Choosing the Right Index for Comparison

Rob Carrick points to the RBC Canadian Dividend Fund as an example that “shows why we need to reform the way investors pay for funds and advice.” He makes a number of excellent points about the problem of hiding the cost of advice in mutual fund MERs in the form of trailing commissions. However, I take issue with his claim that because this fund has beaten the S&P/TSX composite index over the past 5 years it “has been such a consistently good money maker.”

The Canadian S&P composite index is not the right index for judging the RBC Canadian Dividend Fund. A more appropriate index would be the Dow Jones Canada Select Dividend Index. The iShares ETF based on this index, XDV, beat the RBC Canadian Dividend Fund by 1.1% per year for the past 5 years, which is very close to the difference in their MERs.

Another possible index for comparison is the S&P/TSX Canadian Dividend Aristocrats Index. The iShares ETF based on this index, CDZ, beat the RBC Canadian Dividend Fund by 1.5% per year for the past 5 years, which is a little more than the difference in their MERs.

What has made investors money over the past 5 years is the choice to invest in dividend stocks. Among ETFs and mutual funds that focus on Canadian dividend stocks, RBC’s fund has not distinguished itself. There is no reason to believe that dividend stock outperformance will continue. If it doesn’t, then the high MER on RBC’s fund will be less palatable.

Comments

  1. Canadian Couch PotatoMay 7, 2013 at 12:22 AM

    It's surprising how many fund managers take credit for simply being in the right place at the right time.

    ReplyDelete
    Replies
    1. Michael JamesMay 7, 2013 at 8:36 AM

      @Canadian Couch Potato: I guess managers of closet index funds know they won't have many opportunities to take any credit.

      Delete
  2. LifeInsuranceCanada.comMay 7, 2013 at 11:05 AM

    >>>>as an example that “shows why we need to reform the way investors pay for funds and advice.”

    I spoke to an industry person a few weeks ago, about making money off of advising people to use index funds+bonds as a long term strategy, and indicated that I didn't think it would make any money. He disagreed, telling me that advisors have access to low MER index funds that they can mark up. So I could sell an index fund with a .5% MER and add say a 1% advisor fee.

    It's an interesting business model, who's day may have come. Not that having an advisor is advantageous for DIY investors, but for the rest of the folks out there still getting fleeced by active management.

    Unfortunately with gov't regulations this business model requires face to face contact, and I'm not interested in busting down doors to earn a living. It's interesting, and I think there's a need for it, but I'm not about to put on a suit and tie and have evening appointments at people's houses (or go back to having a retail office that I have to sit in 9-5).

    When an advisor can offer index funds over the phone (realistically), call me :). Until then, I think we're stuck with the old school way of doing business.

    ReplyDelete
    Replies
    1. Michael JamesMay 7, 2013 at 11:11 AM

      @Glenn: I think there is room for many different ways of investing and providing advice. What I'd like to see end is payments from funds to advisors. If advisors had to collect their fees directly from their clients, investors would be better served.

      Delete
    2. AnonymousMay 14, 2013 at 9:45 PM

      The education system is now priortizing financial literacy in all its courses which means there will be a growing number of people who understand investments and the cost of having a financial advisor versus self-directed. All the franchised financial investment advisors should be aware that their jobs are in jeopardy sooner than later.

      Delete
    3. Michael JamesMay 15, 2013 at 12:12 PM

      @Anonymous: I'd like to think that financial education would be effective, but I expect that the financial industry will seek to influence the content to be taught.

      Delete

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