Four New ETFs and an Invitation

BMO has announced it’s launching four new ETFs, which will start trading on Tuesday, November 20:

• BMO S&P 500 (ZSP/ZSP.U)
• BMO S&P/TSX Laddered Preferred Share (ZPR)
• BMO S&P/TSX Equal Weight Industrials (ZIN)
• BMO S&P/TSX Equal Weight Global Gold (ZGD)

Let’s look at the two most interesting ETFs in this lineup. Investors seem to be falling out of love with currency hedging, which causes a long-term drag on returns for Canadians who invest in US equities, and ETF providers are responding. Less than three weeks after the launch of the unhedged Vanguard S&P 500 (VFV), BMO has a competitor. Back in September, BMO changed the benchmark for its US equity ETF from a Dow Jones index to the better-known S&P 500, but that fund retained its currency hedging. The new BMO S&P 500 (ZSP), however, is unhedged and its management fee is identical to Vanguard’s at just 0.15%.

What’s interesting is that BMO has also created a version that trades in US dollars (ZSP.U). If you want a USD-denominated ETF that tracks the S&P 500 it generally makes more sense to go with one of the New York-listed funds from iShares, SPDR or Vanguard because of their enormous liquidity and lower fees. But the BMO fund has one advantage: as a Canadian-domiciled fund, it would be exempt from US estate taxes, which can be a major concern for wealthy Canadians with lots of greenbacks to invest. (The two versions might also be useful for using Norbert’s gambit to exchange currencies.)

A ladder of preferreds

Preferred shares are extremely popular with taxable investors, because have little price volatility except when interest rates move (which makes them similar to corporate bonds), and because their distributions are eligible for the dividend tax credit. There are several preferred share ETFs in Canada, the largest of which is the iShares S&P/TSX Canadian Preferred Share (CPD), which at almost $1.3 billion in assets is the 10th largest in the country. (Yes, I was surprised by that, too.)

The BMO Laddered Preferred Share (ZPR) is unique because all of its holdings are what are called rate reset preferreds. These have a specific call date, usually every five years, on which the holder can choose to lock in a new dividend at current rates, or convert to a floating rate that will change monthly or quarterly based on a reference rate. By contrast, CPD is about one third perpetual preferreds, which have no maturity date and pay the same fixed dividend as long as they are outstanding.

So what’s the difference? Rate resets will be similar to short-term corporate bonds in the way they respond to interest rate changes. If rates rise, they will fall in price, but not as much as perpetuals, which behave more like long-term bonds. With many investors worried about the prospect of rising rates, a ladder of short-term issues has obvious appeal. Think of ZPR as a tax-advantaged complement to the iShares 1-5 Year Laddered Corporate Bond (CBO).

Spend Saturday with the spud

This Saturday, November 24, I will be participating in an Introduction to ETFs for Investors, presented by TMX and iShares. I’ll be part of a panel that includes fellow financial journalist Caroline Cakebread and Pat Chiefalo of National Bank Financial. The keynote speaker will be Bruce Sellery, author of Moolala, and all attendees will receive a copy of his book. Rumour has it my own MoneySense Guide to the Perfect Portfolio will also be part of the swag bag.

The event runs from 8 a.m. until noon at the AllStream Centre at Exhibition Place in Toronto. We would love for you to join us: you can register online here. The cost is $25, but Canadian Couch Potato readers can enter the promo code ETF13b and get $10 off. If you attend, make sure you stop by to say hello.