The Bank of Montreal is launching ETFs at a fast and furious pace. Eight new ETFs from BMO started trading on the TSX recently. In just over a year since it launched its first ETFs, BMO has 30 ETFs in its lineup. The new ETFs that started trading last week are:
- BMO Equal Weight REITs (ZRE)
- BMO Equal Weight US Banks Hedged to CAD (ZUB)
- BMO Equal Weight US Health Care Hedged to CAD (ZUH)
- BMO Junior Oil (ZJO)
- BMO Junior Gas (ZJN)
- BMO Long Federal Bond (ZFL)
- BMO Real Return Bond (ZRR)
- BMO Emerging Markets Bond Hedged to CAD (ZEF)
Two of these ETFs are interesting. The BMO Real Return Bond ETF (ZRR) has a MER of 0.25% compared to a MER of 0.35% for the iShares DEX Real Return Bond ETF (XRB). ZRR holds 5 Government of Canada real return bonds but XRB is slightly more diversified as it has about 15% of its holdings in provincial real return bonds. A 10 basis points savings in MER may not be tempting enough for existing investors to switch because investors with large holdings will want to invest in real return bonds directly, not through an ETF. The Sleepy Portfolio, for example, has $7,300 in XRB. Switching to ZRR will save $7.30 per year but will cost $20 in trading commissions plus another 0.5% or so in bid-ask spreads. In other words, it will take 8 years for the Sleepy Portfolio to just recoup the costs of switching.
The BMO Equal Weight REITs (ZRE) has a MER of 0.55%, the same as the iShares S&P/TSX Capped REIT ETF (XRE). But unlike XRE, which is capitalization weighted and just three REITs account for more than half the weighting, ZRE weights 18 REITs equally. Therefore, ZRE may be a more diversified holding than XRE for the REIT portion of a portfolio. It would have been very tempting to switch if BMO had set the MER at a much lower level than 0.55%.
The rest of the new ETFs focus on such narrow market segments that Jon Chevreau says they are “the antithesis of the “buy-and-hold-for-the-long-run” first generation of broadly diversified equity ETFs epitomized by the Vanguards of the world”. I couldn’t have said it better.
