By Keith Damsell
The Globe and Mail
Report on Business
Thursday, November 17, 2005

Exchange-traded funds -- and Barclays Global Investors Canada Ltd. in particular -- are winning the fight for the passive investment dollar.

Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "If you have a plan of action, you have to ride the bumps along the way.”

Investors have been fleeing index funds this fall, reporting net redemptions of about $135-million in the past two months. Total index fund assets under management have hovered between $11-billion and $12-billion for the past 18 months, according to Globefund.com.

In contrast, ETFs have continued to attract new investors despite this fall's volatile market. Assets under management at Toronto-based Barclays are near the $11-billion mark, up from about $3-billion three years ago.

"Our assets tend to have been increasing steadily," said Geri James, product manager at Barclays.

Some Barclays sales growth stems from "assets moving from mutual funds to ETFs," Ms. James said. "Our growth tends to be independent of the market so even in down markets we continue to grow with new assets."

The Toronto-Dominion Bank also sells ETF funds but the bank's success marketing the asset class pales in comparison to Barclays. For example, Barclay's iUnits S&P/TSX 60 Index Fund has a market capitalization of $7-billion; the TD S&P/TSX Composite Index Fund has a market value of $205-million.

Index funds have lost investment dollars this fall. In September, a group of 63 index funds reported net redemptions of $96.3-million and in October, a further $40.6-million in redemptions, reported the Investment Funds Institute of Canada.

ETFs are a cheaper and more tax efficient alternative to many index funds, said Dan Hallett, Windsor, Ont.-based independent fund analyst. Annual costs paid by the unitholder for an ETF are about 25 basis points compared with 50 to 75 basis point fees for index funds. In Canada, Barclays ETFs trade on the Toronto Stock Exchange and can limit taxable capital gains for the unit holder, he said.

The steady flow of investment dollars into ETFs has done little to staunch the sometimes heated industry debate on the merits of active fund management versus passive ETF or index investing. It's an often confusing discussion with both sides using selective data to make their point.

Many clients of Adrian Mastracci of Vancouver's KCM Wealth Management Inc. own index and ETF funds. Passive funds are a more cost-efficient means of reaching long-term financial goals, he said.

"You've just got to be able to roll with the punches," Mr. Mastracci said of the S&P/TSX composite index's 6-per-cent decline in value last month, a tumble mirrored in passive ETFs and index funds tied to the index.

"If you have a plan of action, you have to ride the bumps along the way," he said.

Edward Jones & Co., meanwhile, "tends to shy away" from recommending passive investment funds to investors, said Canadian market strategist Kate Warne.

"It's probably worth paying a little extra fee to make sure somebody is watching the pot and making sure the right ingredients are going in," she said. "What you want is someone who knows what they are doing and is watching the money. A passive index doesn't do that."

The combination of low fees and a three-year bull market in Canada have made ETFs a compelling proposition, said Robert Frances, president and chief executive officer of financial planning firm PEAK Financial Group of Montreal.

October chill

Weak equity markets dampened investor enthusiasm for index funds in October. While some of the sector's largest funds reported net sales, the entire asset class reported net redemptions of about $40-million.

SOURCE: THE INVESTMENT FUNDS INSTITUTE OF CANADA

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.