Difference between US Index Fund and US RSP Index Fund

[burningtyger]

Hi all,

I am wondering what the difference between Index fund and RSP Index fund, for example, TD U.S. Index and TD U.S. RSP Index.

I know that the RSP Index was created at the time when the government put restriction on the percentage of non-Canadian investment in RRSP, and that the RSP account mimic the US index by buying options, derivatives, warrants etc.

However, one look at TD U.S. Index would show that it has MER of 0.55%, but a 3 year yield of 6.18% (comparable to index which is 7.1%)

The TD U.S. RSP Index fund has a MER of 0.89% but a 3 year yield of stunning 16.8%.

Now, if both TD U.S. Index and TD U.S. RSP Index tracks the same US S&P 500 Index, how come there is this huge difference in performance ?

Then, would you highly recommend to buy RSP Index instead of Index fund ?

Thanks :)

[15-20_God]

if i were to guess I would attribute the variance in the return from having to collapse the forward agreements early.

I wouldn't expect the return differential to persist as it was a one time event when they re-jigged their portfolio, and if you look at their current holdings they are pretty much identical.

[TigerEROS]

Direct the question to TD Canada Trust ... TD Investment Services. They should be able to explain it clearer .... www.tdcanadatrust.ca

The main difference has slightly to do with the holdings.

Right now with the government waiving the Foreign Content restriction ... it should not matter any longer.

[barold]

Some of the US RSP index funds I have performed differently due to currency -- the appreciation in the Canadian dollar would have eaten into a US denominated index fund, whereas an US RSP Fund would probably invest a majority into canadian bonds and gain exposure to the index through futures contracts. By not being directly invested in the index in US dollars, there is effectively a currency effect. (Could cut the other way if the C$ declines)

[iambored]

The difference is one is in US dollars, the other in Canadian dollars.

There are actually 3 funds:

TD US Index (CDN $)
3 year return = 6.18%
http://globefunddb.theglobeandmail.com/gishome/plsql/gis.fund_pro?fundname=TD+U.S.+Index&pi_universe=PUBLIC_FUND&product_id=

TD US Index (US $)
3 year return = 16.19%
http://globefunddb.theglobeandmail.com/gishome/plsql/gis.fund_pro?fundname=TD+U.S.+Index+(US$)&pi_universe=PUBLIC_FUND&product_id=

TD US RSP Index
3 year return = 16.49%
http://globefunddb.theglobeandmail.com/gishome/plsql/gis.fund_pro?fundname=TD+U.S.+RSP+Index&pi_universe=PUBLIC_FUND&product_id=

The S&P 500 has gone up over 17% in the last 3 years, however the rise in the Canadian dollar has reduced much of that return in the first fund. If you want to mimick the REAL return on the S&P 500 buy fund 2 or 3. However you need to have a US dollar account to buy fund 2 while you can buy fund 3 with a Canadian dollar account.

Hope that helps

Help me understand... even though fund 2 has gone up 16%+, it was bought was U.S. dollars when their currency was worth more. If you sell now, and convert back to canadian based on the current exchange rate... wouldn't that be much less?

i.e. fund 2 only has a 16% gain if you keep it in U.S. currency.

[KAN]

That is correct. Fund 1 forces you to assume the currency adjusted return, Fund 2 gives you the US return and you are buying and selling with US dollars only. When you convert back to canadian currency you receive the currency adjusted return. Fund 3 gives you the true S&P 500 return but in Canadian currency (currency risk is eliminated).

And since RSP funds use other means to follow the index i.e. they don't buy the index directly they have to buy derivatives (futures I think) in order to comply with the 30% foreign content rule. Also the fund is in can$. That is why you get the 16% return like if you bough the fund in US $ and kept it there.

So, fund 1 you get 6%
fund 2 you get 16% but if you want to cash out, you will get around 6%
fund 3 is already in Can$ you get 16%

few years back it was the contrary, fund 1 would outperform fund 2 and 3 because our dollar was weak and going down.

[burningtyger]

Here is the reply I got from TD Investment Service:

The TD US Index Fund and the TD US RSP Index Fund are very different funds.

The fundamental investment objective of the TD US Index Fund is to provide long-term growth of capital by primarily purchasing U.S. equity securities to track the performance of a generally recognized index of U.S. equity market performance.

The fundamental investment objective of the TD US RSP Index Fund is to provide long-term capital appreciation similar to the performance of one or more generally recognized international equity market indices. The Fund invests in specified derivative instruments based on all, or part of, the generally recognized U.S. equity market indices.

The TD US Index Fund is not hedged against fluctuations between the Canadian and U.S. dollar. This Fund is designed to track the performance of the S&P 500 C$ Index. However, the TD US RSP Index Fund does hedge against fluctuations between the Canadian and U.S. dollar. This Fund is designed to track the performance of the S&P 500 U.S.$ Index. This has resulted in very different performances over the past three years.

[burningtyger]

So ~ if one is building a couch potato portfolio, should one invest in the US index or US RSP index account ?

[ilfsoy]

That depends on how you think the loonie will perform against the greenback. The performance differs entirely do to the rise in the loonie over the past few years. Keep in mind as TD says the holdings differ but are attempting the same result the currency remaining constant should net near identical returns.

[SaraLee]

So ~ if one is building a couch potato portfolio, should one invest in the US index or US RSP index account ?

Does that mean if the Canadian dollar continues to hold strong, one should consider the TD US RSP Index instead of the US Index?

I am in a similar dilemma trying figure out the difference.