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BMO's new ETFs: Timely addition or no big deal?

New exchange-traded funds? Yawn. The North American ETF industry seems to churn out a new product every day, on average.

A big Canadian bank getting into the ETF business? Now, that's interesting for a couple of reasons.

Bank of Montreal has just launched four ETFs - a Canadian government bond fund, a blue-chip Canadian equity fund and two funds focusing on blue-chip U.S. stocks - and three more are coming in the next few weeks. The first notable thing about this initiative is the man running it, Rajiv Silgardo, who as former CEO of Barclays Global Investors Canada helped build the iShares name into the country's top ETF franchise.

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Mr. Silgardo told The Globe last year before leaving Barclays that he saw no reason why ETF assets couldn't rise to 10 per cent of the $517-billion invested in mutual funds from the current 3 to 4 per cent.

This brings us to the second notable thing about BMO getting into ETFs. BMO is the country's seventh-largest mutual fund company, as well as its fourth-largest bank. If BMO is getting into ETFs, it's a serious endorsement of them as mainstream investment products.

Now, let's look at these ETFs from the point of view of investors. Should you jump right in? The early take from a couple of investment advisers who are big ETF users is no.

The reason is that there are now 112 ETFs listed on the Toronto Stock Exchange, plus close to 700 more available to Canadian investors on U.S. exchanges. With that much product to choose from, there's no reason not take some time to assess the new BMO funds.

"You have to ask, if you're looking at the BMO ETFs: Is there something there that I can't get already from more of a proven product?" said Brent Woyat, a portfolio manager with investment dealer Raymond James who is based in Vancouver.

"I'm always looking for something a little better, but I won't jump on the bandwagon," added Adrian Mastracci, a portfolio manager who is also based in Vancouver. "I don't have to be one of the first to have it."

Here are the kinds of things Messrs. Woyat and Mastracci will be looking at as they assess BMO's ETFs.

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Fees ETFs are index funds that trade like a stock and one of the key attributes is fees that come in much lower than mutual funds. BMO has recognized the importance of low fees with management expense ratios that in several cases come in a symbolic 0.01 of a percentage point (that's one basis point in the financial world) lower than competing ETFs.

An example is the BMO Dow Jones Canada Titans 60 Index ETF , which tracks an index of large blue-chip stocks. The MER is 0.16 per cent, which compares with 0.17 per cent for the highly popular iShares CDN LargeCap 60 Index Fund .

An adviser, who asked not to be named, said he would consider putting client money into BMO's ETFs because of this slight MER differential. But Mr. Woyat was ambivalent. "If they're offering the same products for roughly the same price, I don't know if it would be worth my while to switch."

BMO will also be the low-cost leader in offering U.S.-market ETFs with currency hedging to cancel out the impact of changes in the Canada-U.S. exchange rate. The BMO U.S. Equity Index ETF comes in at 0.23 per cent, a tick lower than the comparable iShares CDN S&P 500 Index Fund .

Less aggressively priced is the BMO Canadian Government Bond Index ETF , which is a category where low interest rates make it imperative to keep fees to a minimum. The MER here is 0.34 per cent, which undercuts the 0.35 charged by the iShares CDN Government Bond Index Fund but comes in well ahead of the 0.15 per cent charged by the Claymore 1-5 Yr Laddered Government Bond Index Fund .

Unique Products The standout here is the BMO Dow Jones Diamonds Index ETF , which gives Canadians a currency-hedged option for investing in the Dow Jones industrial average. The Dow, of course, is a collection of 30 of the most dominant blue-chip U.S. stocks. You can buy exposure to it through a NYSE-listed Dow ETF called Dow Diamonds and pay a lower MER of 0.18 per cent, or pay 0.24 per cent for the BMO fund and get currency hedging.

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Dow Jones Canada Titans 60 Index tracked by BMO's Canadian equity ETF is strikingly similar to the S&P/TSX 60 index, which is used by the iShares LargeCap fund. The BMO U.S. Equity Index ETF tracks the Dow Jones U.S. Large-Cap Index, which has 250 holdings that match up fairly closely to the largest names in the more widely known S&P 500.

The Citigroup Canadian Government Bond Index, tracked by BMO's fixed-income ETF, holds federal government bonds, while the index used by the iShares government bond ETF includes both federal and provincial issues. The bonds in both indexes have a weighted average of a bit over six years until maturity, but the Citigroup index has an average yield to maturity of 2.6 per cent while the DEX index is at 3.3 per cent.

The index used by Claymore's government bond ETF is a more conservative choice, with an average of just 2.9 years until maturity and a yield of 1.6 per cent. Shorter-term bonds will hold up better if interest rates rise as expected in the months ahead, but you give up some yield.

Liquidity and Size A large and liquid ETF trades in the hundreds of thousands or millions of shares per day and can quickly and easily be traded at competitive market prices. A small, illiquid ETF is … well, let's look at an example in the form of the now defunct Toronto-Dominion Bank family of exchange-traded funds. TD got into the ETF business in 2001 and then shut its four funds down in 2006 after failing to gain a significant following among investors. Liquidity is an important consideration for advisers. Mr. Woyat said he wouldn't want to buy an ETF for his clients and then have to transfer their assets into something else several years down the road.

"I definitely need to take a look to see if there's anything there of value for my clients," he said of the new BMO ETFs. "But I'm pretty satisfied with what I have."

Getting into the ETF game

Bank of Montreal has just issued four new exchange-trade funds listed on the Toronto Stock Exchange. Here's a profile of each:



MER (%)


BMO Canadian Government Bond Index ETF



Exposure to safe government bonds

TSX-Listed Competitors…

iShares CDN Government Bond Index Fund



Claymore 1-5 Yr Laddered Gov Bond ETF



BMO Dow Jones Canada Titans 60 Index ETF



Covers big TSX-listed blue chips

TSX-Listed Competitors…

iShares CDN LargeCap 60 Index Fund



Claymore Canadian Fundamental Index ETF



BMO U.S. Equity Index ETF



TSX-Listed Competitors…

iShares CDN S&P 500 Hedged to Cdn Dollars Index Fund



Claymore U.S. Fundamental ETF -C$ Hedged



BMO Dow Jones Diamonds Index ETF



TSX-Listed Competitors…


Coming Soon From BMO: BMO International Equity Index ETF; BMO Emerging Markets Equity Index ETF; BMO Global Infrastructure Index ETF

Source: BMO, iShares, Claymore Investments

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998.Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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