ETF, mutual fund worlds collide

ETFs and mutual funds seem to be converging, so investors can get lower fees, plus advice and service.

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From the December/January 2014 issue of the magazine.

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Illustration by Sébastien Thibault

Illustration by Sébastien Thibault

Exchange traded funds (ETFs) are becoming so popular it seems we’re seeing a replay of the mutual fund mania that swept the land in the 1990s. Far from ETFs toppling the mutual fund industry, however, the two industries seem to be converging. A case in point is the fall unveiling of BlackRock Canada’s suite of “outcome-oriented balanced mutual funds.”

When the world’s largest ETF player enters Canada’s $940 billion mutual fund market, that’s news. So is movement in the opposite direction, when the world’s largest maker of actively managed mutual funds–Fidelity Investments–expands aggressively into the U.S. ETF business: in March, Fidelity doubled its offering of BlackRock iShares ETFs to 65. Then in October, Fidelity unveiled 10 sector ETFs subadvised by BlackRock.

 2.42% Average Canadian equity mutual fund’s management expense ratio

Source: Morningstar

BlackRock’s Strategic Portfolio Series means Canada’s mutual fund salespeople can now sell clients ETFs via the prospectus mutual fund route, as was already the case with the PowerShares Funds based on individual PowerShares ETFs. BlackRock’s portfolios, which are made up of its own passively managed ETFs, are similar to Quotential portfolios that package up Franklin Templeton’s actively managed mutual funds.

As you’d expect for passive investments, BlackRock’s fees are below Quotential’s but higher than what DIY investors pay for the underlying iShares ETFs at discount brokers. BlackRock’s All-Bond Portfolio has a projected MER of 1.30% (with 0.5% going to advisers), while its aggressive equity portfolio comes in at 1.81% (with 1% to advisers.)

For investors who don’t want to get bogged down selecting individual ETFs or dealing with asset allocation or rebalancing, this is one way to go. You just have to pick one of seven portfolios that match your particular investment temperament and you’re done. It’s like MoneySense’s Couch Potato approach, but because iShares portfolios are sold by advisers, you also get the advice and service accompanying their sale. Instead of worrying about picking stocks or ETFs, advisers can add value through tax advice, financial planning and the rest of it.

 

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