BMO fires latest volley in price war

Second largest ETF provider positions itself as Canada's co-leader in low-cost investing.

Rudy Luukko 23 April, 2014 | 1:03AM
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Canada's two largest managers of exchange-traded funds are engaging in nickel and diming that investors can only applaud.

The latest volley in the ETF price war was fired by the second-largest player, BMO Asset Management Inc. It's slashing management fees on seven of its ETFs by anywhere from five to 20 basis points, effective April 30. (See table below.)

Announced on April 21, the fee reductions affect six equity funds and one fixed-income fund. In most cases, they match reduced management fees that took effect on March 25 at the $43.3-billion iShares ETF family sponsored by market leader BlackRock Asset Management Canada Ltd.

Last month's fee cuts by iShares, and this week's counter-move by the $13.3-billion BMO family, leave the two firms as the co-leaders in low-cost index investing across various core equity categories.

For the time being, they're "out-Vanguarding" their rivals, which include Vanguard Investments Canada Ltd., the Canadian arm of the U.S.-based fund-management giant known as a champion of low-fee index funds.

Meanwhile, other ETF firms in Canada are emphasizing strategic beta strategies or other approaches that seek to outperform traditional market-capitalization-based indexing.

BMO's price cuts will enable investors to build broadly diversified portfolios -- with exposure to Canadian, U.S., Europe Australasia Far East (EAFE) and emerging markets equities -- with management fees ranging from five to 25 basis points.

The cheapest of these is BMO S&P/TSX Capped Composite Index ZCN, whose new management fee of five basis points (0.05%) will match that of iShares S&P/TSX Capped Composite Index XIC. Also effectively matching this price point is Horizons S&P/TSX 60 Index ETF HXT, a derivatives-based fund that has rebated two basis points of the 0.07% fee specified in its prospectus.

In the U.S. Equity category, BMO and iShares will be positioned as the co-leaders, each charging an industry-low 0.10% for their ETFs, both currency-hedged and unhedged, that track the S&P 500 Index.

In the International Equity category, BMO will become the co-leader with iShares as the low-cost provider for unhedged ETFs. The new management fee for BMO MSCI EAFE Index ZEA is 0.20%, matching the reduced fee announced in March for iShares MSCI EAFE IMI Index XEF.

These two competing ETFs do not have identical indexing strategies. BMO's EAFE fund is a large- and mid-cap mandate that provides exposure to an estimated 85% of the market capitalization of the overseas markets in which it invests. The more inclusive iShares ETF provides exposure to an estimated 99% of market capitalization.

In the same category, BMO stands alone as the soon to be low-cost provider for broad currency-hedged exposure to international equities. The new management fee for BMO MSCI EAFE Hedged to CAD Index ZDM is also 0.20%, a steep reduction of 15 basis points from the current fee being charged until the end of this month.

In the Emerging Markets Equity category, it's again BMO and iShares that will be the co-leaders in low-cost index investing. As is the case with overseas developed markets, iShares MSCI Emerging Markets IMI Index XEC has exposure to 99% of the market, versus 85% for BMO MSCI Emerging Markets Index ZEM.

The only fixed-income ETF affected by BMO's latest fee cuts is BMO Short Corporate Bond Index ZCS. Its new management fee of 0.12% will make it one of the three cheapest ETFs in any fixed-income category, matching the recently reduced fees charged by iShares High Quality Canadian Bond Index CAB and iShares Canadian Short Term Corporate + Maple Bond Index XSH.

BMO ETF fee reductions
ETF Current fee (%) New fee (%) Change (bps)
 BMO S&P/TSX Capped Composite Index (ZCN) 0.15 0.05 -10
 BMO S&P 500 Index (ZSP/ZSP.U) 0.15 0.10 -5
 BMO S&P 500 Hedged to CAD Index (ZUE) 0.15 0.10 -5
 BMO MSCI EAFE Index (ZEA) 0.30 0.20 -10
 BMO MSCI EAFE Hedged to CAD Index (ZDM) 0.35 0.20 -15
 BMO MSCI Emerging Markets Index (ZEM) 0.45 0.25 -20
 BMO Short Corporate Bond Index (ZCS) 0.30 0.12 -18
Source: BMO Asset Management Inc.

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About Author

Rudy Luukko

Rudy Luukko  Rudy Luukko is a freelance writer who contributes to Morningstar.ca on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.

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