All else equal, lower MERs translate into better performance results. And better performance should be reflected in higher monthly
and more FundGrade A+™ Awards. This certainly seems to be the case as proportionally, ETFs have received more A+ Awards than their mutual fund
counterparts. Since the awards were first established in 2012, on average, over 12% of eligible ETFs have received the award each year. This is well above
the overall average of around 5%. And based on early projections, it looks like this percentage could increase for 2016, with around 13% of eligible ETFs
in line to earn an A+ Award.
Here’s a look at some of the perennial A+ winning ETFs as well as some of the ETFs that are vying for their first award this year.
Fixed-income funds’ outperformance
But first, it is interesting to note that fixed-income ETFs have performed particularly well against their peers. While the proportion of ETFs that are
fixed income is much higher than that of mutual funds (32% vs. 15%), the number of fixed-income ETF A+ winners is still disproportionately higher than it
is for mutual funds. Over the past four years, 46% of the ETF award winners were fixed income, whereas for mutual funds the number is closer to 14%.
Only two ETFs have managed to win an A+ award in each of the past four years. Both of these are fixed-income ETFs, and both are looking to make it five for
five in 2016 by continuing this outstanding performance.
The first is iShares Canadian Corporate Bond Index ETF (TSXP: XCB),
which tracks the FTSE TMX Canada All Corporate Bond Index. This fund has an MER of just 0.46%, well below the Canadian Fixed Income average MER of 1.26%.
It has historically generated above-average performance with below-average volatility, and so far in 2016, that trend has continued.
The second ETF to earn four consecutive A+ Awards is the BMO Short Corporate Bond Index ETF (TSX: ZCS). This Canadian Short
Term Fixed Income fund tracks the FTSE TMX Canada Short Term Corporate Bond Index. It has an MER of just 0.13%, third lowest in a category where the
average is 1%. Since inception, this fund has consistently been one of the top performers among its peers, which more than makes up for its slightly
FundGrade A+ candidates for 2016
When looking at projections for the 2016 FundGrade A+ Awards, the U.S. Equity ETFs are the clear standout. BMO is leading the charge in this category with
outstanding performance from two rules-based, or “smart beta,” ETFs. BMO Low Volatility U.S. Equity ETF (TSX: ZLU), which is the
top-performing U.S. Equity fund over the past three years, selects 100 low-beta stocks from the U.S. large-cap universe. While the BMO U.S. Dividend ETF (TSX: ZDY), the top performer over the past
two years, selects dividend payers using growth rates, yields, and payout ratios. These ETFs have MERs of just 0.33% and 0.34%, respectively, compared with
the category average of 1.9%.
BlackRock also has two ETFs in the running to receive their first A+ Award in 2016. iShares Core S&P 500 Index ETF (TSX: XUS) provides low-cost
exposure to the S&P 500 with an MER of just 0.1%. iShares Edge MSCI Minimum Volatility USA Index ETF (TSX: XMU) has a
slightly higher MER of 0.34% and tracks the MSCI Minimum Volatility USA Index. The index consists of equities that in aggregate have lower volatility than
the broad U.S. market. Both of these funds are top-decile performers over the past three years with below-average volatility.
Finally, Vanguard S&P 500 Index ETF (TSX: VFV) also has a
chance at earning its first-ever FundGrade A+ Award in 2016. However, it will have to get back to monthly A-Grade status before it can do so. VFV tracks
the S&P 500 Index and has the distinction of having the lowest MER in the category, at 0.08%.
Brian Bridger, CFA, FRM
, is Vice President, Analytics & Data at Fundata Canada Inc. and is a member of the Canadian Investment Funds Standards Committee.
Notes and Disclaimers
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