Be careful of U.S. Index funds

There’s a 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.

The Royal U.S. Index Fund (-3.8%) and the Royal U.S. RSP Index Fund (-10.9%) also produced widely varying results, for similar reasons.

There was also a disparity at CIBC but in this case the RRSP fund came out ahead. The &t;>CIBC U.S. Equity Index Fund, which is based on the Wilshire 5000 Index, lost 9.2% over the year. The CIBC U.S. Index RSP Fund lost just 4%, but it uses a different benchmark – the S&P 500.

So 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.

Adapted from the April 2001 issue of Mutual Funds Update, a monthly newsletter edited and published by Gordon Pape.