TIPS diversifies an equity investment with limited funds.

TIPS diversifies an equity investment with limited funds

Earlier this year the Toronto Stock Exchange introduced an investment vehicle called Toronto-35 Index Participation Units (TIPS).

The Toronto-35 Index was developed in 1987 for the purpose of trading derivative products such as options and futures to meet the trading, hedging and investing requirements of investors and fund managers.

This index has a better than 99-per-cent correlation with the TSE 300 Index and has approximately 97-per-cent correlation to the Dow Jones Industrial Average and Standard and Poors 500.

TIPS are a direct investment in a diversified basket of the 35 blue chip common stocks which comprise the index. In other words, one TIPS unit is made up of a specific proportion of the shares that are monitored within the Toronto-35 Index.

TIPS are listed on the Toronto Stock Exchange and can be bought and sold exactly like a common stock. Quotations are available throughout the trading day, just like any other lister equity on the TSE. Normal margin requirements and other exchange regulations apply to the trading of TIPS units.

Ownership of these investments have many benefits which often elude the stock market investor. TIPS are eligible investments for RRSPs and RRIFs as well as regular trading accounts you may have with your stock broker.

As well, dividends paid on TIPS are treated as common stock dividends and are thus eligible for the Canadian dividend tax credit. The dividends paid on the underlying stocks are passed through to the unit-holders in their full amount on a quarterly basis similar to the dividend policy of most major Canadian corporations.

Investing in the Toronto-35 Index Participation Units provides an alternative to the popular mutual funds owned by many Canadian investors. Unlike the majority of mutual funds there is no management fee charged to the trust.

An investment in TIPS provides an instant diversified equity investment with a limited amount of funds. A portfolio with this degree of diversification would be very difficult to build for an average person wanting exposure to the Can, equity market.

TIPS are an excellent core portfolio investment. An investor can dedicate a portion of his or her equity investment funds to TIPS and trade the balance of their equity portfolio in special situation stocks.

Ownership of these units ensures that you will do as well as the Canadian stock market as measured by the major blue chip averages.

Because these units are offered exactly like shares of companies listed on the Toronto Stock Exchange, liquidity is a very favorable benefit of holding TIPS. Investors can virtually buy or sell their position as quickly as buying or selling a stock such as Inco or Canadian Pacific. Commissions on the

purchase or sale of TIPS is calculated the same as the commission charges on regular stock transactions. One may find that this charge is actually much less than the costs associated with the purchase of a mutual fund.

In conclusion, if an investor is contemplating directing a portion of his savings to the stock market, Toronto-35 Index Participation Units are worthy of close examination.

At the time this article was written, TIPS were trading at $19.62 per unit and had a dividend yield of 3.45 per cent. They have been priced between $17.75 and $20.50 since their inception in late January of this year.

Pete Bresnahan is vice-president of Richardson Greenshields in Sudbury.