I was quoted in today’s National Post regarding the launch of the Horizons AlphaPro Balanced ETF (HAA/TSX). As is common practice in the ETF world, the firm only quotes the management fee on its website. This fund, like most other AlphaPro offerings, charges a base management fee of 0.70% annually. There was a time when an ETF’s management expense ratio was the same or just a few basis points above the base management fee. It wasn’t unusual to see a sponsor eat the GST and operating expenses. (See this Rob Carrick article for more on this.) With a new tax and stiffer competition – making it tougher to grow assets – this is no longer the case.
We estimated that this new ETF’s fees might clock in at 1.09% annually (0.70% x 1.13 + 0.30%). The firm countered that it expects the MER to slide in under the 1% barrier. But this is not rocket science.
Most new funds have so little in assets that the fund sponsor routinely absorbs many of its costs for a few years. Since AlphaPro is new and small it’s no surprise that the firm subsidizes costs for all of its ETFs. The net amount of operating costs incurred, after the company’s subsidies, come in around 40 basis points annually (before the HST regime). So, our estimate of 30 basis points of operating expenses is conservative. Then again, the extent of subsidies is completely at AlphaPro’s discretion. In other words, they can make the fees whatever they want for a year or two (maybe longer). But this is not sustainable long-term. The firm will have to attract enough new money into this and its other ETFs to bring fees down a sustainably low level.
But as Mark Barnicutt and I noted in a prior posting, they may do just that if they launch quality funds sub-advised by high calibre money managers.