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Mary Anne Wiley, a managing director at BlackRock is photographed in her Toronto office on January 22, 2012. Mary Anne Wiley savours the one coffee she allows herself each day and talks about the current buzz that's coursing through her industry: BlackRock's acquisition of exchange traded funds competitor Claymore Canada. The combination of Canada's two largest ETF providers will offer investors a comprehensive suite of products, while giving BlackRock added heft to take on its most formidable competition in the asset management sphere - the mutual fund industry, says Ms. Wiley, managing director of iShares for BlackRock Asset Management Canada Ltd. JENNIFER ROBERTS FOR THE GLOBE AND MAIL (Jennifer Roberts for The Globe and Mail)
Mary Anne Wiley, a managing director at BlackRock is photographed in her Toronto office on January 22, 2012. Mary Anne Wiley savours the one coffee she allows herself each day and talks about the current buzz that's coursing through her industry: BlackRock's acquisition of exchange traded funds competitor Claymore Canada. The combination of Canada's two largest ETF providers will offer investors a comprehensive suite of products, while giving BlackRock added heft to take on its most formidable competition in the asset management sphere - the mutual fund industry, says Ms. Wiley, managing director of iShares for BlackRock Asset Management Canada Ltd. JENNIFER ROBERTS FOR THE GLOBE AND MAIL (Jennifer Roberts for The Globe and Mail)

Portfolio Strategy

BlackRock's message to investors: Don't worry, be happy Add to ...

Something we’ve learned about banking and investing is that bigger financial companies are rarely better for customers.

If you want the lowest borrowing rates and the highest savings rates, you often have to go beyond the big banks. If you want the lowest mutual fund fees, forget about the fund industry giants for the most part. Now, we’re going to find out how size plays out in the exchange-traded fund business.

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With its purchase of Claymore Investments now complete, the iShares lineup at BlackRock Investments Canada accounts for just about 81 cents of every $1 invested in ETFs. Full credit to iShares for taking control of one of the hottest product categories in the investing world right now. But what does the deal mean to investors?

A few recent moves by BlackRock suggest that, aside from the dropping of the Claymore name, change will be minimal for investors. Ticker symbols for the ex-Claymore funds remains the same, and fees will not be changed. Claymore’s investor-friendly dividend reinvestment and pre-authorized chequing plans are being maintained, as is a series of funds with higher fees that include compensation for investment advisers.

BlackRock is also trying to address concerns that it’s on the lookout for ex-Claymore funds to shut down because they overlap with the rest of the iShares lineup. “If there were changes, they would be minimal,” said Mary Anne Wiley, head of iShares at BlackRock Canada. “We actually acquired Claymore so we could have its products under the iShares brand. We see all kinds of merit in them and we’ll continue to support them.”

BlackRock has announced it will shut down the Claymore Inverse 10-Year Government Bond ETF (CIB), a small and inconsequential fund designed as a way for investors to make money when rates rise. Bonds typically fall in price when rates increase, but an inverse bond ETF would theoretically rise.

Terminating CIB is another sign of BlackRock’s attempts to assuage any investor concerns about how it will do business going forward. BlackRock has so far avoided inverse and leveraged ETFs, which are designed strictly for sophisticated investors and can generate surprisingly big losses in the wrong hands. Leveraged ETFs give you two times the move in an underlying stock index or commodity, and that can magnify both gains and losses. Closing CIB saves BlackRock from being in the hypocritical position of owning a type of ETF it has so far kept out of its product lineup.

Claymore was an innovator in terms of making ETFs more universally accessible and useable through programs such as no-cost dividend reinvestment plans and pre-authorized chequing plans. The DRIP plan, widely available at brokerage firms, remains in place for former Claymore funds and will be expanded to other ETFs in the iShares lineup, probably in the second quarter of the year. The PAC plan, which only a few brokerage firms have adopted, remains in place but won’t be expanded.

The same applies to a systematic withdrawal plan offered by Claymore. BlackRock will also maintain another Claymore innovation, an ETF class with extra high fees that include compensation for investment advisers who assemble portfolios for clients.

BlackRock’s $39-billion in assets compares to $5-billion for its nearest competitor, BMO Asset Management, and $3.3-billion for third-ranked BetaPro Management. Ms. Wiley said there’s still room for BlackRock to grow and, in fact, the firm plans to issue as many as five new funds this year that won’t duplicate any existing ETF strategies. “We’ve increased our size substantially to a whopping 4 per cent of the mutual fund assets,” she joked. “So there’s still lots of opportunity here for iShares.”



Life beyond iShares

Five experts on exchange-traded funds were asked to highlight some worthy choices from companies other than BlackRock Canada, which dominates the Canadian ETF market through its iShares lineup. Here's what they came up with:

Dan Bortolotti, author of the Canadian Couch Potato blog (canadiancouchpotato.com)

ETF

Ticker

Mgt. fee (%)

Price

YTD rtn. (%)

1-year rtn. (%)

Vanguard MSCI U.S. Broad Market ETF (CAD Hedged)

VUS-T

0.15

$27.94

11.4

n/a

Comments: This ETF includes roughly 3,300 large, medium and small stocks, so you're getting more complete coverage of the U.S. market than you do with an ETF tracking only the big companies in the S&P 500. This ETF offers currency hedging, which should insulate you from fluctuations in the Canada-U.S. exchange rate. If you don't want hedging, try the U.S.-listed version of this ETF, which trades on the NYSE under the symbol VTI. "That fund is amazing and it's the one I use. It has a management expense ratio of just 0.07 per cent."

BMO Equal Weight REITs Index ETF

ZRE-T

0.55

$19.24

4.4

3.7

Comments: This ETF is preferable to the iShares S&P/TSX Capped REIT Index Fund (XRE-T), which has a near 25 per cent weighting in RioCan. "The whole point of ETFs is removing single stock risk, and this ETF doesn't do it." ZRE equal weights its holdings, which means that RioCan is held in roughly equal proportion to the other 18 REITs represented in the fund.

Deborah Frame, vice-president of investments and chief compliance offer at Cougar Global Investments

ETF

Ticker

Mgt. fee (%)

Price

YTD rtn. (%)

1-year rtn. (%)

SPDR Gold Shares

GLD-N

0.4

$157.21

3.4

10.7

Comments: This U.S.-listed ETF is favoured over the competing iShares Gold Trust (IAU-N) because it generates higher trading volumes and thus can be traded at tighter spreads between the buy and sell price. That advantage offsets a slightly higher fee.

Vanguard MSCI Emerging Markets ETF

VWO-N

0.2

$42.92

12.3

-14.3

Comments: Cougar seeks ETFs where the price tracks the underlying index as closely as possible, and VWO delivers. It also has an extremely low fee. "Basically, it's the best out there (in its category)." Vanguard offers a version of this ETF on the TSX under the ticker VEE, but the fee is higher at 0.49 per cent.

Guy Lalonde, portfolio manager with National Bank Financial

ETF

Ticker

Mgt. fee (%)

Price

YTD rtn. (%)

1-year rtn. (%)

Vanguard MSCI EAFE ETF

VEA-N

0.12

$33.06

7.9

-12

Comments: Mr. Lalonde pairs this U.S.-listed ETF with the TSX-listed iShares MSCI EAFE Index Fund (XIN). XIN offers currency hedging, while VEA does not. "We like some currency hedging, but not a total hedge." The low MER is the main attraction of this ETF.

SPDR S&P International Dividend ETF

DWX-N

0.45

$48.39

4.1

-19.8

Comments: This ETF is used in income-focused portfolios as an alternative to VEA. The dividend yield is currently running at about twice VEA's 3 per cent level.

Graham Mayes, chief investment officer at EFG Wealth Management (Canada)

Vanguard Canada ETFs

Comments: Mr. Mayes has been keeping his eye on this comparative newcomer to the Canadian ETF market (Vanguard is well-established in the United States). As trading volumes rise, he will look at moving assets from iShares products to lower-cost Vanguard alternatives. "I haven't pulled the trigger yet, but I will." The Vanguard Canadian Aggregate Bond Index ETF (VAB) has a management fee of 0.2 per cent, which is less than the iShares bond ETFs that Mr. Mayes uses. "All of those bond ETFs are going to up for consideration," he said. "Anything you can squeeze out today is money in a client's pocket."

Yves Rebetez, managing director and editor at ETF Insight (etfinsight.ca)

ETF

Ticker

Mgt. fee (%)

Price

YTD rtn. (%)

1-year rtn. (%)

XTF Morningstar U.S. Dividend Target 50 Index ETF

UXM-T

0.6

$10.16

n/a

n/a

Comments: Focuses on U.S. companies that are increasing their dividends, with Canadian dollar hedging.

Horizons Balanced ETF

HAA-T

0.7

$10.66

6.1

-3.6

Comments: A balanced fund in an ETF format with attractive pricing; focused on lowering risks for investors.

BMO Low Volatility Canadian Equity ETF

ZLB-T

0.35

$15.85

2.4

n/a

Comments: Focuses on less risky stocks in the Canadian market; offers better diversification that low-volatility ETFs focusing on the S&P 500.

Source: ETF company websites, Globeinvestor.com



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