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moneysense.ca, 19/11/08
iShares Portfolio Builder ETFs: Complex and Pricey
Current issue:
Jon Chevreau reported that iShares has announced four new wrap ETFs that it calls “Portfolio Builder Funds”. The two core funds — XGR, a growth fund and XCR, a conservative fund — are designed to provide one-stop exposure to the major asset classes. The other two funds (Alternatives Completion Fund, XAL and Global Completion Fund, XGC) provide the “explore” part of the portfolio by capturing alternative assets. The MER for the first group of funds is 0.60% and 0.70% for the second group.
The fees for these portfolio ETFs are slightly less than portfolio mutual funds available through TD e-Series Funds or ING Streetwise Funds but the same criticism directed towards the mutual funds applies here: investors could assemble the same portfolio at a much lower price. The weighted average MER of the Sleepy Portfolio, for instance, is a fraction of these fees: 0.22%.
A far bigger issue with these wraps is their complexity. Let’s take the iShares Growth Core Portfolio Builder Fund (XGR). Here is the fund’s stated objective:
While remaining consistent with the fund’s investment objective, Barclays Canada seeks to identify and optimally diversify certain fundamental sources of return through a proprietary multi-factor selection process. The identified fundamental sources of return include exposure to: interest rates; inflation; credit quality; liquidity premium; incomplete information/transparency; global and domestic economic growth; political uncertainty; and foreign currencies. The selection process determines the fund’s level of exposure to the fundamental sources of return and its expected level of risk. Barclays Canada will apply the selection process to the fund at least once per quarter and more often if market conditions warrant, and, if it considers it appropriate, rebalance the portfolio of the fund.
Can you tell what the asset allocation is? Me neither. The current allocation doesn’t explain much either. The portfolio has 42.7% allocated to bonds, 16.2% to Canadian stocks, 26.5% to foreign stocks and the rest in REITs, commodities etc. The fund holds a motley collection of 21 ETFs and fully three make up less than 1% of the portfolio. Compare the complexity of this fund with the simplicity of the ING Streetwise Balanced Fund, which has 40% in bonds and 60% split equally among Canadian, U.S. and other developed markets.
Passive investors are presumably looking for simplicity and low cost. Products like these fail on both counts.
moneysense.ca, 19/11/08
I’ve written about CDN bank wrap mutual funds a few times and this move really isn’t much of a surprise when you examine the amount of fees they generate by offering a “professional product”. iShares and a few others have slowly been diversifying into more products with higher fees in an attempt to increase revenues, but I start to wonder if too many products starts to draw away from the definitive advantages of low cost ETF’s vs. mutual funds.
Based on the stated objective, the new funds seem to be actively-managed. If this is true, there is no stable asset allocation. It seems doubtful that Barclays can overcome the higher MER consistently through active management. Unfortunately, we can’t be sure of this until the funds have been operating for decades.
Barclays is one of the biggest banks in world and it has bought remnants of Lehman Brothers. Barclays is here to make a profit in Canada unlike Vanguard in the US. One must evaluate carefully before using any of Barclay’s ETFs.
One thing that stand out for me is XRE. Even though XRE only has .55% management fee, it is still ridiculously high considering XRE only hold 13 REITs. I personally think XRE’s MER should be no more than .25% and Barclay would still make a profit off the ETF. Also REITs is a very important to portfolios due to its unique characteristics. As a result, I feel that Canadians don’t have a good product that is representative of Canadian REITs.
Brad: These products are sold, not bought. An investor with nothing more than a desktop calculator can assemble the underlying porfolio for a much lower cost.
Michael: I agree that the fund uses some sort of tactical asset allocation, which would explain why a “growth” fund has more than 40% in bonds.
EconStudent: I agree with you that XRE is too expensive and can be “unbundled” easily:
http://www.canadiancapitalist.com/2008/06/24/unbundling-the-ishares-cdn-reit-index-fund-xre
Barclays could lower the fee on other funds such as the XSB. But unfortunately, ETFs are a product in which the first mover has enormous advantage. Though, Vanguard has introduced VWO and VEA to compete with EEM and EFA respectively at less than half the price, Barclays hasn’t bothered to reduce their MERs. And in a small market like Canada, Barclays isn’t going to budge on fees.
Whatever happened to the idea that ETF’s were supposed to be a simple investment?
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ING Streetwise Funds work for me because I’m dollar cost averaging on a weekly basis. Small sums like $100/week. It seems like it’s probably the best value for the small investor despite the 1% MER. Once my portfolio grows large enough I think I’ll switch to basic iShares ETFs and reduce my buying to quarterly or semi-annually. Anyone have thoughts on this approach?
CC, great post – they are indeed pricey.
The only advantage that I can think of is lower trading commissions as you trading 1ETF as opposed to several different ETFs each time; of course, the difference is most likely nominal especially if you are trading larger amounts. They *may* be good for people who fit in the very narrow – ETF vs. Mutual fund realm.
Sam: You may want to consider looking into the TD e-series funds. You can probably build a well diversified balanced portfolio at a lower cost (requires some basic arithmetic, or a spreadsheet made by CC on an earlier post: http://www.canadiancapitalist.com/2008/02/04/sleepy-portfolio-rebalancing-spreadsheet )
CC: I agree with your previous post on XRE.
However, I must point out that by buying only 50% in RioCan REIT (REI.UN), 30% in H&R REIT (HR.UN) and 20% in Canadian REIT (REF.UN) is taking more unsystematic risk than buying the Canadian REIT index. A concentration of unsystematic risk on REIT portion is acceptable if REIT allocation is small like 5% of the portfolio. If REIT allocation is 15% or 20% of the portfolio, it might be a better idea to take less unsystematic risk by diversification in the index. Ideally, it requires 30 different equities to eliminate unsystematic risk. Research according Professor Malkiel has suggested REIT has positive characteristics that can strongly benefits one’s portfolio.
Overall, I think overweight in Canadian REIT is good idea during this bear market. I think Canadian REITs will get an increase in P/E boost during 2010, because income trust structure for other sectors will be eliminated and a lot of investors will crowd into the REIT sector.
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First, the MER is actually pretty good (as mentioned above). You are forgeting to include transaction costs, that is, the cost of puchasing each ETF. When you do the math, you’ll find that it’s still a cheaper option than buying ING index funds in most cases.
Second, the asset allocation is of thses ETFs are quite sophisticated. A multi-factor model is used to help portfolio mangers determine which sectors or assets will out perform it’s peers (ie. other sectors and assets). It’s a more modern approach, and it’s acceptance is quite high in instituional investment industry (pension funds, pooled funds, personal WRAP accounts). I actually like the asset allocation in XGR etf.
Third, Professor Malkiel study is dated and there are many new studies that show that having only 10-15 stocks are enough to elimanate most unsystematic risk.
Fourth, the NEGATIVE things about these funds are that they are thinly traded!!!!!!!! There can be a large disconect between the actual price of the ETF and NAV, which can hurt your bottom line (or if you are a good trader, potentially increase your returns).