Index tracker three years in

2012-03-15

in Economics, Geek stuff

Three years ago, a discussion began on this site about which investments might do the best job of growing faster than the rate of inflation. It’s a pretty important question for anyone who hopes to attain a reasonable degree of financial security. Bank accounts, government bonds, and GICs all pay well below the rate of inflation, meaning that those who are prudent enough to set money aside actually pay a penalty for doing so.

Based on the way in which equities have consistently outpaced commodities and bonds over the last few decades, my guess was that a low-fee index-tracking mutual fund was probably the best bet for ordinary investors hoping to achieve growth at a reasonable level of risk.

I bought some units of the ING Direct Streetwise Balanced Growth Fund for $8.18 each on 20 May 2009. The unit price has since risen to $9.61 – an increase of 17.5% over three years, after fees. That almost certainly beats the pace of inflation, but I am not sure how it compares to alternative investments that could have been made at the same time. Given how much the price of gold has shot up lately, I suspect it would have been a better investment for the 2009-2012 span. That said, given that gold doesn’t actually produce any return, I suspect the index tracker will dramatically outperform it over a multi-decadal timescale. Time shall tell.

P.S. I really wish there was a low-fee index tracking option that didn’t include investments in the oil, gas, and coal industries. It is particularly troubling that every major Canadian financial institution seems to invest in oil sands development.

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{ 5 comments… read them below or add one }

Byron Smith March 15, 2012 at 1:54 pm

Given what you said over here isn’t the decision whether or not to seek personal financial gain from sources that rely on financing fossil fuel extraction a good example of a type 2 issue?

Milan March 15, 2012 at 2:52 pm

I don’t know of any good investment options for Canadians that combine low fees with avoidance of the oil sands. Even ordinary bank accounts at every Canadian bank are likely to provide some funding to oil sands companies.

I did write to ING Direct, encouraging them to stop investing in the sector.

I have also written a proposal for a low fee low carbon mutual fund, which I have been trying to get various financial institutions interested in.

I may be able to put more time into that effort if I return to school.

Byron Smith March 15, 2012 at 9:03 pm

I guess it might depend on how important low fees are relative to avoiding providing financial support to the fossil fuel industry.

I have pretty much zero idea of the options in Canada (a quick search brought up this page, which may or may not be useful), but I’ve found in the UK and Australia (which are the contexts where I a little more familiar) that if you look at smaller outfits, then you’re more likely to find ethical investment strategies with a bit more integrity than the greenwash most global banks go in for. Of course, you’re unlikely to get the same rates of return, but if the extra interest is coming from oil profits, then you tell me whether it’s something other than stealing from the future.

Byron Smith March 15, 2012 at 9:09 pm

PS Let me say upfront that while we’ve started investigating alternative options in Oz/UK, this is not a topic that we’ve yet resolved and so our accounts remain (for the moment) with banks heavily invested in fossil fuels. I’m hoping to get a chance to rectify this before too long. If I came across as harsh in my previous comments, it is (as much as anything) an expression of my own uneasiness with my tardiness in getting this sorted.

PPS I like what you wrote to ING.

PPPS I’ve also just found this Facebook page for the Canadian wing of the Move (Y)our Money campaign. This page lists some of the options in the UK. Are there similar entities in Canada?

. April 25, 2017 at 12:03 pm

THE aims of a stockmarket index are threefold. First, to reflect what is actually going on in the market; second, to create a benchmark against which professional fund managers can be judged; and third, to allow investors to assemble well-diversified, low-cost portfolios. On all three counts there are reasons to worry about the MSCI All-World Country Index, one of the most widely used gauges of the global stockmarket.

That is because the American market has a weighting of 54% in the index, as high as it has ever been (it reached the same level in 2002). In other words, anyone using the index to monitor the market is seeing a picture heavily distorted by Wall Street. The relative performance of international fund managers against the index will largely depend on how much exposure to America they are willing to take on. Anyone buying a tracking fund is, in effect, making a big bet on the American market. Things are worse if investors track the MSCI World Index, which covers only developed markets. In that benchmark, America’s weight is 60.5%.

Nevertheless, an investment in the MSCI indices is an implicit bet on three things: the importance of the American market; the valuation placed on American companies; and the robustness of profits’ share of American GDP. This is not the kind of lower-risk option those buying an index fund probably have in mind.

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