Under the Hood: Claymore CorePortfolios

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The funds: The Claymore Balanced Growth CorePortfolio ETF (CBN) and Claymore Balanced Income CorePortfolio ETF (CBD), a pair of ETF wraps made up of equity, fixed-income and commodity ETFs and designed to serve as complete portfolios.

The indexes: Both ETFs track versions of the Sabrient Global Balanced Index, a custom benchmark created for Claymore. The index “comprises a mixture of approximately 10-20 (or more) existing ETFs selected, based on investment and other criteria, from a defined set of exchange-traded funds trading on the Toronto Stock Exchange.”

There are Growth and Income versions of the index, each specifying a range for each asset class. For example, in the Growth index, Canadian, US and international equity must all make up 15% to 20% of the portfolio. The Income index must include 20% to 25% government bonds and 17.5% to 22.5% Canadian dividend stocks.

According to the funds’ literature, “weightings are adjusted and rebalanced quarterly to the optimal asset class mix depending on economic conditions and relative value of income and equity securities.” Translation: the fund uses tactical asset allocation, albeit based on quantitative rules and not a manager’s own forecasts.

The cost: The management fee for each ETF is 0.25%, but this does not include the cost of the underlying ETFs. Once you add these fees, plus HST, the full MER of the CorePortfolios becomes about 0.70 to 0.75%. This large discrepancy between management fee and MER is not at all obvious: you have to look in the Management Reports of Fund Performance, available at Sedar.

What’s more, the cost of CBD is misrepresented in the filings. As an eagle-eyed reader point out, the stated MER is 0.47%, but if you add up the fees of the underlying ETFs, that doesn’t compute. An email to Claymore confirmed that our reader was correct, and the true cost is approximately 0.70% plus HST. That’s still low, but it’s worrisome to see fees stated incorrectly in regulatory documents.

The CorePortfolios are also available through advisors—indeed, more than 40% of their assets are in “advisor class” shares, which add an extra 1% trailer fee. The advisor class versions therefore have MERs over 1.7%, which wipes out any cost advantage over balanced mutual funds.

The details: Like a balanced mutual fund, these Claymore ETFs are suitable for investors who want a globally diversified portfolio without having to select a number of individual funds.

Claymore’s Balanced Growth CorePortfolio is currently made up of 14 other Claymore ETFs, plus two iShares ETFs that cover REITs and real-return bonds. It’s most significant holdings are international, US and Canadian equity ETFs, each of which makes up about 17% of the portfolio. CBN also includes an allocation to emerging markets (9%), real estate (8%), government and corporate bonds (13%), and a trivial smattering of infrastructure, water and agriculture. The one significant commodity allocation is 8% to gold, via the Claymore Gold Bullion ETF (CGL). Overall, it is an aggressive fund with about 75% in equities.

The 11 ETFs that make up the Balanced Income CorePortfolio have a more Canadian and more conservative focus. The fund holds 20% in short government bonds, another 10% in real-return bonds and more than 12% in corporate bonds. Almost 50% of the fund is in dividend-paying stocks, more than half which are Canadian.

You can criticize the narrow sectors in the Growth fund (why does anyone need 2.5% in a global water ETF?) and question why there’s gold in the Income fund (last time I checked, bullion pays no income), but these are quibbles. Overall the asset allocations are sensible: well diversified, but not overly complex. The indexes prescribe narrow ranges for each asset class, so the asset allocation should not change much from quarter to quarter.

Claymore launched the CorePortfolio ETFs in June 2007, which was terrible timing. That turned out to be the 10-year peak for the US and international stocks, and while the TSX eventually climbed a bit higher before the crash, global stock  markets are still way below where they were in mid-2007. So you can’t be too hard on CBN for posting a return of –9% since its inception. The more conservative CBD managed to eke out a tiny gain (less than 0.2%) over the same period.

The recent performance of both funds has been outstanding. In 2009, the Growth ETF returned 29.2%, while the Income ETF returned 25.6%. (By way of comparison, the Mawer Canadian Balanced Retirement Savings Fund, perhaps the best balanced mutual fund in Canada, returned 16.4% last year.) And that doesn’t include their distributions: currently CBN yields about 2.5%, while CBD throws off an income of more than 4%. Distributions are paid monthly and can be reinvested using Claymore’s DRIP plan.

The alternatives: The most direct competitors of the Claymore CorePortfolios are the similarly named iShares Conservative Core Portfolio Builder Fund (XCR) and iShares Growth Core Portfolio Builder Fund (XGR). I have reviewed these ETF wraps in a previous post — suffice it to say I don’t like anything about them, despite their low MERs (0.63%).

The bottom line: There is a lot to like in Claymore’s CorePortfolio ETFs, and I think either one would be an good choice for do-it-yourself investors who want an all-in-one solution at low cost compared with a balanced mutual fund. However, if you’re working with an advisor who is using the advisor-class shares, he or she is skimming 1% of your assets in return for buying one ETF. That’s not a good deal.

The CorePortfolios are especially appealing for small accounts: building a portfolio with ETFs is not usually cost-effective with less than $30,000 to $50,000. But these wraps allow you to get an instant portfolio with one initial purchase (maximum price $29), and you can set up preauthorized contributions and a dividend reinvestment plan and avoid all further brokerage fees. The ETFs rebalance themselves quarterly, which also saves brokerage commissions and makes life easier. All considered, you’ve got an extremely simple and inexpensive way to become a Couch Potato.

If you’re considering investing in either of these ETFs, first read the prospectus.

Disclosure: I do not own CBN or CBD in my own portfolio.