In October, Vanguard cut fees for 11 of their 21 TMX-traded ETFs, partly in response to earlier reductions by rivals iShares and BMO. In September, State Street Global Advisors cut fees for 15 of their U.S.-traded ETFs. That included a 40% reduction to their most popular S&P 500 offering (SPY) from 0.15% to 0.09%. Since SPY has about $172 billion in assets, this price decrease represents $103 million in forgone revenue.

Rivals have been clawing at market share with lower fees; iShares’ Core S&P 500 (IVV) is at 0.07% and Vanguard’s S&P 500 (VOO) is at 0.05%. No sponsor can rest on past successes and investor loyalty can, to an extent, be bought. The hardest truth for portfolio managers is to admit that much of investing has become commoditized. While alternative investing like private equity, infrastructure and some hedge fund strategies continue to charge premium fees, mainstream asset allocation is becoming cheaper.

The most obvious result is that investors benefit. Costs are one of the few certainties in the investment business, so lowering them is the most reliable way to improve returns. Canadian investors have had access to Horizons’ swap-based S&P TSX 60 (HXT) with a 0.05% fee (net of rebate) since Q4 2010. Today, six Canadian equity ETFs offer a 0.05% management fee (see Table 1 below).

Behold the 12-basis-point portfolio

Each table shows TSX-traded ETFs with annual management fees under 0.20% for Canadian, U.S. and international equity. Equity ETFs are listed by market capitalization as of October 2014, and Canadian fixed income is listed by duration. For less than 0.12% per year, an investor can now access a well-diversified 60% equity, 40% bond portfolio: 20% Canadian equity (management fee of 0.05%), 20% U.S. equity (0.10%), 20% international equity (0.20%), 40% Canadian bonds (0.12%). An all-Canadian version would cost less than 0.08%.

An investor with $250,000 can get a diversified global portfolio for $300 a year plus commissions. A balanced mutual fund would cost $5,000 (assuming a 2% fee) by comparison, while a balanced portfolio of index funds (assuming a 1% fee) would cost $2,500.

Advisors can leverage time, a scarce resource, by using algorithms to manage investments. In the U.S., some investment advisors are embracing systems similar to those used by robo-advisors to be sure a consistent discipline is applied to client portfolios. If establishing, monitoring and rebalancing a portfolio can be done automatically, more time can be spent developing relationships and gathering assets. In short, client-focused advisors who embrace the efficiencies from unbundling investment services and commoditizing money management will benefit from ETF price wars.

Table 1: Canadian equity ETFs with 0.05% management fees
Symbol Yield Holdings Market
iShares Core S&P/TSX Capped Composite XIC 2.477% 251 1,731,788,000
BMO S&P/TSX Capped Composite Index ETF ZCN 2.675% 252 1,229,606,582
Horizon S&P/TSX 60 Index ETF HXT* N/A N/A 627,475,406
Horizon S&P/TSX 60 Index ETF (US) HXT/U* N/A N/A 570,956,923
Vanguard FTSE Canada Index ETF VCE 2.621% 75 263,384,000
Vanguard FTSE Canada All Cap Index ETF VCN 1.652% 243 124,671,000
Table 2: Low-cost U.S. equity ETFs
Symbol Mgt. Fee Yield Holdings Market
iShares Core S&P 500 Index (CAD) XSP 0.10 1.601% 504 2,307,696,000
BMO S&P 500 ETF ZSP 0.10 1.373% 503 1,581,292,937
BMO S&P 500 ETF (CAD) ZUE 0.10 1.644% 504 563,400,415
Vanguard US Total Market (CAD) VUS 0.16 1.455% 3,742 233,936,400
Vanguard US Total Market Index VUN 0.17 1.287% 3,742 216,109,600
Horizons S&P 500 Index ETF (CAD) HXS* 0.17 N/A N/A 195,572,543
Horizons S&P 500 Index ETF HXS.U* 0.17 N/A N/A 174,950,948
BMO S&P 500 ETF (USD) ZSP.U 0.10 1.464% 503 74,476,060
Vanguard S&P 500 Index ETF (CAD) VSP 0.08 1.54% 505 71,740,000
Table 3: Low-cost international equity ETFs
Symbol Mgt. Fee Yield Holdings Market
BMO MSCI EAFE (CAD) ZDM 0.20 2.324% 441 672,941,892
Vanguard FTSE Dev. ex North America (CAD) VEF 0.20 2.697% 1,370 189,744,000
iShares Core MSCI EAFE IMI Index ETF XEF 0.20 2.298% 1,602 185,320,000
Vanguard FTSE Developed ex North America VDU 0.20 2.793% 1,370 137,728,150
BMO MSCI EAFE Index ETF ZEA 0.20 2.507% 464 130,315,840
Table 4: Low-cost Canadian fixed-income ETFs
Symbol Mgt. Fee Yield Duration Market
iShares Core Canadian Long Term Bond XLB 0.18 3.845% 14.05 yrs 97,104,000
Vanguard Canadian Aggregate Bond Index ETF VAB 0.12 2.999% 7.4 yrs 154,330,000
Horizons Canadian Select Universe Bond ETF HBB* 0.15 N/A 7.21 yrs 10,449,425
BMO Discount Bond Index ETF ZDB 0.20 2.036% 7.03 yrs 20,111,000
iShares Core High Quality Canadian Bond XQB 0.12 2.894% 6.14 yrs 65,952,000
iShares 1-10 Year Laddered Government Bond CLG 0.16 3.404% 4.3 yrs 38,044,500
First Asset 1-5 Year Laddered Govt Strip Bond BXF 0.20 1.727% 3.37 yrs 5,060,000
iShares 1-5 Year Laddered Government Bond CLF 0.17 3.561% 3.02 yrs 972,216,000
BMO Short Corporate Bond Index ETF ZCS 0.12 3.194% 2.74 yrs 749,904,913
iShares Core Candian ST Corp Maple Bond XSH 0.12 3.120% 2.71 yrs 176,398,000
Vanguard Canadian Short-Term Corp Bond VSC 0.10 3.017% 2.7 yrs 411,321,000
Vanguard Canadian Short-Term Bond Index ETF VSB 0.10 2.445% 2.7 yrs 290,043,000
iShares Core ST High Quality Canadian Bond XSQ 0.12 2.601% 2.67 yrs 8,016,000
PowerShares 1-3 Year Laddered Floating Rate PFL 0.20 2.706% 0.5 yrs 3,003,000
RBC Target 2014 Corporate Bond Index ETF RQB 0.20 3.395% 0.12 yrs 15,988,500
Purpose High Interest Savings ETF PSA 0.11 1.295% N/A 80,032,000

All figures as of October 15, 2014

by Mark Yamada, president of PUR Investing Inc., a registered portfolio manager and software development firm. Disclosure: PUR Investing Inc. is a sub-advisor and portfolio provider for Horizons ETFs.

Originally published in Advisor's Edge Report

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