ROB CARRICK

Thursday, February 22, 2001

Exchange-traded funds are about to take a flying leap from Bay Street to the King and Queen Street of every town in the country.

This doesn't seem too crazy a forecast, considering it's Toronto-Dominion Bank that is getting into the ETF business.

By month's end, TD's TD Asset Management arm will issue a pair of new ETFs that track the Toronto Stock Exchange 300 index and the TSE 300 Capped Index, which limits any one stock to no more than 10 per cent of the fund. Both will have a management-expense ratio of .25 per cent.

ETFs are index mutual funds that trade like a stock, which means you buy and sell them through a broker. They're dirt cheap to own, versatile and entirely suitable for the backbone of many an investor's registered retirement savings plan or investment account.

Though they've been available in Canada for about 18 months and longer in the United States, ETFs are still a fringe product among Canada's retail investors.

In part, this is because ETFs are an index investment and index investing has never really taken off with Canadians like it has in the United States.

As well, the Canadian ETF market is dominated by a pair of companies that are much better known to institutional investors than to retail investors.

One is Barclays Global Investors, which is behind the most popular ETF in Canada, the i60 (XIU-TSE). The other player is State Street Global Advisors, proprietor of the DJ40 (DJF-TSE).

While ETFs are on the fringe, TD is the essence of mainstream. Anything it sells stands a good chance of being flogged in hundreds of branches across the country, and in millions of monthly bank and brokerage account statements (TD owns on-line broker TD Waterhouse).

Insofar as it draws attention to ETFs in general, TD's promotion of its new funds will benefit the whole exchange-traded fund sector in Canada.

This is especially true of Barclays, which this week announced launch dates for six new ETFs.

The most awaited of the new funds is the S&P/TSE 60 Capped Index Fund, or i60C (XIC-TSE), which will begin trading today.

This fund caps all constituent stocks at 10 per cent, which means it's the answer if you don't like the 16-per-cent exposure to Nortel Networks that comes with the i60.

The other new Barclays funds are the S&P/TSE Canadian MidCap Index Fund, or iMidCap (XMD-TSE), which starts trading on March 8; the S&P/TSE Canadian Energy Index Fund, or iEnergy Fund (XEG-TSE), and Canadian Information Technology Fund, or iIT (XIT-TSE), which start trading on March 22; and the Canadian Gold Index Fund, or iGold (XGD-TSE) and Canadian Financials Index Fund, or iFin (XFN-TSE), which start trading on March 29.

The MER for these funds is .55 per cent, while the i60C is the same as the i60 at .17 per cent.

What makes TD's entry into the ETF market all the more interesting is that its TD Asset Management division is one of the country's largest mutual fund companies.

In the ecology of retail investing, ETFs eat most mutual funds for breakfast. As index investments, they give you very close to what a target stock index makes in a year. As for regular mutual funds, a majority of them won't measure up to their benchmark index over the long term.

There's a precedent for fund companies getting into ETFs. Vanguard, the U.S. fund company that popularized index mutual funds, has announced an exchange-traded product called a VIPER that will compete with about 75 other ETFs.

TD is similar to Vanguard in that it has one of the better selections of index mutual funds in Canada, including a commendable series of "e-funds" that are available on-line only and offer some of the lowest management expenses around.

Is TD competing with itself by selling funds and ETFs? Some in the mutual fund industry may argue that the answer is yes, but they're wrong.

Really what the bank is doing is rounding out its product lineup to reflect the fact that some investors just aren't satisfied with mutual funds.

The TSE 300 fund from TD (TTF-TSE) and the capped fund (TCF-TSE) will fill an obvious void in the marketplace in that they'll allow investors to track the TSE 300 composite index. With i60s, you follow the S&P/TSE 60 index, while DJ40s mirror the Dow Jones Canada 40 index. Both are strictly large-capitalization indexes that lack the smaller companies rounding out the TSE 300.

The new TD funds are a fair bit more expensive than the competition when it comes to management expenses, but not prohibitively so. The MER on i60s is .17 per cent, while DJ40s charge .08 per cent. TD can justify charging more because of the added costs of tracking the bulkier TSE 300 as opposed to smaller indexes of just 60 or 40 stocks.

Even so, there should be enough fat in TD's MER to pay for a decent ETF marketing campaign. Bring it on.
rcarrick@globeandmail.ca

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