More new ETFs from iShares and BMO

Last Monday, January 25, BMO launched nine new exchange-traded funds, bringing its total number of ETF offerings to 22:

BMO China Equity Hedged to CAD (ZCH)
BMO India Equity Hedged to CAD (ZID)
BMO Nasdaq 100 Equity Hedged to CAD (ZQQ)
BMO Global Infrastructure Index (ZGI)
BMO Equal Weight Utilities Index (ZUT)

BMO Junior Gold Index (ZJG)
BMO Mid Corporate Bond Index (ZCM)
BMO Long Corporate Bond Index (ZLC)
BMO Aggregate Bond Index (ZAG)

Then on Wednesday, January 27, iShares launched six new funds of their own:

iShares China (XCH)
iShares S&P CNX Nifty India (XID)
iShares MSCI Brazil (XBZ)
iShares S&P Latin America 40 (XLA)
iShares U.S. IG Corporate Bond Hedged to CAD (XIG)
iShares U.S. High Yield Bond Hedged to CAD (XHY)

The BMO Aggregate Bond Index (ZAG) is an interesting creation. It tracks a version of the DEX Universe Bond Index (the most widely followed fixed-income benchmark in Canada) that excludes municipal bonds. The new fund’s two biggest holdings are BMO’s short and mid corporate bond ETFs, plus a selection of federal and provincial bonds, including those of Crown corporations. Its 0.28% MER is a couple of basis points lower than iShares’ XBB’s, though it’s not clear how excluding municipal bonds affects the risk profile. Probably not much.

BMO’s Equal Weight Utilities is worth a look if you’re an income investor, or if you’re on the hunt for defensive stocks. The ETF holds roughly equal amounts 16 Canadian utilities, most of which are structured as income trusts. (With an MER of 0.55%, it’s in line with iShares’ many sector ETFs.) By my calculations the weighted yield of the underlying stocks is around 6%, but the new tax that will hit income trusts in 2011 may affect their distributions, so put this one in the “wait and see” category.

Several of the new ETFs track emerging market countries, and BMO and iShares have taken different approaches here: the former’s China and India ETFs are hedged to Canadian dollars, while the latter’s are simply Canadian versions of US-listed iShares ETFs without hedging.

Both China funds are cap-weighted and have broadly similar holdings, but BMO’s India ETF holds 10 stocks with equal weighting, while iShares’ India ETF holds 50 cap-weighted stocks. It’s important to note that the BMO funds do not track an index: they are simply “designed to replicate, to the extent possible, the performance of the broad Chinese/Indian equity market.” Given that passive management and transparency are key benefits of ETFs, that’s a red flag.

In most cases, I’m not a fan of holding Canadian ETFs that simply wrap up US-listed funds: investors usually just end up paying higher fees for the convenience of trading on the TSX, or for currency hedging, which is of dubious value. I’m inclined to make an exception with the new iShares China, India, Latin America and Brazil funds, as the management fees on the Canadian versions are only 10 to 20 basis points higher. If your brokerage charges a 1% or 1.5% currency conversion fee, you’re likely better off with the Canadian versions unless you’re sure your holding period will be at least seven to ten years. If you can buy with greenbacks (in a taxable account or by washing your trade), then the US versions are still the cheaper option.

2 Responses to More new ETFs from iShares and BMO

  1. Doug Morrow February 2, 2010 at 11:42 am #

    I think another factor to consider here are the large bid/ask spreads that are likely to exist with all of these new offerings from both BMO and iShares. Until they pick up traction and increase volumes, investors will be penalized to some extent by holding them.

  2. Pacific February 12, 2010 at 7:44 pm #

    Thanks for doing the research on these new ETFs.
    I’l wait a while before delving in.

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