BMO Takes on the Big Boys

BMO has announced some interesting new changes to some of the ETFs—and one of them may lead to the first genuine price war in the Canadian marketplace.

The company recently announced that the BMO Dow Jones Canada Titans 60 Index ETF (ZCN) will soon be pegged to the S&P/TSX Capped Composite Index, the most widely tracked Canadian equity benchmark. That will increase the number of holdings in the fund from 60 to almost 250, since the broader index includes mid-cap and small stocks as well as large caps. In addition, the BMO US Equity Index ETF (ZUE) will begin tracking the S&P 500. It will grow its holdings from 282 to 500 stocks, though it remains confined to large caps.

BMO says the changes were prompted by requests from advisors who wanted funds that tracked the better-known indexes from S&P. The Dow Jones benchmarks the funds currently use were created specifically for the BMO funds when they were launched in 2009.

Head-to-head with the giants

This is an interesting development in the Canadian ETF market. As most Couch Potatoes will recognize, the revamped ZCN and ZUE will track the same indexes as the iShares S&P/TSX Capped Composite (XIC) and the iShares S&P 500 (XSP), two of the oldest ETFs in the country. With a management fee of just 0.15%, ZCN will be doing so for 10 basis points less. What’s more, the BMO fund is quickly gaining in size: it has already passed $900 million in assets, compared with $1.2 billion for XIC.

All other things being equal, investors prefer index funds with a large asset base, since these tend to be more efficient. ZCN’s former index tracked 60 large-cap companies, which made it a virtual clone of the iShares S&P/TSX 60 (XIU), the largest and most frequently traded ETF in Canada, and also one of the cheapest. That made it awfully tough for ZCN to grab any significant market share. But now that it’s going head-to-head with XIC, the BMO fund can claim a competitive advantage: the two funds track the same index, with a similar asset base, and ZCN offers a significantly lower fee. This could be the first time a competitor takes a real run at one of iShares’ largest ETFs—something even Vanguard hasn’t been able to do yet.

The changes to the BMO US Equity Index ETF (ZUE) are less likely to make a splash. The iShares incumbent, with over $1.5 billion in assets, is seven times the size, and ZUE is a mere two basis points cheaper. That offers no incentive for investors in XSP to switch funds. And, really, the last thing Canadian investors need is another S&P 500 index fund that’s hedged to the Canadian dollar. When will someone step up and launch a broad-based US equity fund without currency hedging?

The proposed changes will be voted on during a meeting on September 13, and if they’re approved the names of the funds will be changed accordingly—to the BMO S&P/TSX Capped Composite Index ETF and the BMO S&P 500 Hedged to CAD Index ETF—though the ticker symbols will remain the same.