ETFs held within mutual funds makes absolutely no sense

ETFs held within mutual funds makes absolutely no sense

ETFs held within mutual funds makes absolutely no sense Yves Rebetez is managing director of ETF Insights, Canada’s leading publication covering the ETF industry. On the weekend Rebetez had a guest column in the Financial Post highlighting the reasons ETFs held within mutual funds make no sense.

Rebetez uses the BMO Canadian Equity ETF Fund to illustrate just how silly this mutual fund really is. Charging an annual MER of 1.05%, 99% of the fund’s total assets are invested in the BMO S&P/TSX Capped Composite Index ETF (ZCN), which itself charges just 0.17% per year.

The year-to-date performance of the mutual fund through October 31 is 8.9%, 80 basis points less than the ETF. Over 10 years a $10,000 investment at similar rates of return as those year-to-date, the ETF would generate close to $2,000 more than the mutual fund.

Yet, BMOs somehow managed to grow the mutual fund’s net assets to $383 million. I reached out to Yves Rebetez to ask him about this and he suggested, “There isn't inherently anything wrong per se in having BMO Mutual Funds avail themselves of the power of ETFs and offering packaged solutions of ETFs accessible to Mutual Fund investors who otherwise might not get to use them.” In his opinion this isn’t so much an issue of fees but rather access to distribution.

I totally understand where he’s coming from.

The bank’s bringing in management fees of $4 million from the mutual fund and then another $650,000 from the ETF all because of this lack of access for the average investor. Sure, you can argue that anyone can buy an ETF but unless they’re shown how, many are going to buy their investments through their branch, ratcheting up the fees paid.

In the end, betting on the BMO mutual fund rather than the ETF Is a lot like betting on the Washington Generals beating the Harlem Globetrotters. It’s just never going to happen.
  • Ryan 2014-11-24 1:12:57 PM
    While the example given does illustrate a situation where owning the individual EFT outside of a mutual fund is more beneficial, there are circumstances (i.e. corporate class mutuals holding ETFs) where the ability to better control taxation offers inherent benefits that you cannot get from the ETFs when repositioning the portfolio for asset allocation and other purposes. Unless there is strategic tax planning involved, however, the article is quite correct in that the only logical reason to purchase the MF instead of the ETF itself is because of the licensing restrictions of a mutual fund only representative.
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  • Will Ashworth 2014-11-24 2:27:57 PM

    Your comment indicates just how in vogue corporate class mutual funds are at the moment.

    Perhaps all 9 of the ETF providers in Canada ought to offer a corporate class structure.

    Thanks for the comment.
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  • Kevin O'Brien 2014-11-24 2:32:58 PM
    BMO is perpetuating the myth that Passive investing is better than Active. Only a Bank would play both sides against the middle. In the end it is the Banks Customers who suffer and the media paints the industry with a broad brush . I suggest the BOM client seek out a fee based advisor, have a plan and for Canadians to drop the Big 5 banks as being your source of financial services. Their focus is on making your money...their money.
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