No free lunch with ETFs, unless you’re a disciplined DIY investor

By Dan Hallett, CFA, CFP on April 29th, 2010

There may be a trend afoot in the industry whereby mutual fund companies launch funds housing exchange-traded funds (ETFs).  The first I can recall is the now-defunct Spectrum Tactonics fund (which used technical analysis to trade ETFs) launched in 2001.  While many funds include ETFs among their holdings, Invesco PowerShares funds began last fall with a line of funds investing in specific PowerShares ETFs.  More recently, BMO launched a family of funds that will employ both passive and tactical strategies using BMO ETFs exclusively.  ETF proponents may criticize these funds, which pay trailer fees that make them pricier than the underlying ETFs.

But an investor cannot expect to receive advice and still enjoy the full fee advantage.  At the same time, advisors may not be able to justify charging a fee that fully eats up the entire ETF fee advantage.  So investors who want or need advice are unlikely to get a cheaper portfolio than is available from some of these new ETF-focused mutual funds.

The only way an investor can expect to benefit from the full ETF fee advantage is to become a do-it-yourself (DIY) investor.  But even that is no guarantee.  In my latest Globe & Mail article, I explained why this is easier said than done.  Investors get in their own way and end up squandering the potential fee savings in brokerage costs, ill-timed trades and poor portfolio construction.  Related to this, Steadyhand CEO Tom Bradley recently explained how ETF Providers Have Cluttered a Pristine Landscape.