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Barclays muscles in to zap TD's last advantage with ETFs

Investors win and Toronto-Dominion Bank loses in the latest developments to hit the world of exchange-traded funds.

Listen up if you're an ETF enthusiast who wants to invest in the most widely followed Canadian stock index, the S&P/TSX composite. Barclays Global Investors Canada will hold a vote on Nov. 15 to convert its iUnits S&P/TSX 60 Capped Index Fund into a product that would track a capped version of the S&P/TSX composite. Capped simply means that no stock can account for more than 10 per cent of the fund.

It so happens that there are already four ETFs that track Canada's benchmark stock index, and they're all offered by TD's funds division, TD Asset Management. There's a straight-up S&P/TSX composite ETF, plus a capped version and two other variants that focus on growth and value stocks within the index.

Barclays dominates the ETF business in Canada to the extent that TD is very close to invisible. But while Barclays has offered ETFs for investing in the blue-chip S&P/TSX 60 index, it had nothing for investors who wanted to buy into the much broader S&P/TSX composite (200 stocks versus 60). Now, Barclays is about to neutralize TD's one small advantage.

In theory, the TD exchange-traded funds are good products at reasonable prices -- the management expense ratios (MER) range from 0.25 per cent for the regular and capped funds and 0.55 per cent for the value and growth funds. But in real life, TD's neglect of its exchange-traded funds shows it's just a poseur in this line of business.

A long-term, buy-and-hold investor might not mind the fact that TD's funds rarely trade, and thus have big spreads between the price that market participants are asking when they sell and offering when they buy. But if you're an even semi-active trader or an institutional investor, those spreads strike you the way that dust and cobwebs do when examining merchandise in a store. shows that the TD S&P/TSX Composite Index Fund often trades less than 2,000 shares a day, and that there are days when it trades just a few hundred shares. What this tells you is that it's possible for one lonely retail investor to generate the entire day's volume for this ETF with a single trade.

Volume figures are more than just a popularity contest. Investor interest in the TD S&P/TSX Composite Index Fund is so lacklustre that it has traded this week with a hefty spread of 25 cents, while Barclays' biggest funds had spreads of 1 to 2 cents.

The other three TD exchange-traded funds are even more unloved. Example: The TD Select Canadian Growth Index Fund had a streak of six consecutive trading days last month in which it did not trade a single share.

The irony here is that the growth index fund is conceptually a smart product because it allows an investor to focus in on the stocks in the S&P/TSX composite that are showing growth characteristics. The growth style of investing has been hot this year, which explains why TD's growth index fund has outperformed Barclays' flagship iUnits S&P/TSX 60 Index Fund, or i60, 32.1 per cent to 30.5 per cent in the 12 months to Aug. 31.

You'll never hear this from TD, which treats its ETFs like an afterthought. This isn't a surprise when you consider that, first, TD is a major player in the conventional mutual fund business and, two, that ETFs are a repudiation of mutual funds because they dispense with the human stock-picking factor and simply mirror a stock index.

Once Barclays gets its capped S&P/TSX fund into action, investors will have no reason to buy TD's ETFs aside from the availability of the value and growth spinoffs. Barclays will offer similar pricing -- the MER of the new capped composite fund would be 0.25 per cent -- with far better liquidity and smaller spreads.

That's why investors win and TD loses.

More on the vote

Barclays clients will be asked to vote on three additional fund changes on Nov. 15. Barclays wants to convert its Government of Canada 5-Year Bond Fund into a more diversified short-term bond fund based on the Scotia Capital Short Term Bond Index. The move will not affect the 0.25-per-cent MER.

The other two changes would add currency hedging to two Barclays funds that track the S&P 500 and MSCI Europe, Australasia, Far East (EAFE) indexes. These latter two changes were discussed in a March 29 column -- the gist was that you'll pay a premium for these funds in order to be protected from the negative investing impact of a rising Canadian dollar. Note that there are cheaper, unhedged S&P 500 and EAFE funds that trade on the American Stock Exchange.

© 2007 The Globe and Mail. All rights reserved.

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