There's a radical new development in one of the great corporate competitions of our time.
Mac v. PC has nothing on mutual funds v. exchange-traded funds, better known as ETFs. Just to set the stage, mutual funds have vastly more market share, while the ETF business is growing faster.
Now, the two rivals have been teamed together in the product lineup of Invesco Trimark, one of the country's largest mutual fund companies. Invesco Trimark announced yesterday that it is offering a series of eight ETFs in a mutual fund wrapper that will be available wherever mutual funds are sold. The new lineup goes by the name PowerShares Funds.
One of the issues with ETFs is that you need a brokerage account to buy them, or an investment adviser who is licensed to sell stocks. Mutual funds are available through a much larger network of advisers, planners, banks and other outlets. What Invesco Trimark is doing, then, is bringing ETFs to the majority of investors and advisers who haven't been able to buy or sell them.
Elsewhere in the fund industry, they want to bury ETFs, not incorporate them into their products. One firm, Mackenzie Financial, recently issued a brochure called "I Thought I Wanted an ETF." It's a point-by-point attempt to demolish ETFs, which at their simplest are mutual funds that track stock and bond indexes. So far, Mackenzie's stratagem hasn't hurt ETFs much. But then, you can no more prove funds are categorically better than ETFs than you can that PCs are better than Macs, that Coke is better than Pepsi, or that Hertz is better than Avis.
Here are some actual facts about funds and ETFs.
All the money placed with the mutual fund industry as of Oct. 31 amounted to $573-billion, which compares with about $27.8-billion for ETFs. Where ETFs have the advantage is in their growth rate. While mutual fund assets have risen about 13 per cent this year, ETFs are up 43 per cent.
Invesco Trimark is unique in the fund industry because its parent company, Atlanta-based Invesco Ltd., also controls the fourth-largest ETF player in the world, PowerShares. U.S.-listed PowerShares ETFs are the core investment of most of the new PowerShares Funds.
Peter Intraligi, president of Invesco Trimark, described his company as being "agnostic" on the ETF v. mutual funds question. "This is not about pitting one investment product over another," he said. "It's about putting products together so you get a better investor experience."
Eureka. Finally, something useful for real-world investors out of the ETF v. mutual fund rivalry. Both are valid portfolio-building tools, and they work well in tandem.
Don't take my word for it, though. Check out what the country's big pension funds are doing with their money and you'll generally find an index component as well as individually selected stocks, bonds and other assets.
The foundation of index investing as carried out through ETFs is low fees: It's much cheaper to match the holdings of an index than it is to pay managers to select the best investments. This explains why the largest Canadian equity funds have management expense ratios ranging from 1.43 per cent to 2.28 per cent, while the largest comparable ETFs have MER as low as 0.17 per cent.
PowerShares Funds have MERs ranging from 1.73 per cent to 2.11 per cent. That's not bargain pricing, but it's reasonable if you take the time to understand what you're getting.
First off, these are not products for do-it-yourself investors, as regular ETFs are. PowerShares Funds are meant to be used by advisers, which is why a full percentage point of their MERs is accounted for by continuing service fees called trailing commissions.
These funds have some other features that help explain their costs. The global funds use currency hedging, so that returns will always come close to matching the underlying ETFs as listed on the New York Stock Exchange. Also, these funds use a tax-efficient corporate class structure, a benefit for non-registered accounts.
To make PowerShares Funds successful, Invesco Trimark has to persuade fund-selling advisers who are used to regarding ETFs as the enemy. The sales pitch is basic: Mixing index investments with regular mutual funds is good for clients. If a fund manager is having a bad year because she's avoiding a sector that's driving the market, then an index-tracking ETF can pick up some of the slack. If the index is going nowhere, then maybe the fund manager's stock picks can outperform.
It's all about smoothing the ride for investors, or minimizing those killer ups and downs. That's how investment companies are going to get and keep customers in the years ahead, not with spin about how funds beat ETFs.
Mutual Funds +ETFs
The mutual fund company Invesco Trimark has introduced a new lineup of funds that offer a way to buy exchange-traded funds for investors and advisers who don't normally have access to them. These funds will be available wherever mutual funds are sold.
|Fund||MER (%)*||Fees for Comparable ETFs (%)|
|PowerShares FTSE RAFI Cdn Fundamental Index Class||1.79||0.17 - 0.65|
|PowerShares Canadian Dividend Index Class||1.73||0.5 - 0.6|
|PowerShares Global Agriculture Class||2.01||0.65 - 0.75|
|PowerShares Global Gold and Precious Metals Class||2.01||0.55 - 0.75|
|PowerShares Global Water Class||2.01||0.6 - 0.75|
|PowerShares Global Clean Energy Class||2.01||0.75|
|PowerShares Golden Dragon China Class||1.86||0.6 - 0.75|
|PowerShares FTSE RAFI Emerg. Mkts Fundamental Class||2.11||0.65 - 0.85|
|*Management expense ratios for PowerShares Funds include commissions paid to advisers, as well as currency hedging (where applicable) and the tax benefits of a corporate structure (you can switch between funds without incurring a capital gain, and year-end capital gains distributions are lessened). ETF fees do not include anything to pay advisers, and do not use a corporate structure.|
© 2007 The Globe and Mail. All rights reserved.
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