Jon Chevreau reported that iShares has announced four new wrap ETFs that it calls “Portfolio Builder Funds”. The two core funds — XGR, a growth fund and XCR, a conservative fund — are designed to provide one-stop exposure to the major asset classes. The other two funds (Alternatives Completion Fund, XAL and Global Completion Fund, XGC) provide the “explore” part of the portfolio by capturing alternative assets. The MER for the first group of funds is 0.60% and 0.70% for the second group.
The fees for these portfolio ETFs are slightly less than portfolio mutual funds available through TD e-Series Funds or ING Streetwise Funds but the same criticism directed towards the mutual funds applies here: investors could assemble the same portfolio at a much lower price. The weighted average MER of the Sleepy Portfolio, for instance, is a fraction of these fees: 0.22%.
A far bigger issue with these wraps is their complexity. Let’s take the iShares Growth Core Portfolio Builder Fund (XGR). Here is the fund’s stated objective:
While remaining consistent with the fund’s investment objective, Barclays Canada seeks to identify and optimally diversify certain fundamental sources of return through a proprietary multi-factor selection process. The identified fundamental sources of return include exposure to: interest rates; inflation; credit quality; liquidity premium; incomplete information/transparency; global and domestic economic growth; political uncertainty; and foreign currencies. The selection process determines the fund’s level of exposure to the fundamental sources of return and its expected level of risk. Barclays Canada will apply the selection process to the fund at least once per quarter and more often if market conditions warrant, and, if it considers it appropriate, rebalance the portfolio of the fund.
Can you tell what the asset allocation is? Me neither. The current allocation doesn’t explain much either. The portfolio has 42.7% allocated to bonds, 16.2% to Canadian stocks, 26.5% to foreign stocks and the rest in REITs, commodities etc. The fund holds a motley collection of 21 ETFs and fully three make up less than 1% of the portfolio. Compare the complexity of this fund with the simplicity of the ING Streetwise Balanced Fund, which has 40% in bonds and 60% split equally among Canadian, U.S. and other developed markets.
Passive investors are presumably looking for simplicity and low cost. Products like these fail on both counts.