Why are derivative funds doing badly?

This is actually happening a fair amount. In the April issue of Mutual Funds Update I dealt with the problem in the context of index funds. Here’s what I wrote:

“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 B but that didn=t help investors over the past year.”