ETFs held within mutual funds makes absolutely no sense

Yves Rebetez is managing director of ETF Insights, Canada’s leading publication covering the ETF industry. On the weekend Rebetez had a guest column in the Financial Post highlighting the reasons ETFs held within mutual funds make no sense.

Rebetez uses the BMO Canadian Equity ETF Fund to illustrate just how silly this mutual fund really is. Charging an annual MER of 1.05%, 99% of the fund’s total assets are invested in the BMO S&P/TSX Capped Composite Index ETF (ZCN), which itself charges just 0.17% per year.

The year-to-date performance of the mutual fund through October 31 is 8.9%, 80 basis points less than the ETF. Over 10 years a $10,000 investment at similar rates of return as those year-to-date, the ETF would generate close to $2,000 more than the mutual fund.

Yet, BMOs somehow managed to grow the mutual fund’s net assets to $383 million. I reached out to Yves Rebetez to ask him about this and he suggested, “There isn't inherently anything wrong per se in having BMO Mutual Funds avail themselves of the power of ETFs and offering packaged solutions of ETFs accessible to Mutual Fund investors who otherwise might not get to use them.” In his opinion this isn’t so much an issue of fees but rather access to distribution.

I totally understand where he’s coming from.

The bank’s bringing in management fees of $4 million from the mutual fund and then another $650,000 from the ETF all because of this lack of access for the average investor. Sure, you can argue that anyone can buy an ETF but unless they’re shown how, many are going to buy their investments through their branch, ratcheting up the fees paid.

In the end, betting on the BMO mutual fund rather than the ETF Is a lot like betting on the Washington Generals beating the Harlem Globetrotters. It’s just never going to happen.

Learn the history of the Bank of Montreal in this article.