The country’s second-largest player in exchange-traded funds issued a news release recently to announce it was cutting the fee on one of its ETFs by 0.01 of a percentage point.
Yes, 0.01 of a point. The annual management fee on the $3.5-billion BMO Aggregate Bond Index ETF (ZAG-T) falls to 0.08 per cent from 0.09 per cent. Figure on the more comprehensive management expense ratio – the management fee is the major component here – being in the area of 0.09 to 0.13 per cent.
BMO’s fee reduction means little by itself, yet it’s highly symbolic of two important trends in the ETF business. One, overall competition is so fierce that companies are chopping fees by the micro-slice. Two, the stubbornly high cost of bond ETFs is declining to much more reasonable levels for a low interest rate world.
Two big competitors for ZAG are the $2.4-billion iShares Core Canadian Universe Bond Index ETF (XBB), with a management fee of 0.09 per cent and an estimated MER of 0.09 to 0.13 per cent, and the $1.6-billion Vanguard Canadian Aggregate Bond Index ETF (VAB-T), with a management fee of 0.08 per cent and an MER of 0.13 per cent. Five years ago, diversified bond ETFs typically had MERs in the 0.33 per cent range.
An analysis of the Top 100 largest mutual funds shows MERs barely moved on average over the past five years. Meanwhile, in ETF-land, they’re bludgeoning each other with fee cuts. The contrast couldn’t be more pronounced.
The downward ETF fee trend is particular welcome in the bond category. Even after a sharp rise in bond yields in the past 12 months, ZAG’s after-fee yield to maturity was just 2.6 per cent as of mid-June. The recent cut in the management fee for ZAG won’t make much difference to this yield, but it does have value. It shows that in a slow-growth world where returns are hard to come by, low-cost ETFs are an ally to investors. Let’s hope the mutual fund industry is taking notes.
Rob Carrick