H.M. Wise Asset Management

Financial Information

Mutual funds and Exchange Traded Funds (ETFs) are more alike than different. The difference is mainly in their regulatory structure. Both invest their investors’ money into a diversified portfolio of stocks and/or bonds. The same portfolio manager may well be managing a mutual fund and an ETF that has the same mandate.

There are also mutual funds that consist of a portfolio of ETFs.

Mutual funds are sold by prospectus, and even have their own regulatory agency, the Mutual Funds Dealers Association (MFDA). This adds a whole extra layer of costs onto the mutual funds that the ETF does not have. The regulator would say it adds an extra layer of investor protection.

When you buy or sell a mutual fund, the fund company will either create or eliminate fund units, according to the ebb and flow of investor dollars. All mutual fund transactions are done at the close of business each day.

An ETF, on the other hand, trades on a stock exchange, and the value can change continuously according to market sentiment instant by instant. The price you get depends upon the bid/ask spread.

While mutual funds typically have higher management fees than an ETF, you can trade a mutual fund without incurring any transaction costs. Every transaction made on an ETF, however, will attract a brokerage commission.

Mutual funds offer a great deal of flexibility for clients. Among the benefits are Corporate Class funds that offer tax benefits in Open accounts, T-SWPs (Tax-advantaged systematic withdrawal plans) that reduce current taxation of interest, dividends and capital gains in exchange for future capital gains when eventually sold, PACs (pre-authorized purchases on a regular basis), SWPs (systematic withdrawal plans for redemptions on a regular basis), DCAF (dollar-cost averaging) that automatically switches money from a money market fund into an equity, balanced or bond fund, and automatic rebalancing services by the fund company.

The minimum purchase commitment is generally lower for mutual funds than it is for ETFs, for which purchases must be made in multiples of 100 units at the current market price. Also, financial institutions generally want clients making RRSP loans to purchase mutual funds that they can hold as collateral.

Clients can hold mutual funds in client name or through a Portfolio Strategies nominee account. A client name account is held at the fund company, and can consist only of that firm’s products. A Portfolio Strategies nominee account can be either Open or Registered. It gives the client the flexibility to choose from the entire universe of mutual fund and ETF offerings.

There are 2 basic flavours of ETF: passive and active. Passive ETFs have attracted the most investor dollars, by far. Their objective is to match the performance of a large stock or bond index, for example the S&P500 index in the US. The management fee for a passive ETF is very low. Sector ETFs will invest in one particular segment of the overall market; for example a Technology ETF will invest only in a tech stock index. Active ETFs, on the other hand, use a wide range of potential strategies to attempt to achieve either superior returns or lower volatility than a passive index. The management fee attached to active ETFs and sector ETFs tends to be much higher, approaching the costs of holding a similar mutual fund. Once trading costs are included, it might be cheaper to own the mutual fund.

I can offer ETFs to my clients through a Portfolio Strategies nominee Open or Registered fee-based account.

Folks associated with financial markets are great innovators. A great many investors can no longer live off the interest received from ultra-low interest rates, and are spooked by record high stock market valuations and the volatility associated with stock markets. Hence the invention of the “Liquid Alternative”.

The “alternative” part is easy: it is anything that can be bought and/or sold but is not a stock or a bond.

Real estate is a prominent example. Other examples are commodities – primarily gold – or fine art, jewellery, or antique autos.

This is not some obscure corner of the financial markets. The giant pension funds, of which the Canada Pension Plan is one, might have 20% or more of their total assets invested in alternative asset classes. They invest directly in toll roads, airports, etc. and receive the revenue stream as income.

The “liquid” part required a bit of imagination on the part of the marketing gurus on Bay Street. A stock issued by a real estate company, for example Brookfield or Cadillac Fairview, has now magically transformed itself into a “liquid alt” because it is backed by real estate yet trades readily on an established stock market. And carrying this further, mutual funds that invest in multiple real estate companies or in infrastructure-related businesses are now also “liquid alts”.

More recently, the term has been used to include investments that use more sophisticated financial instruments like options, futures, credit default swaps, etc; things that aren’t backed by any tangible “alternative”. A lot of bond funds are now using these financial instruments in an effort to enhance yield. Ordinary mutual funds that include short-selling as part of their investment strategy are characterized as “liquid alts”. Even hedge funds are being rebranded as “liquid alts”. Clearly, we have to look inside a “liquid alt” to see what exactly is going on! They are definitely not all alike!

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