Thank goodness for eagle-eyed readers! My initial enthusiasm for a new clutch of ETFs from BMO has evaporated based on reader feedback to yesterday’s post. I initially thought the BMO US Equity ETF and the BMO Emerging Markets Equity ETF fill gaps in the Canadian ETF lineup but I was mistaken. Here are the problems that readers have pointed out:

The BMO US Equity ETF is a total market ETF but it does not provide currency diversification as any US dollar exposure is hedged. Investors wanting a hedge already have plenty of options through iShares and Claymore ETFs. But investors wanting an unhedged, Canadian dollar denominated ETF for the US market still have to turn to US-listed ETFs.

Investors will have plenty of allocation to the Canadian market already through stocks, mutual funds and ETFs. In addition to providing redundant exposure to Canada, the BMO International ETF is expensive at 0.475%. Note that the TD International Index e-Series mutual fund charges almost exactly the same MER but requires no trading commisions or bid/ask spreads.

The BMO Emerging Markets ETF provides exposure to just one BRIC country — Brazil. Conspicuous by their absence are three major emerging market economies — Russia, India and China. Reader Chris noted that if all four had been left out, at least the fund could have been a nice complement to Claymore’s BRIC ETF!

The bottom line is that BMO is essentially coming out with some “me-too” ETFs that don’t fill existing holes in the Canadian ETF lineup. This is especially ironic considering that in the ETF industry the first mover has enormous advantage and newcomers have to compete by offering either (a) lower price or (b) innovative products. The new BMO ETFs fail on both counts.

This article has 7 comments

  1. Why is it that nobody wants to compete with the TD e-series funds? After 10 years, you’d think one of the other major banks would.

  2. I too am disappointed that the Emerging Markets ETF has a bizarre geographical weighting.

    Here is an alternative suggestion for Canadians looking to invest in emerging markets ETF while we weight for a first-rate product: put half your allocation into Vanguard’s VWO and the other half in Claymore’s CBQ. The combined allocation works out as follows (approximately):

    Brazil: 30%
    China: 30%
    India: 9%
    Russia: 5%
    Taiwan: 6%
    Korea: 6%
    South Africa: 4%
    Mexico: 2%
    Other: 8%

    This strategy has several benefits:

    a) it splits your currency risk, since one fund is in US dollars, the other in Canadian

    b) it tilts 30% your exposure to each of the two biggest economies, Brazil and China; by comparison VWO is 15% Brazil and 19% China, while CBQ is 45% Brazil and 41% China

    c) the combined MER of 0.46% is quite reasonable for this asset class

    Not a perfect solution, but perhaps a happy medium for now.

  3. I have very little faith in these start up etfs. Like a commenter said yesterday there is the possibility that the etf will shut down and you could be forced to liquidate at the worst possible time.

  4. To Dan B. Just because it is an ETF doesn’t automatically mean that it is an index fund. This is apparently an actively managed ETF of emerging markets. An index fund would probably have to weighted according to the size of the economy. Once you eliminate the former G7 nations, you really do have only very miniscule economies left to invest in…

    Also keep in mind that this fund is being put together now, when we already know of certain economies which are headed for trouble. Russia, with Vladimir Putin on a power grab, nationalizing assets, who knows where it’s going to go – I would also underweight Russia. The same obviously goes for Venezuela under Hugo Chavez. Don’t even talk to me about Iceland, the officially bankrupt country. We also have Robert Mugabe’s Zimbabwe, where the government is confiscating and mismanaging assets as well. And would you want to go and put your money into Sudan, Somalia, Ethiopia, Iraq, Haiti or Afghanistan? They’re all either failed states or are borderline so. The reality is that there simply aren’t really any places in the world where it is safe to invest… I say we should all count our blessings that we live in Canada! Sorry, that’s more than just a little bit of flag waving here!

  5. Dan B: Nice Strategy.

  6. Phil S: Both VWO and CBQ are index ETFs. They just use different indexes as benchmarks. As for Venezuela, Zimbabwe, Sudan, Somalia, Ethiopia, Iraq, Haiti or Afghanistan, none are included in either fund. I think you’ll find few people who would argue with keeping these countries out of your portfolio.

  7. http://www.reuters.com/article/newsOne/idUSTRE52M7QM20090323

    iShares is up for sale to shore up Barclays balance sheet.

    It isn’t clear whether it is Barclay Global Investors or only iShares for sale.

    Barclays is willing to finance 80% of the purchase.

    Could it be possible that Vanguard can buy most of iShares with financing from both Barclays and J P Morgan? (J P Morgan is very close with Vanguard.) Anyone have any idea how much cash is on Vanguard’s balance sheet (Vanguard is a not for profit company.) In such a deal, I will see that either JP Morgan or Goldman Sachs taking over the ETNs (Exchange Traded Notes). Some of the special commodity ETFs will probably be taken over by State Street or Invesco.

    Will Fidelity join the bidding process? The company (Fidelity or Vanguard or Capital Group(Provider of American Funds)) that can buy iShares will secure the top spot as the world’s largest mutual fund company.