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The Claymore alternative: Value in a plain wrap

Introducing the thinking investor's wrap program.

Wraps are a hot ticket in the mutual fund industry right now, accounting for 64 per cent of net sales in the first eight months of the year and $107.3-billion of the total $589-billion held in funds. Call it a victory for salesmanship over sense.

Sure, wraps offer a measure of convenience in the way they bundle various funds together into packages suitable for various types of investors. But let's get real here. How hard is it to build a portfolio of mutual funds and, if you have an adviser, isn't that his or her job anyway?

And then there's the ongoing cost to investors of owning wrap programs. Let's just say it's expensive, even by mutual fund standards.

As it happens, the thinking investor's wrap doesn't come from a mutual fund company. It's offered by Claymore Investments, an exchange-traded fund company that is getting creative in its efforts to challenge Canada's ETF leader, the iShares family owned by Barclays Global Investors.

This summer, Claymore introduced a pair of wraps based on ETFs, which are index funds that trade like a stock. The Claymore Global Balanced Income ETF and Claymore Global Balanced Growth ETF are classic wraps in that they provide an instant portfolio that offers diversified exposure to stocks and bonds. Where they differ from the fund industry version of the wrap is in cost.

Both Claymore wraps have a management expense ratio of 0.7 per cent, which includes the MERs for the various bond and equity components. Contrast that to the 2 to almost 3 per cent you might typically pay for a fund industry wrap and you'll understand the appeal to thinking investors.

It has to be said that if you dig down into the cost numbers, the Claymore wrap ETFs are not a screaming bargain. The global balanced growth fund's MER would be about 0.46 per cent if it were based strictly on the fees charged by its constituent funds according to their weightings. The fact that the MER is actually 0.7 per cent tells us that Claymore is collecting extra fees.

Thinking investors will make their peace with this for a couple of reasons. One, you stand to get a decent level of value by paying that small fee premium for the wrap. Take the global balanced income fund, for example. In a single purchase, you get an income-oriented portfolio that is roughly weighted 60 per cent to stocks and 40 per cent to bonds. More specifically, you get heavy exposure to Canadian dividend stocks and bonds, as well as real estate investment trusts, preferred shares and sprinklings of U.S. and global stocks. There's also a tiny bit of exposure to the energy sector and stocks in the global water sector. The total number of ETFs in the portfolio is 13, and the yield is about 3.9 per cent.

Automatic portfolio rebalancing is another benefit. Claymore's partner in building these ETFs, California-based Sabrient Systems, regularly monitors the market to see if the weightings in any particular sector need to be ratcheted up or down within a preset floor and ceiling. You simply buy an ETF like this and either leave it alone or augment it with small investments in other sectors.

Something that tells you Claymore is serious about offering an effectively diversified product is the fact that it's using some ETFs from archrival Barclays in the two wrap funds. The reason has to do with effective asset allocation.

Sabrient, a specialist in asset allocation, calls for bonds and real estate investment trusts to be used in the global balanced income and growth funds. The only way to get exposure to these sectors in Canada using ETFs is with iShares. "Their products make sense for a certain part of a portfolio, and so do ours," said Som Seif, Claymore's chief executive officer.

If they've read this far, mutual fund industry people would no doubt say that mutual fund wraps do pretty much the same things as the Claymore ETF wraps. More, even, if you consider the fancy risk questionnaires that fund wraps provide for new customers and the detailed account statements that clients receive.

The difference, of course, is cost. There's simply more value to be had in a no-frills ETF wrap that costs you 0.7 per cent in ownership fees than a plushly marketed mutual fund wrap at 2.5 per cent. Think about that if the all-in-one packaging of a wrap speaks to you as an investor.


ETF wraps: A primer

What are they?

Bundles of stock and bond exchange-traded funds wrapped into a single, easy-to-buy package.

Who offers them?

Claymore Investments Inc.

How do you buy them?

Listed like stocks on the TSX.

Stock symbols?

Claymore Global Balanced Income ETF is CBD; Claymore Global Balanced Growth ETF is CBN.

What do they hold?

13 or 14 separate ETFs covering Canadian government and corporate bonds, Canadian, U.S. and global stocks, and other sectors.

How much to buy?

As little as $5 to $29 at an online broker, depending on its commission schedule.

How much to own?

The management expense ratio is 0.7 per cent.


Wrapping up the fund market

Mutual fund industry assests, Aug. 31, '07

Stand-alone mutual funds ($588.8-billion) 85%

Mutual fund wraps ($107.3-billion) 15%

Mutual fund net sales, 2007 Year-to-date, Aug. 31, 2007

Stand-alone mutual funds ($9.7-billion) 36%

Mutual fund wraps ($17-billion) 64%


© 2007 The Globe and Mail. All rights reserved.

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