So for every dollar of exposure to the underlying foreign fund, the clone must maintain a dollar of cash reserves. Consequently, most of the clone's assets are held in Canadian treasury bills or other cash instruments, enabling the fund to meet the holdings criteria for full RRSP eligibility. It sure does, in two ways. The returns from clone funds will normally be in the form of fully taxable interest income. By contrast, the funds to which the clones are linked will normally produce returns in the form of capital gains or dividends.
Clones have lower returns than the funds on which they're based.
The reason is that the banks charge fees for their ongoing work in creating, selling and buying back forward contracts. These costs get passed on to the unitholders of the clone funds. The MER consists of the management fee plus expenses, like auditing and custodial costs, that the fund company is allowed to charge to the fund. The higher the fund's MER, the lower the return. Other performance gaps will occur, normally fairly small, depending on how skilled the money managers and forward-contract providers are at replicating the underlying fund.