# Invesco Trimark's ETF-based mutual funds blur the lines



## Jon Chevreau (Apr 4, 2009)

As I note in the FP today, Invesco Trimark has blurred the lines between mutual funds and ETFs with its new PowerShares Funds, which are available today. I suggest this may alter the landscape because it means mutual fund sales people licensed only to sell through the MFDA channel can now tell their clients they can now have ETFs: albeit ETFs that pay them a 1% trailer and defeats some of the purpose of true ETFs. But it's also interesting that those licensed via IIROC or the old IDA that could already sell ETFs and stocks and bonds directly can now sell these PowersShares Funds and collect a trailer fee that they can't get from Barclays or Vanguard (but can if they sell Claymore Advisor Class ETFs).

Some interesting things the new product can do that ETFs can't and vice versa but perhaps the net effect for consumers is good because it will put more fee pressure on the rest of the mutual fund industry?

Here's the piece, which is also on my blog:

http://www.financialpost.com/news-sectors/story.html?id=2227771


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## CanadianCapitalist (Mar 31, 2009)

I haven't looked at the prospectus but it is hard to get excited about Trimark climbing on the ETF bandwagon:


Fee-wise, the funds seem to be pricier side after including advisor compensation. IMO, all-in costs of a passive portfolio constructed through an advisor should cost 1.5% or less.
What does "intelligent" indexing mean anyway? It sounds suspiciously like active management by another name.


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## HaroldCrump (Jun 10, 2009)

CanadianCapitalist said:


> What does "intelligent" indexing mean anyway? It sounds suspiciously like active management by another name.


There is an element of subjectivity in this.
_With intelligent indexing, the index provider seeks to outperform passive market benchmarks through intelligent security selection and weighting_
I assume this means the fund manager has the flexibility to have customer weightings of certain securities.
Not exactly a pure, passive ETF any more.
The so-called "intelligence" will deviate the return from the return of the underlying index.
I think the primary purpose behind this move is to get a cut off more and more people moving to ETFs.
The mutual fund companies must be feeling the need to tap into that segment of investors and kick it back to its "advisors".


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## Jon Chevreau (Apr 4, 2009)

MERs on the new funds will range from 1.65% to 1.9% according to a Morningstar piece today by Rudy Luukko. If that helps push the fund industry to view 2% as a ceiling rather than a floor, that's a positive for investors who value advice, IMO. I've added a few comments and links on my blog on this, which like this forum is "in progress."

http://network.nationalpost.com/np/...-hybrids-that-will-shake-up-the-industry.aspx


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## Jon Chevreau (Apr 4, 2009)

Here are the full MER charts for both A class and F class. As I note in the blog, you'll have to add in your advisory fee on the F class so it may be a wash. Pity discount brokerage DIY investors are forced to buy A class and pay higher MERs for advice they neither value nor are provided with:

http://network.nationalpost.com/np/...rts-of-invesco-trimark-powershares-funds.aspx


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## ThickenMyWallet (May 20, 2009)

I don't worry about the beachhead. I worry about phase 2, 3 and 4. Inveso PowerShares in the U.S. had to close a series of ETFs this year which did not gain market acceptance including most of its FTSE RAFI series. Products were too exotic (one of the ETFs invested in hardware & consumer electronics; not surprisingly, it closed). 

On a larger perspective, isn't the question we should be asking why are there so many regulators for financial intermediaries? If we are merging our securities commissions into one, perhaps its time to raise the proficiency bar for all intermediaries and allow all of them to sell mutual funds and stocks. 

Do you not find it absurd that a product has been created so that: (i) for MFDA registered only intermedaries allows them to sell what is theortically a low cost product for higher? (ii) for IIROC registered intermedaries allows them to push clients into higher priced product when a lower alternative exists because they get paid a trailer (and what disclosure rules are in place to disclose that you can buy a lower MER product)?

I don't fault the issuer for exploiting the loophole. But the government can't preach financial literarcy on one hand and then allow a regulatory system to exist that crams high priced product onto the public with the other hand (with little to no alternative in smaller regions).


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## mogul777 (Jun 2, 2009)

I also fail to find the benefits of these products. Bottom line is you can pay nearly 2% for the privilege of paying a trailer fee (and other added expenses) when the much less expensive ETF is readily available for purchase. Sure there are a few perks such as lower or no transaction fees, alternative to otherwise offered even higher priced mutual funds, and jobs for the industry people.


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## HaroldCrump (Jun 10, 2009)

mogul777 said:


> Sure there are a few perks such as lower or no transaction fees, alternative to otherwise offered even higher priced mutual funds, and jobs for the industry people.


These funds also appear to be "corporate class" funds i.e. switching between these do not trigger capital gains (at least according to their website).
Still, a very high price to pay for some dubious "intelligent" passive investment and some capital gains savings.


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## CanadianCapitalist (Mar 31, 2009)

More coverage on this:

Michael James on Money -- ETF Pollution Rises to a New Level



> This solves financial advisors’ problems nicely. If clients want ETFs – no problem – they can have ETFs. Never mind that the underlying reason why clients want ETFs is to pay lower fees. These new products are hybrids only in the marketing realm. In reality, they walk and talk like mutual funds, but advisors can call them ETFs.


Rob Carrick -- A mutual fund taking ETFs to the masses



> Mac v. PC has nothing on mutual funds v. exchange-traded funds, better known as ETFs. Just to set the stage, mutual funds have vastly more market share, while the ETF business is growing faster.
> 
> Now, the two rivals have been teamed together in the product lineup of Invesco Trimark, one of the country's largest mutual fund companies. Invesco Trimark announced yesterday that it is offering a series of eight ETFs in a mutual fund wrapper that will be available wherever mutual funds are sold. The new lineup goes by the name PowerShares Funds.


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## Jon Chevreau (Apr 4, 2009)

Here's Trimark's response to the ETF industry's criticisms of its PowerShares Funds:

http://network.nationalpost.com/np/...mark-responds-to-etf-industry-criticisms.aspx


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## HaroldCrump (Jun 10, 2009)

So what is this "intelligent" indexing they keep talking about?
Isn't that an oxymoron?
It appears to mean that the fund manager will choose when to enter into or exit out of an underlying ETF position?
Doesn't that defeat the purpose of index investing?
So now we will have two types of index investing - passive (couch potato style) and active ("intelligent")?


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## CanadianCapitalist (Mar 31, 2009)

HaroldCrump said:


> So what is this "intelligent" indexing they keep talking about?
> Isn't that an oxymoron?
> It appears to mean that the fund manager will choose when to enter into or exit out of an underlying ETF position?
> Doesn't that defeat the purpose of index investing?
> So now we will have two types of index investing - passive (couch potato style) and active ("intelligent")?


It seems to me that by "intelligent" Trimark refers to the fundamental indexing. They also mention that the funds will maintain full exposure to the asset class it belongs to, so I'm assuming that's what they mean.


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## HaroldCrump (Jun 10, 2009)

CanadianCapitalist said:


> It seems to me that by "intelligent" Trimark refers to the fundamental indexing. They also mention that the funds will maintain full exposure to the asset class it belongs to, so I'm assuming that's what they mean.


So how is it more intelligent than couch potato?
Just by the % allocation across various ETFs?


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## mogul777 (Jun 2, 2009)

HaroldCrump said:


> So how is it more intelligent than couch potato?
> Just by the % allocation across various ETFs?


In a nutshell they manage the allocation based on certain criteria. The method is passive the result is active. Intelligent is hardly the best term, but it sounds good in the marketing spiel. I haven't actually looked at these funds in particular that is a generalization of "managed" ETFs. 

In other words ETFs that want to be managed mutual funds, and now of course we have mutual funds pretending to be ETFs because they are now the in thing. The excuse for the "value-added" (cough cough) ETFs is the vast bloat of the industry and the need for differentiation for sale purposes. The blurring of the lines will ultimately lead to a mishmash smorgasbord of mostly crap... wait that sounds like what we have now. 

And yes ultimately any kind of interference does indeed defeat the _fundamental_ reason for index investing.


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## Jon Chevreau (Apr 4, 2009)

Should advisors take a 1% trailer fee on an index fund? Are they "spoiled" or is it the bank-owned discount brokers who take a 1% trail for no service really spoiled. My blog on this, which is followed by a Trimark-penned essay on the "value of advice."

http://network.nationalpost.com/np/...t-spoilt-quot-by-unearned-1-trailer-fees.aspx


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