Invesco Trimark's ETF-based mutual funds blur the lines

[Jon Chevreau]

As I note in the FP today, Invesco Trimark has blurred the lines between mutual funds and ETFs with its new PowerShares Funds, which are available today. I suggest this may alter the landscape because it means mutual fund sales people licensed only to sell through the MFDA channel can now tell their clients they can now have ETFs: albeit ETFs that pay them a 1% trailer and defeats some of the purpose of true ETFs. But it's also interesting that those licensed via IIROC or the old IDA that could already sell ETFs and stocks and bonds directly can now sell these PowersShares Funds and collect a trailer fee that they can't get from Barclays or Vanguard (but can if they sell Claymore Advisor Class ETFs).

Some interesting things the new product can do that ETFs can't and vice versa but perhaps the net effect for consumers is good because it will put more fee pressure on the rest of the mutual fund industry?

Here's the piece, which is also on my blog:

http://www.financialpost.com/news-se...tml?id=2227771

[CanadianCapitalist]

I haven't looked at the prospectus but it is hard to get excited about Trimark climbing on the ETF bandwagon:

• Fee-wise, the funds seem to be pricier side after including advisor compensation. IMO, all-in costs of a passive portfolio constructed through an advisor should cost 1.5% or less.
• What does "intelligent" indexing mean anyway? It sounds suspiciously like active management by another name.

[HaroldCrump]

Originally Posted by CanadianCapitalist

What does "intelligent" indexing mean anyway? It sounds suspiciously like active management by another name.

There is an element of subjectivity in this.
With intelligent indexing, the index provider seeks to outperform passive market benchmarks through intelligent security selection and weighting
I assume this means the fund manager has the flexibility to have customer weightings of certain securities.
Not exactly a pure, passive ETF any more.
The so-called "intelligence" will deviate the return from the return of the underlying index.
I think the primary purpose behind this move is to get a cut off more and more people moving to ETFs.
The mutual fund companies must be feeling the need to tap into that segment of investors and kick it back to its "advisors".

[Jon Chevreau]

MERs on the new funds will range from 1.65% to 1.9% according to a Morningstar piece today by Rudy Luukko. If that helps push the fund industry to view 2% as a ceiling rather than a floor, that's a positive for investors who value advice, IMO. I've added a few comments and links on my blog on this, which like this forum is "in progress."

http://network.nationalpost.com/np/b...-industry.aspx

[Jon Chevreau]

Here are the full MER charts for both A class and F class. As I note in the blog, you'll have to add in your advisory fee on the F class so it may be a wash. Pity discount brokerage DIY investors are forced to buy A class and pay higher MERs for advice they neither value nor are provided with:

http://network.nationalpost.com/np/b...res-funds.aspx

[ThickenMyWallet]

I don't worry about the beachhead. I worry about phase 2, 3 and 4. Inveso PowerShares in the U.S. had to close a series of ETFs this year which did not gain market acceptance including most of its FTSE RAFI series. Products were too exotic (one of the ETFs invested in hardware & consumer electronics; not surprisingly, it closed).

On a larger perspective, isn't the question we should be asking why are there so many regulators for financial intermediaries? If we are merging our securities commissions into one, perhaps its time to raise the proficiency bar for all intermediaries and allow all of them to sell mutual funds and stocks.

Do you not find it absurd that a product has been created so that: (i) for MFDA registered only intermedaries allows them to sell what is theortically a low cost product for higher? (ii) for IIROC registered intermedaries allows them to push clients into higher priced product when a lower alternative exists because they get paid a trailer (and what disclosure rules are in place to disclose that you can buy a lower MER product)?

I don't fault the issuer for exploiting the loophole. But the government can't preach financial literarcy on one hand and then allow a regulatory system to exist that crams high priced product onto the public with the other hand (with little to no alternative in smaller regions).

[mogul777]

I also fail to find the benefits of these products. Bottom line is you can pay nearly 2% for the privilege of paying a trailer fee (and other added expenses) when the much less expensive ETF is readily available for purchase. Sure there are a few perks such as lower or no transaction fees, alternative to otherwise offered even higher priced mutual funds, and jobs for the industry people.

[HaroldCrump]

Originally Posted by mogul777

Sure there are a few perks such as lower or no transaction fees, alternative to otherwise offered even higher priced mutual funds, and jobs for the industry people.

These funds also appear to be "corporate class" funds i.e. switching between these do not trigger capital gains (at least according to their website).
Still, a very high price to pay for some dubious "intelligent" passive investment and some capital gains savings.

[CanadianCapitalist]

More coverage on this:

Michael James on Money -- ETF Pollution Rises to a New Level

This solves financial advisors’ problems nicely. If clients want ETFs – no problem – they can have ETFs. Never mind that the underlying reason why clients want ETFs is to pay lower fees. These new products are hybrids only in the marketing realm. In reality, they walk and talk like mutual funds, but advisors can call them ETFs.

Rob Carrick -- A mutual fund taking ETFs to the masses

Mac v. PC has nothing on mutual funds v. exchange-traded funds, better known as ETFs. Just to set the stage, mutual funds have vastly more market share, while the ETF business is growing faster.

Now, the two rivals have been teamed together in the product lineup of Invesco Trimark, one of the country's largest mutual fund companies. Invesco Trimark announced yesterday that it is offering a series of eight ETFs in a mutual fund wrapper that will be available wherever mutual funds are sold. The new lineup goes by the name PowerShares Funds.

[Jon Chevreau]

Here's Trimark's response to the ETF industry's criticisms of its PowerShares Funds:

http://network.nationalpost.com/np/b...riticisms.aspx