lost 10.9%. How can this be possible? Currency exchange, says TD. The U.S. Index Fund has a portfolio of securities denominated in U.S. dollars. When the loonie tumbled against the greenback, the currency gain helped to offset the index losses. The RSP Index Fund is a clone, which invests in future contracts that track the parent U.S. Index Fund. Those contracts are all in Canadian dollars, so there are no currency exchange gains or losses. Thus the RSP Fund more accurately reflects the performance of the S&P 500 but that didn't help investors over the past year.

So what to make out of all this? Here are my conclusions:

1. Canadian index funds have not proven they can outperform actively-managed funds over the long haul. If you must use them, they should only be a small percentage of your portfolio.

2. U.S. index funds are better bets but performance numbers vary considerably even among funds based on the same index. Look for the funds with the best longer-term consistency or consider using exchange-traded funds like SPDRs (S&P 500) or DIAMONDS (Dow Industrials).

3. Diversify your U.S. index fund holdings. Include one Dow fund, one S&P fund and, if you're feeling adventurous, a Nasdaq fund.

4. Before you invest in a U.S. RRSP index fund, find out exactly how it differs from the non-registered fund in the same family (if there is one) and see which has done better over the longer haul. You don't have to buy the RRSP version for your registered plan if you have foreign content room available.

Abridged from the April 2001 issue of Mutual Funds Update. For subscription information: http://www.gordonpape.com/mfudemo.cfm

Bond Commissions

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  Many people think there is no brokerage commission on bond purchases because no fee appears on the transaction slip. Wrong! In fact, you may be paying more to buy a bond than for a comparable investment in stocks. It's just that the brokers cleverly hide their charges. Read the full story on this questionable practice: http://www.gordonpape.com/News/Newsdetails.cfm?NewsletterID=645

Education Savings - a 10-Minute Primer

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  Looking for some fast tips on how to save for your children or grandchildren's education? Read this excerpt from Head Start, by Gordon Pape and Frank Jones. http://www.gordonpape.com/BookEX.cfm?bkex=bookex4

Mortgage Renewal - Short or Long Term?

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  Many people are trying to decide whether to lock in current interest rates by renewing their mortgage for five years or to stay short. Gordon Pape has an answer for this frequently asked question that may help you make a decision. http://www.gordonpape.com/Q_and_A/qadetail.cfm?NewsletterID=647

IWB Stocks do Well

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  Several IWB stock recommendations are doing very well in today's turbulent markets. Here are three of them.

Canadian Utilities (CU). Originally recommended May 1, 2000 at $37.75. Recent price $52.50. Gain to date including dividends: 47%. Half profits taken; holding balance.

Alcan (AL). Originally recommended Oct. 4, 1999 at $46. Recent price $63.87. Gain to date: 39%. Still holding.

Petro-Canada (PCA). Originally recommended July 19, 1999 at $21.95. Recent price $38.70. Gain to date: 76%. Still holding.

For information on becoming a member of the Internet Wealth Builder: http://www.gordonpape.com/newsletter/iwbnl.cfm

Last Minute Tax Tips

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  If you want some tips for saving a few dollars on your 2000 tax return, check out Gordon Pape's latest CBC radio commentary: http://www.gordonpape.com/cbcradio/Main.cfm

6 Steps to $1 Million

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  Time's running out. The 25% off pre-publication offer for my exciting new book expires at the end of this month. To take advantage of it, go to: http://www.gordonpape.com/

Believe me, this is one book you won't want to miss.

That's all for this edition. We'll be back with you again in early May.

Best regards,

Gordon Pape (gordon@gordonpape.com)