By Tom Bradley

Invesco Trimark announced this week that it is offering a new series of mutual funds based on existing exchange traded funds (ETFs) offered by an affiliated company, U.S.-based PowerShares (both companies are owned by the asset management conglomerate, Invesco). The funds essentially package up ETFs in the form of a conventional, advisor-sold mutual fund. They come in an ‘A’ series version for advisors working on commission (they pay a 1.0% trailer fee) and a ‘F’ series that is suitable for fee-based relationships.

There has already been lots of debate about the features, fees and timing of these funds, but essentially they bring specialized ETFs to the investor that doesn’t have a brokerage account. By definition, ETFs are exchange traded, so the investor needs to have a brokerage account to buy and hold them. With the Invesco funds, a mutual fund account will suffice.

For those wanting to read more, Rob Carrick, Jonathan Chevreau and the Canadian Capitalist have written on the topic.

Our takeaways:

• We like ETFs when they replicate broad market indices and are CHEAP.
  
• Whether you think the trailer fees belong on an ETF or not (the advisor has to be paid somehow), the base management fees are ridiculously expensive – 0.7% for a general Canadian market ETF and 0.8 - 1.0% for more specialized funds (agriculture, gold, water, clean energy, etc). The investor is paying a fee that is close to what is reasonable for active management, let alone indexing. Remember, the granddaddy of all ETFs, the iShares CDN LargeCap 60 Index Fund (XIU), has an MER of 17 basis points (0.17%). Fees have been steadily trending up and we are now at the point where some commentators feel that 0.8-1.0% (before trailers) is reasonable. It isn’t...not even close.
  
• As we said in a blog in December, 2006 (ETFs - I've Seen This Movie Before) and have emphasized many times since, ETFs have taken the same wrong turn that mutual funds did in the 90’s. There is a new flavour every week and with each new marketing initiative, the emphasis moves further away from the products’ key feature, they’re CHEAP to run.

If Trimark wants to jump on the ETF bandwagon, they should do a better job of it. Asking investors to pay the full freight on their PowerShares ETFs, and then add a management fee and further expenses on top of that, just doesn’t cut it. When they were designing the funds, if they had shopped around to other index managers and negotiated a wholesale rate (as we do with our managers), they could have brought the fee down meaningfully. The cost of managing funds like these is in the neighbourhood of 1-2 basis points, maybe less.

Our advice (which comes with no trailer fee attached) to investors interested in integrating ETFs into their portfolio – don’t pay 1.7 - 2.0% for indexed product. Open a discount brokerage account, look for the lowest cost funds available, and stick to vanilla.

Related reading:
The ETF Diaries - Part V: All Dressed Up and Nowhere to Go
The ETF Diaries - Part IV: As Splinters Get Thinner, They Get Sharper
The ETF Diaries - Part III