Confusion, conflicts and costs
BM O ETFs, the second-largest e- xchange- traded- fund pro vider in Canada behind BlackRock’s iShares, earlier this summer introduced its BMO Canadian ETF Dashboard. Aside from keeping track of ongoing developments in the industry in Canada, the dashb- oard provides industry statistics and a compendium of ET-F-related articles that advis ers, clients and investors generally may wish to consult or f-ollow through on the action able ideas provided by various people engaged in the space.
I-t also includes a table con taining a list of BMO mutual f-unds built to suit different in v- estment mandates that con sist exclusively of ET- Fs, over whelmingly those from BMO.
Lumping mutual funds and ET- Fs is an ongoing develop ment in the industry and one that creates a number of issues Canadian investors should keep in mind heading into 2016.
Fund convergence, in general, should mean lower costs for investors as ETFs take the place of mutual funds, but don’t take it as a given.
I-t also creates conflicts, re sulting in a lot of disclosure statements as everyone from advisers to product providers to regulators wants to make sure investors know what t- hey’re getting. That way, ul timately, investors will only have themselves to blame when things don’t work according to plan
Re- gardless of these disclosures, however, investors can expect increased confusion a- s mutual- fund providers en ter the ETF space, and there should be several powerful new entrants in 2016 that will offer mutual funds comprised solely of ETFs, just like BM O is successfully doing.
T-o muddy the waters fur ther, there are also platform-traded funds ( PTFs): mutual funds that some suggest trade like ETFs.
Using t- he plumbing of ex changes, they offer benefits, most notably bulk trading (the a-bility for advisers to get execu tions in one trade that they can then spread through multiple client accounts). But, contrary to what the ads would have you believe, they do not trade like ETFs nor, for that matter, stocks.
Consider them another distribution method for their manufacturers, hopefully with more economical access to some actively managed funds investors may wish to consider.
The most important factor t-o keep in mind in all this con vergence, however, is cost. ETFs are driving down the cost of investing across the industry. Some simple index- tracking ETFs cost as low as 0.05 per cent. And putting together a few ETFs to provide exposure to different asset classes isn’t n- early as complicated or ex pensive as some make it sound.
But the jump in costs when putting together ETFs into a fund solution can increase the MER to as high as 1.86 per c- ent, as shown in the accom panying table showing BM O’s top 10 funds using ETFs.
T- he big financial institu tions Canadians typically rely on realize that the mutual fund fees they’ve enjoyed for so long w-ill continue to be under pres sure, so that anything they can do to offset the declines — such as packaging ET- Fs into mu tual funds — is worthwhile, particularly if what they have p-ackaged can be priced at lev els not far below their standard mutual fund offerings.
It is up to investors to ensure they get the best prices for the solutions they need. Rememb-er that the established finan cial institutions aren’t going to significantly drop their prices, particularly as they know the v-alue of their distributions ca pabilities.