BMO has announced some interesting new changes to some of the ETFs—and one of them may lead to the first genuine price war in the Canadian marketplace.
The company recently announced that the BMO Dow Jones Canada Titans 60 Index ETF (ZCN) will soon be pegged to the S&P/TSX Capped Composite Index, the most widely tracked Canadian equity benchmark. That will increase the number of holdings in the fund from 60 to almost 250, since the broader index includes mid-cap and small stocks as well as large caps. In addition, the BMO US Equity Index ETF (ZUE) will begin tracking the S&P 500. It will grow its holdings from 282 to 500 stocks, though it remains confined to large caps.
BMO says the changes were prompted by requests from advisors who wanted funds that tracked the better-known indexes from S&P. The Dow Jones benchmarks the funds currently use were created specifically for the BMO funds when they were launched in 2009.
Head-to-head with the giants
This is an interesting development in the Canadian ETF market. As most Couch Potatoes will recognize, the revamped ZCN and ZUE will track the same indexes as the iShares S&P/TSX Capped Composite (XIC) and the iShares S&P 500 (XSP), two of the oldest ETFs in the country. With a management fee of just 0.15%, ZCN will be doing so for 10 basis points less. What’s more, the BMO fund is quickly gaining in size: it has already passed $900 million in assets, compared with $1.2 billion for XIC.
All other things being equal, investors prefer index funds with a large asset base, since these tend to be more efficient. ZCN’s former index tracked 60 large-cap companies, which made it a virtual clone of the iShares S&P/TSX 60 (XIU), the largest and most frequently traded ETF in Canada, and also one of the cheapest. That made it awfully tough for ZCN to grab any significant market share. But now that it’s going head-to-head with XIC, the BMO fund can claim a competitive advantage: the two funds track the same index, with a similar asset base, and ZCN offers a significantly lower fee. This could be the first time a competitor takes a real run at one of iShares’ largest ETFs—something even Vanguard hasn’t been able to do yet.
The changes to the BMO US Equity Index ETF (ZUE) are less likely to make a splash. The iShares incumbent, with over $1.5 billion in assets, is seven times the size, and ZUE is a mere two basis points cheaper. That offers no incentive for investors in XSP to switch funds. And, really, the last thing Canadian investors need is another S&P 500 index fund that’s hedged to the Canadian dollar. When will someone step up and launch a broad-based US equity fund without currency hedging?
The proposed changes will be voted on during a meeting on September 13, and if they’re approved the names of the funds will be changed accordingly—to the BMO S&P/TSX Capped Composite Index ETF and the BMO S&P 500 Hedged to CAD Index ETF—though the ticker symbols will remain the same.
Does ZCN already made the change to is ETF or we have to wait for September 15 to see more stock and less MER
On the assumption that XIC and ZCN will end up the same, is there any reason for those holding over $20,000 in XIC to not switch over and save the 10 basis points in the coming year (assuming 2 x $9.95 in transaction costs).
@Francis: The changes will not take place until after the September vote. Note you will not see “less MER”: the MER will remain unchanged, though it will be lower than the fee on XIC.
@JAH: It might be reasonable to wait a year or so to see whether ZCN tracks the index accurately. I doubt that will be an issue, but I’m going to wait before switching the recommend ETF in my model portfolios for that reason.
Has BMO confirm that the MER will not change? Seems to me if you have to manage more, the fee should reflect that, or are we seeing the end of the gravy train for ishares?
@ACMZ: Yes, BMO has confirmed that the MER will not increase after the changes to the indexes.
J A H, one reason would be those of us who are in a capital gain position on XIC in non registered accounts and prefer to defer the taxes.
Below is an article posted on the TDWaterhouse site. Could you comment on these new low volatility funds please.
ETFs for a twitchy stock market
Aug 23, 2012 by Rob Carrick
The ETF industry is turning its attention in a big way to investors who want exposure to stocks, but hate the sharp ups and downs.
Blackrock’s iShares family has just introduced five minimum volatility funds covering Canadian, U.S. and global markets. They join the BMO Low Volatility Canadian Equity ETF, which was introduced last October and has so far attracted a reasonably impressive $25-million in assets. Expect to see more of these low volatility products because they have the potential to solve the investor’s dilemma of how to invest at a time when bond yields are low and stock markets are as twitchy as ever.
The five new Blackrock ETFs are:
-The iShares MSCI Canada Minimum Volatility Index Fund (XMV)
-The iShares MSCI USA Minimum Volatility Index Fund (XMU)
-The iShares MSCI EAFE Minimum Volatility Index Fund (XMI)
-The iShares MSCI Emerging Markets Minimum Volatility Index Fund (XMM)
-The iShares MSCI All Country World Minimum Volatility Index Fund (XMW)
Each of these ETFs tracks an index built on stocks that show lower volatility than their peers. A screening process is then applied to weight individual stocks in a way that further lessens risk. An important feature of these ETFs is that they give you complete exposure to their respective equity categories rather than simply focusing on comparatively conservative sectors like utilities or consumer staples.
An example is XMV, which is like other broad Canadian market ETFs in that energy and banks and materials are the three largest sectors. However, the three add up to a little over 50 per cent of the total, compared to something like 75 per cent for conventional broad market ETFs.
BMO’s ZLB offers a clue of how low volatility ETFs perform. The more conventional BMO Dow Jones Canada Titans 60 Index ETF (ZCN) rose 1.9 per cent for the year through Aug. 20, while ZLB made 7.2 per cent. In the fast-rising markets of August, ZLB made 2 per cent and ZCN made 4.4 per cent. To sum up, low volatility ETFs should offer better returns in challenging market conditions, while conventional ETFs will do better in fast-rising markets.
Low volatility ETFs still need to prove themselves in a severe stock market decline, but early indications are that they’re worth a look for investors who want exposure to stocks, but are nervous about the ups and downs.
I was thinking about the capital gain position as I walked home, which needs to be mentioned. I left that out of my own thinking probably because my position is relatively new and has yet to grow so much as to be an issue. And yes, those who have had a lot of growth in XIC are not going to want to move it if their tax payment is going to dwarf the savings on MER.
@Darby: I’m planning on doing a detailed post or two about these in the future. Stay tuned.
This moves makes sense. I thought BMO using a different index (Dow Jones Titans) was mistake from a marketing perspective. Perhaps it was a cost-saving measure. The interesting thing to see going forward is how many ETF providers begin to move to their own passive indexes to avoid paying substantial licensing costs to index providers. Hopefully the threat of changing indexes keeps the index providers honest.
“When will someone step up and launch a broad-based US equity fund without currency hedging?”
I agree completely. Also, when will someone offer an ETF, which invests outside Canada/USA, and which I can get tax credits for foreign withholding taxes?
“When will someone step up and launch a broad-based US equity fund without currency hedging?”
I agree completely. Also, when will someone offer an ETF, which invests outside Canada/USA, and which I can get tax credits for foreign withholding taxes?”
I will second (and third) these statements! I am waiting for similarly priced versions of VT, VTI, and VEU traded on the TSX. Hopefully someone from Vanguard Canada is following this post…
I understand why anyone would go with the ETFs from BMO. If I want to purchase an ETF that follows the S&P 500 and is hedged to the Canadian dollar, I might as well go for VUS from Vanguard rather than ZUE. MER on VUS is only 0.17%, after all. For Canadian equities, VCE is the best bet. MER is 0.11%
I’m not happy with this change. I wanted an ETF that followed an index of the 60 large cap. I already had XMD for the completion. I chose ZCN over XIU because it’s index capped each company at 10% (XIU wasn’t capped).
@Jenn: It’s true that XIU is not capped, but that’s a moot point, given that no stock in the index is close to 10%. That might happen in the future, of course, but the chances of another Nortel-type situation (with one company making up 30% or more) seem rather remote. And, of course, that would not happen overnight, so you could always make adjustments if one company did begin to dominate.
Any idea if the change for ZCN has been approved and if approved when it will be effective?
@Tommy: Just got the notice from BMO today. All five index changes have been approved. ZCN, ZUE, ZGI will switch after the market close on Sept 21. ZCH and ZID will do so after September 28.
I do not want to spend too much on per unit price and neither like to convert to US currency. Any pointers/education to consider in your view for the following.
VFV/ZUE vs VTI
VEF vs VXUS
@Novice: VFV (or ZSP) are closer to VTI than ZUE, because ZUE uses currency hedging, while the others do not. My preference is to avoid currency hedging.
VEF uses currency hedging, and unlike VXUS, it does not include emerging markets. It’s a reasonable choice for some global exposure, but the fact is there just aren’t very good international equity ETFs in Canada.
I’m not sure why the unit price is relevant to the decision. It really has almost no bearing on anything important.
Again, I again admit my novice knowledge … I understood that yield/return is distributed based on number of units purchased… please educate?
Could you comment if XWD be a better choice to replace VXUS?
Any ideas for “Canadian” replacement for VXUS and VTI inside RESP?
@Novice: The unit price of comparable funds is not relevant. Think of it like this: if you are shopping for cheese and there are two bricks, one selling for $3 and another for $6, which one you would buy? Your answer should be, “It depends how big the bricks are.” If the $3 brick is half the size of the $6 one, it makes no difference which one you buy: both fairly reflect the value of the asset. The same is true of ETFs: funds that trade with a higher unit price reflect the fact that each unit represents more assets. That’s why yield is expressed as a percentage and not in terms of a dollar amount.
XWD holds US and European/Japanese stocks, while VXUS holds all countries except the US. They are very different. Unfortunately, there is no Canadian substitute for VXUS.
If you are building an RESP portfolio, I would recommend avoiding ETFs altogether and keeping things very simple:
which sp 500 etf would you buy
@Harry: ZSP, VFV and XUS are virtually identical, so take your pick.
Larry Berman on BNN, threw this name around SDIV, Global x’s SuperDividend ETF.
It has a awesome yield of 7 percent for the etf.
Any thoughts about including in a CP portfolio? Maybe 5-10 percent?
Do you expect that ETF to have a superior total return to a simple cap-weighted index of foreign stocks? For comparison, VT (Vanguard total world stock market ETF) returned over 20% in the past year, while SDIV returned about 12%.
Do you want it for yield? Yield is pretty much irrelevant when it comes to equities.