Investors this week will have another option for holding an easily maintained, diversified portfolio through a single exchange-traded fund with fees that are a fraction of traditional mutual funds.
Horizons ETF Management (Canada) Inc. is introducing two ETFs that automatically rebalance and provide one-stop shopping to a portfolio of underlying equities and fixed income funds.
By doing so, Horizons takes direct aim at Vanguard Investments Canada Inc., which launched similar low-fee balanced ETF products earlier this year. It also means another competitor for robo-advisers and their simple-solution, low-cost portfolios for investors.
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The Horizons “fund of funds” products will start trading on Thursday on the Toronto Stock Exchange. They will rebalance on a semi-annual basis in January and July of each calendar year.
The Horizons Conservative TRI ETF Portfolio (HCON) and Horizons Balanced TRI ETF Portfolio (HBAL) will compile seven ETFs from the Horizons family of total return index ETFs (TRI ETFs), which are index-tracking ETFs that use an investment structure known as a total return swap to deliver index returns in tax-efficient manner.
The company is touting the funds as Canada’s first funds with 0 per cent “direct” or upfront management fees. But that doesn’t mean there are no costs in holding them. While the “direct” management fee will be nil, the fund of funds structure includes underlying management fees for the TRI ETFs held within both HCON and HBAL, as well as any additional trading expenses incurred by the funds. These can be as high as 30 basis points.
Based on the management expense ratios of the initial portfolios of TRI ETFs held by HCON and HBAL, the total management expense ratios of HCON and HBAL will initially be 0.15 per cent and 0.16 per cent, respectively, and will not exceed 0.17 per cent and 0.18 per cent on any rebalance.
The more conservative HCON ETF will have an asset allocation of approximately 50-per-cent equity securities and 50-per-cent fixed income securities, while HBAL’s asset allocation will consist of approximately 70-per-cent equity securities and 30-per-cent fixed income securities. The fixed income component of both portfolios will include TRI ETFs that offer North American exposure to government debt, provincial debt and corporate bonds, and the equity component will include TRI ETFs that offer exposure to North American and other global equities. Both funds will hedge its non-Canadian-dollar currency exposure to the Canadian dollar at all times.
The funds are comparable in design to three “one-ticket solution” balanced ETFs launched by Vanguard. With a management fee of 0.22 per cent, the funds have seen a flurry of investor interest since February. As of June, the funds had surpassed $500-million in assets.
Robo-advisers — also referred to as online wealth managers or digital advisers — go beyond simply offering a balanced portfolio. They provide investors with an online risk-assessment tool that calculates an appropriate asset allocation based on age, financial goals and risk tolerance. The results provide clients with a recommended investment portfolio predominantly made up of exchange-traded funds which gets automatically rebalanced. The typical fee for robo-advisers is 0.50 per cent, plus the additional fees for the underlying ETFs within the portfolio.
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For some investors, such as those who don’t feel confident in making their own investment choices or those new to investing, robo-adivsers can be an attractive alternative to the more expensive traditional investment adviser.
But do-it-yourself investors who may be looking at a robo-adviser solely for a rebalancing tool may find considerable appeal in the new Vanguard and Horizons fund offerings.
At first blush, the two sets of funds appear to be comparable when looking at underlying management fees and trading expenses. But Horizon’s tax efficiency of the TRI funds should provide a higher after-tax benefit with a lower cost in non-registered accounts, according to Horizons.
Unlike a physical replication ETF, that typically purchases the securities found in the relevant index in the same proportions as the index, a TRI ETF is a synthetic structure that never buys the securities of an index directly.
In addition, the company is also launching an actively managed emerging markets fund: Horizons Active Emerging markets Bond ETF (HEMB). It will begin trading on the Toronto Stock Exchange on Tuesday. Sub-advised by Fiera Capital and Mirae Asset USA, HEMB will invest primarily in debt securities of emerging market issuers and use hedging to offset currency fluctuations. The management fee for HEMB is 0.55 per cent.