From our Canadian Bureau: The Retirement Fund Shell Game

By Christian Chensvold, Contributing Writer

Think Canada's only known for its hockey players? Well get a load of this hat trick.

RRSPs (Registered Retirement Savings Plans) are the Canadian equivalent of America's tax-free IRAs. Trouble is, in Canada the government requires you to own 75 percent of your holdings in Canadian companies. This is intended to provide appropriate diversification opportunities for RRSP holders while ensuring that the bulk of their tax-assisted retirement savings is invested domestically. But investors have found a way around this with a neat little shell game involving index funds and "clone" funds that allow the portfolios of Canadians to grow without borders.

A key aspect of the loopholes is understanding that the bulk of money in the fund is not actually held in stocks.

Certain index funds offer Canadians RRSP-eligible, foreign-exposure funds that track the performance of a foreign index, such as the S&P 500. In general, the managers of these funds put over 90 percent of their money in domestic treasuries, and then use futures contracts on the index being tracked in order to replicate its performance. "That gets around the rule because technically the fund is mostly Treasury bills, and the rest is foreign," says the mysterious Mr. Bylo Selhi (that's "buy low, sell high"), who operates a financial Web site at bylo.org. "But because they lever it, they get the same return as if they were buying the S&P index directly."
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