BGI Proposed Changes to XIC and XGV

[adrian2]

I see no advantage to someone who already owns XIC. There's no upside.

Yes there is. It will be an opportunity to index the broader market at a low cost. This is desirable according to many index proponents, like Bogle. According to Fama-French research, small caps have a higher expected returns, so that's a plus on that score, too. Having a more diversified portfolio is likely to reduce volatility as well.

[like_to_retire]

If trusts are included, it might not. Were calculations of before-and-after yields provided?

No yield comparisons were provided. Barclays did suggest this higher possibility of yield of the Composite in an e-mail to me after I carped about my yield dropping and MER increasing etc.
They simply state they'll comply with the provisional 50% trust inclusion and then the 100% inclusion at the same time as the S&P/TSX includes them. I suppose since the trusts will be included in the present MidCaps 14.3% and Small Caps 8.9% portion that the increase in yield of the 'new' XIC won't increase much. I hope it does.

It will be an opportunity to index the broader market at a low cost. This is desirable according to many index proponents, like Bogle. According to Fama-French research, small caps have a higher expected returns, so that's a plus on that score, too.

Well, this says otherwise.

Having a more diversified portfolio is likely to reduce volatility as well.

Insignificant.

Historical Volatility:

XIC vs S&P 1year = 7.9% vs 7.8%
XIC vs S&P 2year = 9.1% vs 8.8%
XIC vs S&P 3year = 8.9% vs 8.7%
XIC vs S&P 4year = 11.7.7% vs 11.3%

BTW...I see that XGV is getting a name change to XSB......

ltr

[Bylo Selhi]

Barclays refuses to do anything for the present holders of XIC. I would like a no-tax conversion to XIU.

And I'd like for either XIU to track the Composite index or for BGI to offer a no-tax conversion to XIC (or, equally likely, for CRA to let you and me do a no-tax swap )

[adrian2]

It will be an opportunity to index the broader market at a low cost. This is desirable according to many index proponents, like Bogle. According to Fama-French research, small caps have a higher expected returns, so that's a plus on that score, too.

Well, this says otherwise.

Otherwise what?
Bogle and many index theorists cannot be contradicted so easily: a more diversified index is more desirable.
Fama-French talk about expected returns, not past 5 years.
In any case, I see the red line above the blue one for the recent times.

Having a more diversified portfolio is likely to reduce volatility as well.

Insignificant.

Historical Volatility:

XIC vs S&P 1year = 7.9% vs 7.8%
XIC vs S&P 2year = 9.1% vs 8.8%
XIC vs S&P 3year = 8.9% vs 8.7%
XIC vs S&P 4year = 11.7.7% vs 11.3%

Same as above - this is the past, and only 4 years. The expected outcome is reduced volatility.

[like_to_retire]

The expected outcome

Yeah sure, but the graph and volatility figures look close to me and I don't expect much change in the future.

Barclays says:
Barclays is not proposing this change because we believe the performance of the Capped Composite Index will be significantly different than the performance of the 60 Capped Index over longer periods of time. However, we believe that the increased diversification should make the performance of the Capped Composite Index less volatile than the 60 Capped Index.

Those past volatility figures don't show much difference in volatility to me and I expect it won't be much different in the future.

ltr

[Springbok]

I don't want my yield to go down - it will.

If trusts are included, it might not. Were calculations of before-and-after yields provided?

I have same circular to vote on. I don't own XIC, but it includes XGV and the other two funds.

It does give historical data. If my arithmetic is correct, Total Return of TSX Capped has exceeded that of TSC Composite index by following amounts :

Code: Select all

1yr       1.8%
2yr       0.4%
3yr       0.5%
4yr      -0.8%

Income Trusts could increase yield of Composite index, but Total Return could go either way, don't you think?

I own XIU, so don't have to vote on this.

I might buy some XSP if changes (hedging) are approved. I have been burned twice buy investing in S&P500 directly. If US$ recovers vs C$, so be it

[adrian2]

Yeah sure, but the graph and volatility figures look close to me and I don't expect much change in the future.

Fama-French says the expected outcome is that value outperforms growth.

In 2000, growth had trounced value by a larger than ever margin. Would you have said, then, I don't expect much change in the future?

[Norbert Schlenker]

Here's another reason to vote no. The MER is going up by 7bp. If the FF "small" premium is less than about 1.5%, the MER increase on the entire portfolio decreases returns more than the small-caps increase them.

Take that, Adrian.

[adrian2]

Using Barclay's figures of the TSX composite having 9% small caps and 14% mid-caps, a 7 bps increase in MER is justified by:

- a small cap premium of 0.78%, if mid caps have no premium
- a small cap premium of 0.44%, if the mid cap premium is half the small cap

Take that, Norbert.

[Norbert Schlenker]

Owww! Using data? That's not fair at all. Now take a look at the TSX index page. Note that the market cap of the Composite is $4.18b and the market cap of the Small Cap index is 0.28b. That's only ~7% in small cap, so a 7bp jump in the MER is only worthwhile if the premium is >1% a year.

P.S. to onlookers: No, this isn't "angels on the heads of pins". Really it isn't.

[like_to_retire]

so a 7bp jump in the MER is only worthwhile if the premium is >1% a year.

And actually isn't it worse, since the MER difference is not 7bp but 8bp (rising from 0.17% to 0.25%)?

ltr

[adrian2]

Owww! Using data? That's not fair at all. Now take a look at the TSX index page. Note that the market cap of the Composite is $4.18b and the market cap of the Small Cap index is 0.28b. That's only ~7% in small cap, so a 7bp jump in the MER is only worthwhile if the premium is >1% a year.

Sorry, I did not get a chance to answer until today.

As I said, my percentages came from the Barclays documents re: proposed conversion. In any case, you did not take into account any mid-cap premium, compared to large caps. Here's a Canadian article about the small cap premium, written in 1999, when large caps were really dominating in North America:

The discrepancy between the high expectations and the realities of banking on these investments is not confined to Canada--a recent study in the U.K. found that the 6% incremental small cap return cited during the research period has turned into a discount of exactly the same amount since the mid-1980s (see "Small caps, U.K. style," page 59).

The results of the U.K. study have sparked a re-analysis of the original Canadian data in hopes of finding an explanation for the vanishing small cap premium. But, in addition to revealing what seems to be a failed assumption of success years ago, this lengthy period of underperformance could also signal a small cap revival.

The long-term record for Canadian small cap returns reveals a premium of 2.4% per year accompanied by significant incremental risk as measured by standard deviation. On further investigation, all incremental returns occurred during the research period, from 1950 to 1980, when the small cap premium was 6.4% per year and the incremental risk no greater. The commercial period, (since 1980) has seen a small cap discount of -3.9% per year and a lower risk profile both in absolute terms and relative to the large cap benchmark.

[...]

In Canada, the golden era of small cap investing took place from 1964 to 1980, when an incremental return of 11.9% per year dominated the incremental risk factor and enhanced small cap returns for the entire research period.

Interestingly, when combining the data from the minimal small cap effect, the golden era and the commercial period deviation, we see the amount by which small cap returns exceeded or fell short of the large cap index on a yearly basis. Interestingly, this data parallels that of the U.K. The research documents a small cap premium of about 6% per year and the commercial period results in a small cap discount rate of return.

And actually isn't it worse, since the MER difference is not 7bp but 8bp (rising from 0.17% to 0.25%)?

See above. Around 1 percentage point of the small cap premium will be eaten by the increased MER. This is less than the expected premium.

[scomac]

This is likely worthy of a separate thread, but I'm choosing to comment here.
(Moderator: If you like, you can move this)

In Canada, the golden era of small cap investing took place from 1964 to 1980, when an incremental return of 11.9% per year dominated the incremental risk factor and enhanced small cap returns for the entire research period.

The above comments confirms that small cap premiums are highest in Canada during periods of extended commodity bull markets. I wonder if there is corroborating evidence from the US that would indicate the highest small cap premium was achieved, in that market, during the tech bull of the 1990's? I'm making this assumption based on the fact that the Canadian economy tends to be resource based vs. the US economy which is much more focused on inovation in the areas of technology, consumer products and industrial goods. The following quote tends to support this hypothosis:

The commercial period, (since 1980) has seen a small cap discount of -3.9% per year and a lower risk profile both in absolute terms and relative to the large cap benchmark.

However this may refute it, notwithstanding that the UK economy is more resource oriented than the US, but considerably less so than Canada:

Interestingly, this data parallels that of the U.K. The research documents a small cap premium of about 6% per year and the commercial period results in a small cap discount rate of return.

Never-the-less, based on the above research, you could conclude that we are currently in a period of small cap premium since 2000 which could well extend for several more years.

Therefore, ISTM to be only prudent to maintain some exposure to small caps going forward, particularily in the Canadian market.

[Shakespeare]

ETFs provide access to the world of bonds for the retail investor

I hold both of the Barclays bond iUnits in my registered retirement savings plan, and I also plan to vote in favour of the restructuring of the XGV units at the special meeting on Nov. 15, or at least on-line. (I love the way you can vote your shares on-line these days instead of having to mail in a proxy -- way cool!) I think the revamped XGV is a fiendishly clever instrument for the retail bond investor. Now, if only they would come up with a pure corporate bond variant.

[infopls]

Quick question.......
Having just transferred my accounts from full service to (TD) discount.....I have some new money to invest and was considering various ETFs and have just read this entire thread.........very informative.
My question:
Would it be best for me to wait until 'after the vote, Nov 15th'?
Would like to hear about the pros and cons......both for registered and non-registered accounts.
Great that the FWF is available to help one to keep updated!
TIA for your comments.

[Shakespeare]

Would it be best for me to wait until 'after the vote, Nov 15th'?

Yes.

Which is today.

[Shakespeare]

Changes Approved (pdf)
XGV now becomes XSB (tomorrow). The changes will be completed by Nov. 21, which may or may not mean some selling is needed by XIC, depending on how fast the money rolls in.

[Ken]

Thanks Shakes.

[like_to_retire]

Why is it that the holdings of the new XIC shows that it includes many 'trusts', when the S&P/TSX Composite Capped Index doesn't hold trusts yet?

What did I miss.....

ltr

[like_to_retire]

Why is it that the holdings of the new XIC shows that it includes many trusts ?

I'm confused why no one has commented on my question?

This is an ETF representing an index, and it includes a barrelful of trusts when the actual index doesn't. How can they track the index?

Isn't anyone curious about this?

In part to show a few of the trusts in XIC



ltr

[Arby]

I'm confused why no one has commented on my question?

I'm also confused. According to S&P, trusts will not be included in the TSX Composite until Dec 16.

Income Trusts will be added to the S&P/TSX Composite Index in two steps, after the close on Dec. 16, 2005, at 50% of the full float-adjusted weight; and on March 17, 2006, at 100% of full float-adjusted weight.

[Shakespeare]

Why don't you contact BGI?

[like_to_retire]

Why don't you contact BGI?

Been there, done that....awaiting reply.....ltr

[Springbok]

Why don't you contact BGI?

Been there, done that....awaiting reply.....ltr

I own XIU not XIC, so did not initially check, but you are right - it is confusing, at least for the moment.

Perhaps the web site was updated to reflect the way the starting portfolio will be? The changes are supposed to be implemented by Nov 21st so would not be in effect yet.

I have not read how often they will do their rebalancing, but I don't think they match the index daily , do they?

[Shakespeare]

I haven't been able to find the index components, but there is an S&P TSX Provisional Index.

See, for example, this

Implementation Plan1

* May 2005 – Publication of the plan to bring income trusts into the S&P/TSX Composite.
* June 2005 – Publication of revised rules for the S&P/TSX Indices covering changes related to income trusts in the Composite Index.
* June 2005 Quarterly Rebalance – Continuation of the current indices.
* September 2005 Quarterly Rebalance – Introduction of two provisional indices: the Provisional S&P/TSX Composite® (which will include income trusts at full float adjusted weight) and the Provisional S&P/TSX Income Trust Index®. Both indices will be published on an end-of-day basis.
* December 2005 Quarterly Rebalance – The S&P/TSX Composite will include income trusts at 50% of the full float adjusted weight. The S&P/TSX Income Trust Index will add those trusts that are in the Composite, but were not already in the old Income Trust Index, at 50% of full float adjusted weight. Income trusts in the S&P/TSX Income Trust Index, which do not qualify for inclusion in the Composite, will be removed from the Income Trust index. Publication of the S&P/TSX Equity Index®, including all the equities in the Composite Index, will begin.
* March 2006 Quarterly Rebalance – The Composite Index and the S&P/TSX Income Trust Index will include income trusts at full float adjusted weight. The transition will be complete. The two provisional indices will terminate.

An interesting note from that link

# S&P estimates that the dividend yield of the new Index would be 2.36%, up 0.54% compared to the current Index.