Rob Carrick: ETFs are cheap, but you can still overpay on fees

Exchange-traded funds have built a huge and growing franchise on their low fees, but there are some higher-cost outliers you should watch out for.

Some are niche products issued by companies that seem to be hoping investors bent on chasing a particular trend will forgive the high cost. And some are foundational funds that simply haven’t benefited from the long-term trend toward lower ETF costs.

Two examples of this latter type of expensive ETF were inadvertently revealed in some news from BMO ETFs about changes in the underlying index tracked by some of its bond funds. The BMO Government Bond Index ETF (ZGB-T) and BMO Corporate Bond Index ETF (ZCB-T) are among a group of funds moving to benchmark FTSE Canada bond indexes from similar Bloomberg-Barclays indexes.

The switch means that ZGB and ZCB will track the same index as competing products from BlackRock’s iShares family. In each of these two cases, the iShares counterpart carries a fee that seems out of step with today’s ETF pricing.

ZGB’s management expense ratio is 0.17 per cent, while the iShares Canadian Government Bond Index ETF (XGB-T) comes in at 0.39 per cent. ZCB’s MER is also 0.17 per cent, while the iShares Canadian Corporate Bond Index ETF (XCB-T) has an MER of 0.44 per cent.

These iShares funds are by no means tiny. Together, XGB and XCB have assets of about $2.4-billion. A lot of investors seem fine with the fees for these funds, even as low yields reduce the income flow from bond ETFs. Low fees have never been more important than they are today in choosing bond ETFs.

The iShares ETF franchise has done a lot to push the cost of ETF investing lower over the years and its products are generally priced very competitively. XCB and XGB are cost outliers that offer an important lesson. Even in ETF-land, you have to be vigilant about how much you pay for a fund.

One more example comes from BMO itself – the BMO Equal Weight Banks Index ETF (ZEB-T), with an MER of 0.61 per cent and $1.4-billion in assets. That’s a hefty price to pay for an ETF holding six bank stocks.

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