Archive | ETFs

Unpacking ETF Fees, Part 3: BMO

BMO is the newest player in the ETF arena in Canada, and it has aggressively tried to undercut the low fees of its competitors: its large-cap Canadian equity fund, the Dow Jones Canada Titans 60 (ZCN), is marketed as the cheapest equity ETF in the country.

However, like Claymore, BMO lists its only the funds’ “Maximum Annual Management Fee” on its website, not its total management expense ratio. To find the MERs, you need to look on pages 51 and 52 of the latest prospectus. In some cases the differences are three or four basis points, while in others you’re looking at an extra 10 or 12:

Mgmt Fee
MER
Difference

Dow Jones Canada Titans 60
ZCN
0.15
0.18
0.03

S&P/TSX Equal Weight Banks
ZEB
0.55
0.60
0.05

S&P/TSX Equal Weight Oil & Gas
ZEO
0.55
0.60
0.05

US Equity
ZUE
0.22
0.33
0.11

Dow Jones Industrial Average
ZDJ
0.23
0.33
0.10

International Equity
ZDM
0.46
0.50
0.04

Emerging Markets Equity
ZEM
0.54
0.58
0.04

Canadian Government Bond
ZGB
0.33
0.45
0.12

Short Corporate Bond
ZCS
0.30
0.35
0.05

Again,

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Unpacking ETF Fees, Part 2: Claymore

As discussed in Monday’s post, the Claymore website does not report the entire management expense ratios (MERs) of their exchange-traded funds. Instead, they report the ETF’s management fee, which does not include GST and some other expenses that are passed along to investors. Today’s post will dig deeper into the costs of Claymore’s funds.

Twice a year, all mutual funds and ETFs are required to file a Management Report of Fund Performance, which discloses the returns, activities and expenses of the past six or 12 months. To learn the full management expense ratio of Claymore ETFs, you need to track down these documents. They are available from SEDAR, a website where fund companies post electronic versions of their regulatory filings. Follow this link, type “Claymore” in the search box, then choose “Management Report of Fund Performance” from the pull-down menu.

The most recent reports available are for the period ending June 30, 2009. Here are the MERs for some popular Claymore ETFs, compared with the management fee reported on their website:

Mgt Fee
MER
Difference

Canadian Fundamental Index
CRQ
0.65
0.60
-0.05

S&P/TSX Canadian Dividend
CDZ
0.60
0.64
0.04

US Fundamental
CLU
0.65
0.62
-0.03

International Fundamental Index
CIE
0.65
0.62
-0.03

Japan Fundamental Index
CJP
0.65
0.68
0.03

Global Monthly Advantaged Dividend
CYH
0.65
0.64
-0.01

Global Real Estate
CGR
0.65
0.72
0.07

BRIC
CBQ
0.60
0.66
0.06

1-5 Year Laddered Government Bond
CLF
0.15
0.17
0.02

1-5 Year Laddered Corporate Bond
CBO
0.25
0.28
0.03

S&P/TSX CDN Preferred Share
CPD
0.45
0.48
0.03

Balanced Income CorePortfolio
CBD
0.25
0.70
0.45

Balanced Growth CorePortfolio
CBN
0.25
0.82
0.57

Note that most of the MERs are just two to four basis points higher than the management fee,

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Unpacking ETF Fees: Part 1

Keeping costs low is one of the pillars of Couch Potato investing. Even if fans of actively managed mutual funds remain oblivious to the corrosive effect of fees and expenses, index investors know better. That’s why the first thing they do when choosing an ETF is look at its cost.

Unfortunately, the costs of Canadian ETFs are not as straightforward as one might think. Most investors don’t realize that iShares, Claymore and BMO disclose their fees in different ways, making apples-to-apples comparisons difficult.

The first point to understand is that Claymore and BMO list their ETFs’ management fee on their websites. iShares, on the hand, lists each ETF’s management expense ratio, or MER. The two terms are not synonymous: the management fee is only part of a fund’s overall MER. It’s usually the largest part, for sure, but it’s not the whole picture.

The management fee covers all of the ETF’s administrative costs, the manager’s compensation, the index licensing fee, and all fees paid to the custodian (the investment firm that holds the securities), registrar and transfer agent (the firm responsible for keeping shareholder records).

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Bad Advice from BMO

Jim, a loyal reader of this blog, recently emailed to ask about the model ETF portfolios that BMO is offering to its InvestorLine clients. The portfolios were designed by Lipper, the mutual fund research firm based in New York. “All the Lipper Leader Model Portfolios,” BMO’s website explains, “are based on a proprietary Lipper rating and built by their independent and unbiased experts.”

I can’t link to these model portfolios, since they’re available only to InvestorLine clients, but Jim sent me some details. Here’s one for long-term investors looking for a balance of income and growth:

Equity

iShares Canadian LargeCap 60 Index (XIU)
19.1%

iShares Canadian Composite Index (XIC)
10.9%

PowerShares QQQ Trust, Series 1 (QQQQ)
9.7%

WisdomTree DEFA Fund (DWM)
8%

Fidelity NASDAQ Composite Index Tracking Stock (ONEQ)
5.3%

Fixed Income

iShares Barclays 7-10 Year Treasury Bond Fund (IEF)
20%

iShares Barclays Aggregate Bond Fund (AGG)
19.1%

iShares Barclays TIPS Bond Fund (TIP)
7.9%

Jim asked whether this portfolio might be appropriate for an RRSP. My answer is that this portfolio isn’t appropriate for anyone in Canada,

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Will We Soon Trade ETFs for Free?

Exchange-traded funds may be the best products ever to come along for retail investors, but they still have at least one major drawback: they incur a trading commission every time you buy and sell them. If you’re a customer of one of the big bank’s discount brokerages, you pay as much as $29 per trade, a fee that makes monthly contributions and dollar-cost averaging prohibitively expensive.

Claymore took a big step toward improving this situation last year when it became the only ETF sponsor to offer pre-authorized cash contributions (PACCs): after making an initial purchase, you can arrange to make regular monthly, quarterly or annual contributions without additional fees. Unfortunately, not all brokerage houses have embraced this arrangement yet (I recently had problems setting up a Claymore PACC with Scotia McLeod), and it’s not as flexible as what you’d get from a portfolio of mutual funds.

But the game is beginning to change, at least south of the border. Beginning today, Fidelity Investments in the US will allow its customers to buy a lineup of 25 popular iShares ETFs with no trading commissions. The move follows a similar one by Charles Schwab,

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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.

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The Trouble With Leveraged ETFs

Being a Couch Potato is about buying, holding and rebalancing over the long term. Exchange-traded funds are great tools for index investors, but not all ETFs are designed for Couch Potatoes. In fact, some are nothing more than gambling instruments.

Readers may have noticed that my list of Canadian ETFs does not include most of the offerings from Horizons BetaPro. That’s because many of the ETFs from this provider are radically different from those of iShares, Claymore and BMO.

Horizons’ so-called leveraged ETFs promise to deliver double the return of the index they track: if the Canadian stock market goes up 2% in a given day, the Horizons BetaPro S&P/TSX 60 Bull Plus should go up 4%. If the index declines, the ETF will lose twice as much. The Bear Plus ETF works the other way around, delivering twice the inverse of the day’s returns: if the market drops 2%, the fund goes up 4%. Canadian investors love these things: they are among the most frequently traded securities on the TSX.

In the hands of a professional, leveraged ETFs may be useful for managing short-term risk.

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Should You Buy US-listed ETFs?

Jason, a reader of this blog, recently wrote to ask why an investor would want to invest in Canadian-listed  ETFs that hold US stocks when there are US versions with much lower fees.

For example, the iShares Canadian S&P 500 Index Fund (XSP) charges 0.24%, while the Vanguard Total Stock Market ETF (VTI) has an MER of just 0.09%. Jason had several specific questions—all very good ones—which I’ll attempt to answer.

Q: When one holds a US-based ETF, are the dividends paid out in US dollars and then converted to Canadian dollars by the brokerage, costing the investor conversion fees?

Yes, dividends earned from US-listed ETFs are paid in US dollars. If you hold the ETF in a taxable account, the dividends simply go onto the US-dollar side of the account. But if you hold the ETF in RRSP or other account that does not allow US dollar holdings, your broker automatically converts them before depositing them in your account. This usually incurs a fee of about 1% or more: check your broker’s website or call and ask.

While this conversion fee does cause a small drag on your dividend return,

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