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What are i60s? What should I consider before investing in them?

The i60s are similar to units of a mutual fund except that you buy and sell them on the Toronto Stock Exchange rather than from a fund company.

When you invest in i60s, you are buying a share of a fund made up of the 60 companies in the Standard &Poor's/TSE 60 Index. The index is supposed to be representative of Canada's economy and the companies in it are among the largest and most heavily traded in the country. These companies include Royal Bank, Canadian Pacific and Nortel Networks. The i60s aim to track the performance of this index as closely as possible. That means you will never do better than the index. This is in contrast to most mutual funds, where a fund manager tries to beat a relevant index. However, most fund managers in the past have been unable to beat the indices. Each i60 unit is worth about 10% of the value of the S&P/TSE 60 Index. If the index is trading at 400, a unit would be worth about $40. The trading symbol is XIU. The i60s are an example of an investment product known as an index participation unit (IPU). IPUs generally pay quarterly dividends, based on the dividends and other distributions the fund receives from the shares it holds. If the fund receives stock dividends, rights, warrants and other distributions from its holdings, it will sell them and distribute the cash to you.


The main attraction of i60s compared to regular stock mutual funds is that they have lower yearly management costs. The management expense ratio (MER) on i60s is about 0.17%. This compares to more than 2% for the typical actively managed Canadian stock fund and around 0.5% to 1% or so for Canadian stock index funds. Stock index funds, like IPUs, are not actively managed and hold a basket of stocks designed to represent a particular stock index. Because the stocks held by an IPU rarely will change, you will know what companies you own, while most mutual funds buy and sell investments regularly. Another feature of IPUs is lower current-year capital gains taxes. Capital gains are kept to a minimum because the trust rarely sells its component stocks. An active stock fund manager, on the other hand, may do a lot of buying and selling - producing significant current-year taxes that you might instead prefer to delay. IPUs offer a wide range of trading options and flexibility. Unlike mutual funds, you can buy derivative contracts called options or futures on most IPUs. You can use these to either speculate on the IPU's future price direction or to reduce your risk by locking in a price ahead of a possible decline. You can profit from IPUs if their value drops since most qualify for short-selling, something you can't do with mutual funds.


IPUs will track downturns in the market. If the stock market falls, your return will drop along with it. The manager of an actively managed mutual fund, on the other hand, might be able to shift you into cash or take other defensive action to reduce your losses. An IPU's returns are capped relative to the index. It can only do as well as the market benchmark, never better. An actively managed stock fund has the potential to beat the market, though most have been unable to do that consistently. If you're an active trader or a short-term investor, it may be cheaper to switch in and out of mutual funds since you pay commissions to buy and sell IPUs. If you have only a small amount to invest, commission costs could make IPUs unsuitable. Mutual funds lend themselves to small purchases, and many don't charge a commission. Because you can't buy fractions of IPU units, they do not work well in a dollar cost averaging program where you would invest a set dollar amount on a regular basis. Before investing, consider seeking professional advice.