In 2000, the fund’s value rose to $3,853.99, where the reset feature was used to freeze the “minimum benefit amount.” This would be returned to me  ten years later upon request, or awarded to my beneficiary in the event of my death.

Throughout the 2000s, the value of the mutual-fund units declined steadily (but not the benefit amount). This was due to market conditions and the high annual management expense ratio. It had been jacked up to over 4% when regulators forced insurance companies to put aside more reserves to honour the benefits promised).

There were also some anxious moments during the financial crisis of 2008 and 2009, wondering if the insurance company backing the guarantee would still be around — although one advisor tells me the funds are held separately from the insurance co. assets, so the most at risk would be the difference in the market value and minimum benefit (and even that should be covered by CompCorp).

Today, I received the annual account statement. The market value was $1,551.79 as of Dec. 31, 2009. This will probably be my last annual statement: for on March 16, 2010, the ten-year waiting period is up and I can have the $3,853.99 returned.

If I had missed using the reset option, just the original principal would have been returned.  

(This is post is revised version of the original post).

iShares CDN MSCI World Index Fund (XWD)

• tracks the MSCI World Index, which covers 1,500 stocks from 23 developed markets, including Canada and the United States (but not emerging markets)
• it does this by investing in U.S-based, country-focused iShares ETFs in proportion to the weighting pattern in the MSCI World Index
• MER is 0.45%
• denominated in U.S. dollars (not hedged back to Canadian dollars)
• because invests in a large number of countries, foreign currency exposure will be broadly diversified

iShares CDN MSCI Emerging Markets Index Fund (XEM)

• tracks MSCI Emerging Markets Index, which cover stocks in emerging countries
•  does this by investing in U.S.-based iShares MSCI Emerging Markets ETF (EEM)
• MER is 0.82%
• denominated in U.S. dollars (not hedged back to Canadian dollars)
• because invests in a large number of countries, foreign currency exposure will be broadly diversified

These new ETFs join the three other foreign-equity iShares ETFs: iShares CDN MSCI EAFE Index, iShares CDN S&P 500 Index and iShares CDN Russell 2000 Index Funds. These three existing iShares foreign-equity ETFs are currency hedged (back to Canadian dollars).

Why not invest in U.S.-based ETFs instead?

Are the two new ETFs worth investing in? Why not just invest in U.S.-based ETFs tracking the same markets with lower MERs — like those in the Vanguard group? 

The main reason for investing in the iShares ETFs instead of  U.S.-based ETFs, as given in the iShares news release, is to avoid “… estate tax considerations usually associated with U.S.-listed ETFs.” This is a reference to the fact that Canadians owning U.S. assets face a U.S. estate tax on those assets in the event of their death.

However, if the value of a Canadian’s worldwide gross estate is less than $3.5 million (U.S), they are exempt in 2009. In 2010, there will be no limit.

The threshold will come down to $1.78 million (U.S.) in 2011, which includes $780,000 in credits. Another $780,000 U.S. in credits is available if your assets are willed to your spouse. This would bring the effective ceiling to $2.5 million (U.S), which still leaves most Canadians unaffected. It would appear most Canadians thus need not worry about U.S. estate taxes.

Even if one is over the threshold, there are several strategies for minimizing U.S. estate taxes. For example, one can hold U.S. assets in a corporation (as discussed in tax guides such as Tim Cestnick’s 101 Tax Secrets for Canadians (2008 edition).

Investing directly in the U.S.-based ETFs also avoids extra tax, according to posts by Canadian Capitalist blogger. As he concludes:

“If a Canadian ETF simply holds a U.S.-listed ETF, an additional tax drag is created due to withholding taxes that are not recoverable when the ETF is held within a RRSP account. It may be cheaper, instead, to simply hold the US-listed ETF directly.”