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Tracking error in TD e-Series Funds, Part 2

Canadian Capitalist — Tue, 16 Mar 2010 04:06:20 +0000

In Part 1 of this series, we examined the tracking error exhibited by the TD e-Series Canadian Bond Index Fund and the Canadian Index Fund and found that both funds track their respective benchmarks fairly well. In today’s post, we’ll look at the tracking error in the TD e-Series US Index fund and the International Index Fund.

TD e-Series US Index (TDB902)

The TD e-Series US Index Fund tracks the S&P 500 in Canadian dollars and has a MER of 0.33%. Assuming the dividend yield of S&P 500 is 2%, the withholding tax can be expected to result in a further hit of 0.3% (15% withholding tax on a 2% dividend yield). The actual tracking error of TDB902 averages 0.57% over the 2004-09 period, which is fairly close to the expected tracking error of 0.63%. However, note that the tracking error fluctuates quite a bit around the average and in some years, the fund’s returns are higher than the index.

Year	S&P 500 (in CAD)	TDB902	Difference
2004	2.8%	2.2%	0.6%
2005	1.5%	1.7%	-0.2%
2006	16.0%	14.7%	1.1%
2007	-10.3%	-11.1%	0.9%
2008	-22.6%	-21.7%	-1.1%
2009	9.1%	6.7%	2.2%

TD e-Series International Index (TDB911)

TD e-Series International Index Fund tracks the MSCI EAFE Index in Canadian Dollars. It has a MER of 0.48% but its tracking error can be expected to be higher due to the drag from withholding taxes on dividends. In 2009, TDB911 trailed the index by 4.2% but in the previous year, it returned 3.1% more than the index. On average, TDB911 has trailed the index by 0.74% over the past five years.

Year	MSCI EAFE (in CAD)	TDB911	Difference
2004	11.9%	10.9%	0.89%
2005	10.3%	10.2%	0.09%
2006	27.1%	25.5%	1.26%
2007	-5.0%	-6.0%	1.05%
2008	-30.0%	-27.9%	-3.05%
2009	14.3%	9.5%	4.20%

Both the US Index Fund and the International Index Fund track the benchmarks fairly well over the five year period ending in 2009 but the annual returns can deviate quite a bit from the index. This is especially so for the international fund because TD Mutual Funds does not fully replicate the MSCI EAFE Index but instead uses a sampling technique to select a representative subset of stocks. ETFs such as the Vanguard Europe Pacific ETF (VEA) also employ statistical methods to sample the index. Sampling can sometimes result in quite large tracking errors in annual returns, especially in volatile markets like the ones we experienced in 2008 and 2009.

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Finishing Making Home Affordable…

DebtAway — Mon, 15 Mar 2010 10:00:29 +0000

After six months, nearly 30 phone calls, and countless hours on the phone…

We were rejected for the Making Home Affordable Program through Bank of America.

Our application was ‘lost’ and we were asked to reapply. We applied with the exact same numbers we used 6 months ago but this time, we were denied. The program requires homeowners to spend 37% or more of their gross income on their mortgage to qualify and does not include the second mortgage in calculating the percentage. The monthly payment for our first mortgage is 36% of our gross income. I was disappointed with how close we were until the Bank of America representative (a supervisor) told me that even if we were at 37%, we would have been turned down anyway. She said that Bank of America isn’t likely to approve homeowners for the Making Home Affordable Program unless they are closer to 40-45%.

I asked her if we could refinance and she immediately said no. Not because we are upside-down on our home, but because refinancing requires homeowners to spend less than 33% of their gross income on BOTH mortgages combined.

I have a feeling there are a lot of homeowners stuck in this percentage window.

I’m disappointed to be stuck with a high interest mortgage, but we’re fortunate to be able to ‘afford’ our payment and we aren’t at risk of losing our home. We’re going to hold on, take responsibility for our poor decisions, and move forward.

Tracking error in TD e-Series Funds, Part 1

Canadian Capitalist — Mon, 15 Mar 2010 04:20:10 +0000

TD e-Series funds are popular holdings in many low-cost portfolios because the funds’ MERs are among the lowest for index mutual funds in Canada. We too own TD e-Series funds in our kids’ RESP accounts because, as I noted in earlier posts, these mutual funds are ideal for relatively smaller portfolios. However, I’ve never paid much attention to the tracking error of e-Series funds even though how well a fund tracks its benchmark is an important criterion in picking an index fund. After a recent note from a reader, who noticed a large tracking error in the TD International Index Fund for 2009, I decided to examine the tracking error in e-Series funds.

TD e-Series Canadian Bond Index Fund (TDB909)

The TD e-Series Canadian Bond Index Fund, which tracks the DEX Universe Bond Index, is a popular pick for the fixed-income component of a portfolio. It sports a MER of 0.48% but it’s tracking error averages 0.62% over the 2004-2009 period.

Year	Bond Index	TDB909	Difference
2004	7.1%	6.5%	0.6%
2005	6.5%	5.7%	0.8%
2006	4.1%	3.6%	0.5%
2007	3.7%	3.2%	0.5%
2008	6.4%	5.7%	0.7%
2009	5.4%	4.6%	0.8%

TD e-Series Canadian Index Fund (TDB900)

The TD e-Series Canadian Index Fund has a MER of just 0.31%. The tracking error averages just 0.30% and the fund tracks the index fairly well as you can see from the table below.

Year	Canadian Index	TDB900	Difference
2004	14.5%	14.0%	0.44%
2005	24.1%	23.3%	0.64%
2006	17.3%	16.9%	0.34%
2007	9.8%	9.6%	0.18%
2008	-33.0%	-32.9%	-0.15%
2009	35.1%	34.6%	0.37%

Both TDB909 and TDB900 track their benchmarks reasonably well but the Canadian Bond Index does have a larger than expected tracking error. Tomorrow, we’ll take a look at the tracking error in TD e-Series US Index (TDB902) and the TD e-Series International Index (TDB911).

Note: Benchmark returns were obtained from the Libra Investments website.

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