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moneysense.ca, 30/05/10
More ETFs from BMO
The Bank of Montreal is launching ETFs at a fast and furious pace. Eight new ETFs from BMO started trading on the TSX recently. In just over a year since it launched its first ETFs, BMO has 30 ETFs in its lineup. The new ETFs that started trading last week are:
- BMO Equal Weight REITs (ZRE)
- BMO Equal Weight US Banks Hedged to CAD (ZUB)
- BMO Equal Weight US Health Care Hedged to CAD (ZUH)
- BMO Junior Oil (ZJO)
- BMO Junior Gas (ZJN)
- BMO Long Federal Bond (ZFL)
- BMO Real Return Bond (ZRR)
- BMO Emerging Markets Bond Hedged to CAD (ZEF)
Two of these ETFs are interesting. The BMO Real Return Bond ETF (ZRR) has a MER of 0.25% compared to a MER of 0.35% for the iShares DEX Real Return Bond ETF (XRB). ZRR holds 5 Government of Canada real return bonds but XRB is slightly more diversified as it has about 15% of its holdings in provincial real return bonds. A 10 basis points savings in MER may not be tempting enough for existing investors to switch because investors with large holdings will want to invest in real return bonds directly, not through an ETF. The Sleepy Portfolio, for example, has $7,300 in XRB. Switching to ZRR will save $7.30 per year but will cost $20 in trading commissions plus another 0.5% or so in bid-ask spreads. In other words, it will take 8 years for the Sleepy Portfolio to just recoup the costs of switching.
The BMO Equal Weight REITs (ZRE) has a MER of 0.55%, the same as the iShares S&P/TSX Capped REIT ETF (XRE). But unlike XRE, which is capitalization weighted and just three REITs account for more than half the weighting, ZRE weights 18 REITs equally. Therefore, ZRE may be a more diversified holding than XRE for the REIT portion of a portfolio. It would have been very tempting to switch if BMO had set the MER at a much lower level than 0.55%.
The rest of the new ETFs focus on such narrow market segments that Jon Chevreau says they are “the antithesis of the “buy-and-hold-for-the-long-run” first generation of broadly diversified equity ETFs epitomized by the Vanguards of the world”. I couldn’t have said it better.
moneysense.ca, 30/05/10
I suspect it won’t be long until the other major banks follow suit, but have you heard one way or the other? Is this in response to the overwhelming success of the Horizon line up? Thanks!
@Doctor Stock, I would be curious to know to what extent the Big 5 banks believe that any new ETFs they introduce would cannibalize their mutual fund sales.
@CC, can you elaborate on why you believe investors with large holdings would want to invest directly in RRBs? Is there something special about RRBs or do you have the same perspective for investors with large holdings and all bonds? Thanks!
I think investors have to move past the idea that all ETFs are passive, cheap and diversified. Not unlike mutual funds, ETFs are just an investment structure and can take any form the creators want.
@Doctor Stock: I haven’t heard any rumours that the other banks will follow suit. ETFs is an area where the first mover has enormous advantage. I don’t see how the big banks can take market share from iShares.
Horizon is taking a different tack by going for highly speculative investment vehicles and higher cost active investments. I don’t follow Horizon all that much — their products are not appealing for long-term, buy-and-holders at all.
@DM: There are only 5 Govt. of Canada RRBs available. Investors can buy them directly (either strip bonds or regular bonds) if their allocation to RRBs is large enough — say $50 K or more and save on the MERs. Bylo’s RRB page (http://www.bylo.org/rrbs.html) has useful information.
Investors who need income from their portfolio might also opt for a ladder of bonds instead of a bond ETF for the same reasons. Bond ladders do not have a clear cut advantage because bond ETFs tend to hold corporate bonds that typically have a higher yield. Investors can also opt for a ladder of GICs because GICs tend to pay a slightly higher interest as compensation for lack of liquidity.
@Money Smarts Blog: Agree. ETFs are now focussing on such narrow niches that their rationale for most investors is questionable.
I think the inclination to create proprietary ETFs stems not from the desire to take market share away from iShares, but rather to stem the flow of assets TO iShares. Plus, the money to be made from securities lending, the money made from keeping the price tight to the NAV (using their own designated brokers) can all be handled in house, no?
The salutary reputation of Canadian banks during the recent crisis,pre-ordained some self correction in this regard.Certain Laws are immutable.
So this is all that’s happening—in typical Canadian manner.
CC said..”I don’t follow Horizon all that much — their products are not appealing for long-term, buy-and-holders at all.”……Well would you say the same thing about TD Efunds? Some of the new Alphapro etf’s are good for the long run. Not all managed money is crap…you just have to dig a bit.
There are a ton of ETFs out there. Individual investors need to proceed with caution as some are very illiquid and many do not represent the sector or commodity as well as you may think. Researching how they are setup to trade is key before buying.
T4k have you ever had a problem clearing a ETF trade? Just because a ETF has a low volume on any given trading day, does not mean it’s illiquid. Most brokers have large inventors of any given ETF or they will find it on a ATN (pure or omga ) Now that said some ETF’s give better inner day pricing then some, an that’s the part to study if your swing trading these babies.
I like the diversification benefits of ZRE over XRE. It will be interesting to see how these “equal weight” indexes will perform in comparison to the traditional market cap weighted indexes. They might potentially outperform, as they give a higher weighting to smaller cap companies. However, I am a little hesitant to switch into ZRE as this is in another way picking a strategy and moves away from traditional couch potato indexing.
@dj: Touche! I was talking about their BetaPro products, not their AlphaPro products. I readily concede that not all actively-managed products are junk.
@MM: Yes, ZRE is better diversified than XRE. Either would be fine for the REIT portion. Personally, REITs only make up 5% of the portfolio, so any performance differential isn’t going to make a huge difference to the portfolio return.
@Preet: Only to the extent that the new ETFs have some uptake among investors. A number of ETFs have such low assets and low turnover that I wonder how long it will be before the vendors kill the product.
I would invest in BMO etf’s only if they paid dividends on a monthly or maybe quarterly basis. I don’t like them because of their yearly dividend payments. That makes Claymore and Ishares more interesting.
Why can’t we throw in a few high IQ designed derivative products in the mix, just so that the “options” available to devotees of ETFs become even more elasticised!.
Many are the combos and their viral possibilities, for bringing investors into the current investment age.
I can help if asked.
HJS.
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