ETF series versus stand-alone ETFs

What is an ETF series? And how does it compare to stand-alone ETFs?

Over the past few years, ETF series have seen considerable growth. Essentially, an ETF series is simply a version of an existing or new mutual fund trust, such as series A, series D, etc. So, for example, series A would be aimed at investors with a financial advisor, series D would be for individual investors who buy through a discount brokerage and series F would be for investors who work with advisors on a fee-based basis.

ETF series aren’t new: the first one launched in Canada in 2013. Since then, many ETF providers have launched ETF series on existing or new mutual funds. ETF series typically charge the same fee as their series F mutual fund counterparts and provide identical exposure to other series that are part of the same mutual fund.

It’s important for advisors and investors to know the differences between stand-alone ETFs and ETF series because the product structure can have an impact on its performance. The challenge that investors unknowingly face is that sometimes there is no easy way to tell if an ETF is a stand-alone trust or a series as part of a mutual fund. It’s important to know this because, while there are advantages to the ETF series structure, there are also drawbacks.

Benefits of ETF series versus stand-alone ETFs

• Benefits of scale due to assets of multiple series being managed in one fund:
  • A reduction in certain fixed costs of maintaining a separate mutual fund and separate ETF.
  • Potentially lower transaction costs when trading because the portfolio manager has a larger pool of assets to transact.
• If the primary series of the mutual fund was launched some time ago, investors can benefit from knowing the strategy’s historical performance.
• Smaller asset managers may not be able to trade large blocks of securities and allocate them to all their funds and ETFs respectively. In such situations, smaller asset managers may benefit from having multiple series as part of one fund, to allow them to manage trades effectively.

Drawbacks of ETF series versus stand-alone ETFs

• Within an ETF series, the costs of buying the underlying securities are mutualized (that is, those costs are shared by all investors in the series). For example, if an investor buys $50,000 of an ETF series, the cost of buying the new securities is shared by all investors in the series. This mutualization exposes investors to the risk of large in and out movements, which can reduce the series’ performance. This can also have an impact on capital gains and bring tax implications for all unitholders.
• Additional spread costs for ETF series: ETFs are subject to spread costs (B-A) that investors who buy or sell the ETF have to pay. ETF series are subject to the same observable spread costs plus spreads on the underlying securities that occur when product managers buy or sell securities for the fund trust. This leads to a reduced performance.
• The performance of an ETF series will differ from that of any mutual fund series because an investor’s total return will be impacted by ETF transaction costs.
• Transaction fees vary between mutual funds and ETFs, which may lead to a variance in ETF series. ETFs may charge brokerage and commission fees, while mutual funds charge admin fees. ETF series have the same brokerage and commission fees but also may be impacted by the admin fees from the underlying mutual funds.
• Some ETF series may not provide daily transparency of their holdings, unlike stand-alone ETFs. This might have a significant impact in very volatile markets, where the ETF’s market price could be considerably impacted by the fund’s changing exposures and their values.

How to tell whether an ETF is a stand-alone or series

Check to see if the word “series” appears in the ETF name or on the ETF webpage. You can also check the ETF’s prospectus, which can be found on the ETF provider’s website, or on sedar.com.

When to choose stand-alone ETFs versus ETF series

Ultimately, this is a matter of personal preference. In some cases, the benefits of scale of series ETFs can outweigh the drawbacks of the product’s structure, particularly for smaller asset managers. Advisors should talk to their Mackenzie sales team for more details. Investors should talk to their advisors.

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