ETF investors get access to PACCs and SWPs

Some of the major advantages mutual funds have enjoyed over exchange-traded funds — automatic investment and withdrawal programs — are no longer. Responding to increased advisor interest in ETFs, one provider has introduced a distribution reinvestment plan (DRIP), a pre-authorized cash contribution plan (PACC) and a systematic withdrawal plan (SWP) for its ETFs.

DRIPs, PACCs and SWPs are standard programs for retail mutual fund investors. While there are an increasing number of investors and advisors philosophically aligned with ETF investing, many have been deterred from using the product structure because there was no cost-efficient way to employ dollar-cost averaging or systematic withdrawals.

Som Seif, president of Claymore Investments, concedes it’s been a reason some investors have opted to stick with mutual funds.

“The area where mutual funds remained a better investment for investors was if you were a smaller investor or a dollar-cost averaging compounding type of investor. A major hurdle for smaller investors comes down to the fact you do have trading commissions on ETFs,” he says. “For small amounts, — let’s say $3,000 or $4,000 — the cost of the investment can outweigh the benefit of the lower management expense ratio offered by an ETF.”

Claymore’s Auto DRIP Plan will allow unitholders to acquire additional units in their investment without incurring additional trading commissions. The PACC plan offers unitholders the ability to dollar-cost average into Claymore ETFs in a commission-free manner.

The Claymore ETF SWP will allow an existing unitholder of any Claymore ETF to withdraw a fixed amount of money from that specific Claymore ETF on a monthly, quarterly or annual basis. This allows an investor — typically a retiree — to supplement income he or she receives from other sources without incurring additional trading commissions.

As mentioned, these services are pretty standard for mutual fund providers. Since ETF providers have comprehensive designated broker trading agreements, offering a service like this requires developing a separate agency to oversee the program and to create separate accounts for investors that choose the programs.

“A transfer agency takes care of the work,” Seif says. “For the PACC program, it only works for existing unitholders — you have to hold at least one share. You can contribute monthly, quarterly or semi-annually. All you do is you put in your enrolment request, and at the end of each month, you’ll have the cash deducted from the account by the securities on the same date as the distribution for the month. Units will then be credited into the account for the amount paid.”

John De Goey, CFP, vice-president of Burgeonvest Securities, says it’s a great move for an ETF provider to offer these services. De Goey, a vocal proponent of low-cost passive investment products, expects it will materially change the way many of his clients will invest in the coming year.

“My practice, which was highly PACC-driven six to eight years ago, moved to having RRSP contributions typically being done in a lump sum in the month of February. I would expect it’s a little premature to say, but by early 2010, I will likely have re-established PACCs for all my clients, so they can get into the habit of saving monthly as opposed to lump sums,” he says.

About half of De Goey’s client assets remain in low-cost index funds offered by Dimensional Fund Advisors. He says many of those clients employ a dollar-cost averaging strategy. He’s felt hamstrung in offering ETFs because of the inability to dollar-cost average.

“On both the planning side and the cost side, I think I have a very good value proposition compared to other advisors. If an ETF was the preferred product line to use for a client, an advisor offering mutual funds could dollar-cost average, and I couldn’t,” he says. “Here I have a better mousetrap, and I can’t use it in a better way. Dollar-cost averaging is often, but not always, a better way. At the very least, it gives clients a choice.”

In this investment climate in particular, De Goey points out dollar-cost averaging has become a powerful tool to keep clients in the market.

“You don’t have to worry about the emotion of trying to buy low. A lot of people don’t have the emotional constitution to follow through with that,” he says. “It’s easier to come up with money on a monthly basis versus once a year. Many people don’t want to invest because they are scared about the market. I would rather they put in one-twelfth of their annual savings on a monthly basis than try to get blood from a stone — and in some instances, get nothing.”

While Claymore is the first to offer these services for investors, it will not likely be alone for very long. iShares, the largest ETF provider in Canada, also plans to roll out similar services within the year.

“The last year has been such a powerful year for the ETF industry, with the majority of new assets coming from the retail side. That has really changed the dislocation of ETFs versus mutual funds. Programs like these are a natural evolution,” says Heather Pelant, the head of iShares Canada. “I’ve been doing due diligence on this for the last 18 months to find a third-party organization that then has the authority to pull out those dividends and distributions and re-invest them.”

Pelant also points out that many investors can take advantage of DRIP programs provided by their brokerage.

“DRIPs are not the issue. [Advisors] can set those up with their firm,” she says. “It’s the other pieces that require work to set up.”

(02/02/09)