Explaining XIU’s bi-polar performance

By Dan Hallett, CFA, CFP on August 3rd, 2010

In her latest Globe & Mail Number Cruncher, Shirley Won ranked the largest Canadian stock funds (including those with significant foreign stock holdings) by 5-year annualized return as of June 30, 2010.  The column also featured each of the funds’ 10-year annualized return and the last few calendar year returns.  The iShares S&P/TSX 60 Index Fund (XIU) topped the 5-year list with a 6.3% per year rise.  But it’s a cellar-dweller on the 10-year list with a 2.9% per year ascent.  What caught my attention were the reasons iShares gave for the big ETF’s bi-polar performance.

Won correctly pointed out that XIU’s hefty commodities exposure was a huge driver behind its 5-year outperformance.  The iShares representative quoted explained that its low 0.17% management expense ratio was also a factor.  Fees are always a factor but in XIU’s case its low MER has been trumped by other factors in explaining its performance – even over the past decade.

XIU’s underperformance for the ten years ending June 30, 2010 was dominated by the massive decline of technology stocks from their euphoric ascent.  Some will recall that Nortel Networks – now in restructuring mode – accounted for 45% of XIU’s market value at its peak.  That this ten-year period starts just a couple of months prior to Nortel’s peak explains the bulk of XIU’s poor performance.  The Nortel effect is so strong, XIU even underperformed most Canadian-Focused Equity funds, which were held back by a soaring loonie.

Be careful about reading too much into 10-year return figures, however.  End-date bias will skew comparisons for several months until the Nortel and tech stock effects fade away.  Once that effect is dropped from compound return numbers, XIU may well be more competitive – that is unless its 45% stake in commodity stocks knocks it back down to the basement.