From our Canadian Bureau: CIBC and Barclays Roll Out New Index Products

By Dan Hallett, Contributing Writer

The pressure to lower fees on Canadian mutual funds and similar products just heated up. Over the past week, nine new index products were introduced covering unique pockets of the world markets not previously available to Canadian indexers. While this is good news on the surface, it may also be a sign of danger for the average Canadian investor.

CIBC unveiled three new index funds: CIBC Nasdaq Index, CIBC Asia Pacific, and CIBC Emerging Markets - with the latter two tracking the respective Morgan Stanley indexes. Though Canadians have had access to Nasdaq funds for some time, it was only available in derivative form (i.e. - funds using index futures) and only appropriate for Registered Retirement Savings Plans (RRSP) and other tax-deferred retirement savings plans. Additionally, the older Nasdaq offerings were in the form of segregated funds offered by life insurers and, hence, carried a hefty annual price tag of 2.00% to 2.69% annually. CIBC also offers a fully RRSP-eligible derivative version of the new Nasdaq fund. Until now, Asia Pacific and Emerging Markets were scarce to nonexistent. CIBC's three new funds are eligible for RRSP accounts up to the 25% foreign content limit and have maximum management expense ratios (MERs) of 1.20% - though most CIBC index funds charge 0.90% to 1.05% per year. CIBC's offerings truly round out their index products for foreign equity markets by giving them bragging rights to the broadest stable of index fund offerings in Canada.

Ironically, Barclays Global Investors Canada launched exclusively Canadian index exchange-traded funds (ETFs) with one broad ETF and five sector funds. While Barclays already offers an ETF tracking the S&P/TSE 60 large cap index (i60 units), it was dominated by one high-tech stock - Nortel Networks. At its peak, Nortel comprised over 45% of the index and the ETF, making for poor diversification in a product that typically boasts its broad diversification. Nortel's recent slide provided a painful reminder of the need for prudent diversification. A Canadian mutual fund can invest no more than 10% of its book value into any one issue. Hence, Canadian money managers refused to be benchmarked against an index that was neither prudent nor reflective of the regulatory environment. S&P's response was to create a capped 60-stock index to match Canadian fund regulations, with the ETF version launched on September 28, 2000.

The specialty ETFs launched by Barclays were: Canadian MidCap Index fund ("iMidCap fund"), Canadian Energy Index fund ("iEnergy fund"), Canadian Information Technology fund ("iIT fund"), Canadian Gold Index fund ("iGold fund"), and Canadian Financials Index fund ("iFin fund"). All of the new iUnits are expected to have MERs of 0.18% annually. While Barclays now boasts of its diverse lineup of iUnits in Canada, I see both recent launches as a danger to the average Canadian investor.

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