In October, Vanguard cut fees for 11 of their 21 TMX-traded ETFs, partly in response to earlier reductions by rivals iShares and BMO. In September, State Street Global Advisors cut fees for 15 of their U.S.-traded ETFs. That included a 40% reduction to their most popular S&P 500 offering (SPY) from 0.15% to 0.09%. Since SPY has about $172 billion in assets, this price decrease represents $103 million in forgone revenue.
Rivals have been clawing at market share with lower fees; iShares’ Core S&P 500 (IVV) is at 0.07% and Vanguard’s S&P 500 (VOO) is at 0.05%. No sponsor can rest on past successes and investor loyalty can, to an extent, be bought. The hardest truth for portfolio managers is to admit that much of investing has become commoditized. While alternative investing like private equity, infrastructure and some hedge fund strategies continue to charge premium fees, mainstream asset allocation is becoming cheaper.
The most obvious result is that investors benefit. Costs are one of the few certainties in the investment business, so lowering them is the most reliable way to improve returns. Canadian investors have had access to Horizons’ swap-based S&P TSX 60 (HXT) with a 0.05% fee (net of rebate) since Q4 2010. Today, six Canadian equity ETFs offer a 0.05% management fee (see Table 1 below).
Behold the 12-basis-point portfolio
Each table shows TSX-traded ETFs with annual management fees under 0.20% for Canadian, U.S. and international equity. Equity ETFs are listed by market capitalization as of October 2014, and Canadian fixed income is listed by duration. For less than 0.12% per year, an investor can now access a well-diversified 60% equity, 40% bond portfolio: 20% Canadian equity (management fee of 0.05%), 20% U.S. equity (0.10%), 20% international equity (0.20%), 40% Canadian bonds (0.12%). An all-Canadian version would cost less than 0.08%.
An investor with $250,000 can get a diversified global portfolio for $300 a year plus commissions. A balanced mutual fund would cost $5,000 (assuming a 2% fee) by comparison, while a balanced portfolio of index funds (assuming a 1% fee) would cost $2,500.
Advisors can leverage time, a scarce resource, by using algorithms to manage investments. In the U.S., some investment advisors are embracing systems similar to those used by robo-advisors to be sure a consistent discipline is applied to client portfolios. If establishing, monitoring and rebalancing a portfolio can be done automatically, more time can be spent developing relationships and gathering assets. In short, client-focused advisors who embrace the efficiencies from unbundling investment services and commoditizing money management will benefit from ETF price wars.
| Table 1: Canadian equity ETFs with 0.05% management fees | ||||
| *Swap-based | ||||
| Symbol | Yield | Holdings | Market Capitalization |
|
| iShares Core S&P/TSX Capped Composite | XIC | 2.477% | 251 | 1,731,788,000 |
| BMO S&P/TSX Capped Composite Index ETF | ZCN | 2.675% | 252 | 1,229,606,582 |
| Horizon S&P/TSX 60 Index ETF | HXT* | N/A | N/A | 627,475,406 |
| Horizon S&P/TSX 60 Index ETF (US) | HXT/U* | N/A | N/A | 570,956,923 |
| Vanguard FTSE Canada Index ETF | VCE | 2.621% | 75 | 263,384,000 |
| Vanguard FTSE Canada All Cap Index ETF | VCN | 1.652% | 243 | 124,671,000 |
| Table 2: Low-cost U.S. equity ETFs | |||||
| *Swap-based | |||||
| Symbol | Mgt. Fee | Yield | Holdings | Market Capitalization |
|
| iShares Core S&P 500 Index (CAD) | XSP | 0.10 | 1.601% | 504 | 2,307,696,000 |
| BMO S&P 500 ETF | ZSP | 0.10 | 1.373% | 503 | 1,581,292,937 |
| BMO S&P 500 ETF (CAD) | ZUE | 0.10 | 1.644% | 504 | 563,400,415 |
| Vanguard US Total Market (CAD) | VUS | 0.16 | 1.455% | 3,742 | 233,936,400 |
| Vanguard US Total Market Index | VUN | 0.17 | 1.287% | 3,742 | 216,109,600 |
| Horizons S&P 500 Index ETF (CAD) | HXS* | 0.17 | N/A | N/A | 195,572,543 |
| Horizons S&P 500 Index ETF | HXS.U* | 0.17 | N/A | N/A | 174,950,948 |
| BMO S&P 500 ETF (USD) | ZSP.U | 0.10 | 1.464% | 503 | 74,476,060 |
| Vanguard S&P 500 Index ETF (CAD) | VSP | 0.08 | 1.54% | 505 | 71,740,000 |
| Table 3: Low-cost international equity ETFs | |||||
| Symbol | Mgt. Fee | Yield | Holdings | Market Capitalization |
|
| BMO MSCI EAFE (CAD) | ZDM | 0.20 | 2.324% | 441 | 672,941,892 |
| Vanguard FTSE Dev. ex North America (CAD) | VEF | 0.20 | 2.697% | 1,370 | 189,744,000 |
| iShares Core MSCI EAFE IMI Index ETF | XEF | 0.20 | 2.298% | 1,602 | 185,320,000 |
| Vanguard FTSE Developed ex North America | VDU | 0.20 | 2.793% | 1,370 | 137,728,150 |
| BMO MSCI EAFE Index ETF | ZEA | 0.20 | 2.507% | 464 | 130,315,840 |
| Table 4: Low-cost Canadian fixed-income ETFs | |||||
| *Swap-based | |||||
| Symbol | Mgt. Fee | Yield | Duration | Market Capitalization |
|
| iShares Core Canadian Long Term Bond | XLB | 0.18 | 3.845% | 14.05 yrs | 97,104,000 |
| Vanguard Canadian Aggregate Bond Index ETF | VAB | 0.12 | 2.999% | 7.4 yrs | 154,330,000 |
| Horizons Canadian Select Universe Bond ETF | HBB* | 0.15 | N/A | 7.21 yrs | 10,449,425 |
| BMO Discount Bond Index ETF | ZDB | 0.20 | 2.036% | 7.03 yrs | 20,111,000 |
| iShares Core High Quality Canadian Bond | XQB | 0.12 | 2.894% | 6.14 yrs | 65,952,000 |
| iShares 1-10 Year Laddered Government Bond | CLG | 0.16 | 3.404% | 4.3 yrs | 38,044,500 |
| First Asset 1-5 Year Laddered Govt Strip Bond | BXF | 0.20 | 1.727% | 3.37 yrs | 5,060,000 |
| iShares 1-5 Year Laddered Government Bond | CLF | 0.17 | 3.561% | 3.02 yrs | 972,216,000 |
| BMO Short Corporate Bond Index ETF | ZCS | 0.12 | 3.194% | 2.74 yrs | 749,904,913 |
| iShares Core Candian ST Corp Maple Bond | XSH | 0.12 | 3.120% | 2.71 yrs | 176,398,000 |
| Vanguard Canadian Short-Term Corp Bond | VSC | 0.10 | 3.017% | 2.7 yrs | 411,321,000 |
| Vanguard Canadian Short-Term Bond Index ETF | VSB | 0.10 | 2.445% | 2.7 yrs | 290,043,000 |
| iShares Core ST High Quality Canadian Bond | XSQ | 0.12 | 2.601% | 2.67 yrs | 8,016,000 |
| PowerShares 1-3 Year Laddered Floating Rate | PFL | 0.20 | 2.706% | 0.5 yrs | 3,003,000 |
| RBC Target 2014 Corporate Bond Index ETF | RQB | 0.20 | 3.395% | 0.12 yrs | 15,988,500 |
| Purpose High Interest Savings ETF | PSA | 0.11 | 1.295% | N/A | 80,032,000 |
All figures as of October 15, 2014
by Mark Yamada, president of PUR Investing Inc., a registered portfolio manager and software development firm. Disclosure: PUR Investing Inc. is a sub-advisor and portfolio provider for Horizons ETFs.