4 ETF tips for clients: BMO

The number of ETF products and investment niches has increased significantly in the last five years.

And BMO says many new products have been launched that offer competing exposure to existing market segments.

Kevin Gopaul, senior vice president and CIO of BMO Asset Management adds, “With the growing number of ETFs, it’s critical investors educate themselves on a fund’s structure, objective, risks and provider to ensure the ETF is a good match that helps them reach their investment goals.”

The bank offers the following tips for those using ETFs:

• Boost portfolio diversification through wider exposure ETFs versus industry-focused ETFs. An investor looking to invest in Canadian banks could use broad market equity ETFs, dividend ETFs, or financial sector ETFs, for example.

• While multiple funds may target the same market segment or industry, remember that each could use different weighting schemes. Choosing between market capitalization, equal weighting or factor weighting will affect returns, costs, and tax efficiencies.

• The majority of Canadian ETFs get exposure through securities, but a subset invests in derivatives. These funds receive the return of an index from a financial institution, so investors should weigh the added risk and additional fees against the advantages.

• The total cost of transacting in an ETF is three-fold; the management expense ratio (MER) includes management fees and taxes, and the trading expense ratio (TER) includes portfolio expenses like commissions paid and withholding tax on foreign income. The trading costs also reflects commissions as well as the bid and ask spread, which is more heavily traded in the secondary market and decreases as fund matures.

Also read:

10 tips for placing ETF orders

12 ETP trends in 2012

Why mutual funds are buying ETFs

Index construction is tricky