A bond ETF that you’ve probably never heard of becomes a bit cheaper.
The management fees of the Desjardins Canadian Universe Bond Index ETF (DCU-T) drop from 0.10% to 0.07% as of November 1.
Obligations ? Nobody likes them right now because interest rates are going up. A 0.03 percentage point reduction in fees? Yawn, right?
Here is why this drop in fees for Desjardins Global Asset Management is more important than it seems. Exchange traded bond funds are now becoming almost as cheap as equity funds, a big help in this low yielding world we live in. Each gradual drop in bond ETF fees puts a little more money in investors’ pockets, while also laying the groundwork for further fee reductions to come.
Desjardins is one of the smaller players in a crowded Canadian ETF market – DCU has assets of around $ 18 million, compared to $ 6 billion for the BMO Aggregate Bond Index ETF (ZAG-T) and 4 . $ 6 billion for the iShares Core Canadian Universe Bond Index ETF (XBB-T). Why consider DCU?
The low fees are as good a reason as any. ZAG’s management fee is 0.08%, while XBB’s is 0.09%. The flat fee for holding bond ETFs like these, as measured by the management expense ratio, is typically 0.01 point above the management fee. So imagine that DCU has an MER of 0.08 or 0.09%, compared to 0.09% for ZAG and 0.10% for XBB.
These three ETFs do the same job in portfolios by providing access to the broad bond market, including federal and provincial government bonds as well as corporate debt securities. ZAG and XBB appear to have higher corporate weightings, which is attractive right now because corporate bonds are a bit more resilient to rising rates.
The main downside of DCU is that it doesn’t trade as much as ZAG and XBB, which in turn means a bigger gap between the minimum price that sellers are willing to accept and the maximum amount that buyers will pay. One day this week, the bid-ask spread for DCU was 3 cents, while ZAG and XBB had a tight 1 cent spread.
It’s completely understandable that investors stick with proven large-scale bond ETFs. But let’s hope that Desjardins brings in new money. Continuous fee competition is one of the quiet advantages of investing in ETFs and should be encouraged as much as possible.
– Rob Carrick, Personal Finance Columnist
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Ask Globe Investor
Question: I was wondering if you could comment on Canadian General Investments Ltd. This company appears to be trading at a discount to its net asset value. Can you please explain why? Is this a potential value trap? In addition, this company has a habit of constantly increasing its dividends.
Reply: It is a closed-end fund that trades on the TSX under the symbol CGI-T. To my knowledge, it is the oldest fund of its kind in Canada, having been launched in 1930. Since 1956 it has been managed by Morgan Meighen & Associates.
Closed funds have a limited number of shares. There is no new offering unless the company sets up a secondary issue, which is rare.
One would think that, logically, closed fund units would be worth more because of the limited supply. But this is not the case. Many closed-end funds trade at a (sometimes significant) discount to their underlying net asset value. For example, CGI closed on October 22 at $ 39.26. The net asset value that day was $ 62.47. That’s a discount of over $ 23!
This fund has historically traded at a discount to NAV, but NAV is near the end of the range. What’s behind it?
It’s not the wallet. The top 10 holdings are strong and growing companies like Shopify Inc., Nvidia Corp., Lightspeed Commerce Inc., Canadian Pacific Railway Ltd., TFI International Inc., Descartes Systems Group Inc. and Amazon.com Inc.
But income investors won’t be excited about the quarterly dividend of 22 cents per share (88 cents per year). This translates to a yield of 2.2 percent. However, as our reader points out, the fund has a habit of increasing its payouts each year, typically by a dime per quarter.
The law of supply and demand also plays a role in pricing. The average transaction volume for CGI is only 3,784 units per day. If more people are looking to sell than to buy, it drives down the bargaining price.
Some investors follow the discount bands of closed funds, buying when they are at their peak and selling when they are near their trough. But finding the information can sometimes be difficult. Many of these funds are not known for their transparency.
CGI has a 10-year average annual compound rate of return of 14.25% on its stock price. This is worth considering, especially if you are interested in buying stocks at a great price. But beware: the shares are trading at a price close to their highest for 25 years. If the market undergoes a correction, their value will drop.
What’s new in the coming days
As companies are poised to funnel more liquidity to shareholders in Canada, should investors focus on stocks making buybacks to generate higher returns? Robert Tattersall will have answers.
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Compiled by Globe Investor Staff