Jonathan Chevreau notes on his Wealth Boomer blog that BMO has launched 8 new ETFs to complement the 4 they launched earlier this year. I took a look at the new kids on the block and immediately I gravitated towards ZEB.to which seeks to track the S&P/TSX Equal Weight Diversified Banks Index. This ETF has an MER of 0.55% and it holds only six stocks in equal positions: BMO, CIBC, Royal Bank, Scotia, TD and National Bank.
As Norm Rothery pointed out in a Wealthy Boomer video interview, with the advent of discount brokerages you might be better off buying the underlying stocks yourself. For example, suppose you had $100,000 to invest in this strategy. You could either spend $10 per order x 6 orders = $60 to buy an equal weight starting allocation to these six stocks, or you could pay $10 for one order of the ETF. If we assume that this basket of stocks grows at a compounded rate of 8% for 10 years, the MER would’ve taken roughly another $8,000 from your portfolio in fees.
So on one hand, we have $60 to execute this strategy versus about $8,000.
Some may argue that there are benefits to rebalancing to consider. Fine – take the dividends as cash and once per year put the accumulated cash into the worst performing bank stock. This adds $10 per year for a total of $150 instead of $60.
Still not satisfied? Even if you fully rebalanced to an equal weight on a quarterly basis (which I think most would agree is excessive) the ETF would be more than 10 times more expensive than just buying the underlying holdings.
I think narrow ETFs for the most part might only be useful for market timers looking for specific sector beta for short periods of a time. (Beta means market exposure, essentially.)
For those of you who are interested, here is Jon’s interview with Norm Rothery in which they talk about how $10 trades was a game-changer. Note, they also talk about the disadvantage of cheap trades, too. :)