ETF series defined: getting down to the bare bones

Retail investment products come in a whole slew of shapes and sizes, ranging from conventional mutual funds to actively managed exchange-traded funds (ETFs) and everything in between. While it’s customary for a mutual fund to be offered across one or more series, the notion of an ETF series has only recently worked its way into mainstream discussion. 

Unlike your typical stand-alone mandate, an ETF series is defined as a purchase option offered by an existing or newly launched mutual fund. Providing both flexibility and intraday liquidity, an ETF series caters to investors who may be drawn to a particular mutual fund strategy but ultimately prefer the packaging and structural design of ETFs. 

The rise of ETF series in Canada

Spurred in great measure by the growing allure of actively managed ETFs, more fund providers are complementing their product shelves with an ETF series on new or existing mutual funds. And that’s not all: More lax regulations—notably the fact that managers aren’t required to disclose their positions daily—have incited fund providers to consider offering their popular mutual fund strategies in an ETF wrapper. To provide context, ETF series assets in Canada have grown nearly threefold within the last five years. 

What are the advantages of an ETF series?

Not only do ETF series provide choice for investors, but they foster simplicity and an overall ease of doing business for advisors. For starters, ETF series units are actively traded on exchanges such as the Cboe Canada or the S&P/TSX Composite Index, offering intraday liquidity (unlike their mutual fund counterparts).

From a fiscal perspective, tax reporting is also greatly simplified under both an ETF and ETF series structure. When investors buy mutual funds, for instance, they receive tax slips from each individual mutual fund manufacturer. This could get fairly complex if investors own multiple mutual funds, resulting in many tax slips that are sent out at varying times. In contrast, investors in ETFs or ETF series will often receive one consolidated end-of-year tax slip generated by their dealer.

Additionally, there’s the accessibility aspect. ETF series can be a formidable option for investors that want to invest in an actively managed mutual fund strategy but don’t have access to F series mutual funds. Since ETF series often have fees that are aligned with F series mutual funds, these investors can essentially access the same underlying strategy at a similar cost.

Last, since an ETF series is often premised on an existing mutual fund strategy, investors have the option of looking back at its historical performance. While bearing in mind that the past isn’t indicative of future performance, this allows them to get a firmer grasp on the consistency of its management team, the volatility of its holdings, and an understanding of how the strategy has fared in different market environments. 

What are the drawbacks of an ETF series?

One of the main disadvantages of ETF series is that they may seem more volatile on an intraday basis. That’s because they’re mark to market, whereas mutual funds are priced at their end-of-day net asset value. Another drawback is that large movements in and out of a fund trust could have an impact on ETF series performance, resulting in capital gain and tax impacts.

In periods of heightened market volatility, it may also seem like a stand-alone ETF has more control over managing holdings or conducting trades. ETF prices may fluctuate substantially during these periods because their holdings aren't usually disclosed daily. This is especially true as their exposures and values change.

Additionally, since an ETF series may bear costs associated with stand-alone ETFs (such as spread costs) while also sharing costs associated with mutual funds (such as administrative costs), it isn’t uncommon to see discrepancies between mutual fund and ETF series performance.

Last, since ETF series are actively traded on an exchange, they don't benefit from systematic withdrawal plans or preauthorized contributions, rendering them unsuitable for investors that have grown accustomed to these features.

What are mutual fund series and how do they differ from ETF series?

Mutual fund and ETF series differ on many fronts, including fee structure, level of liquidity, and investment minimums.

In contrast to ETF series, mutual funds are often classified into multiple series or classes of securities, each of which varies according to fee structure or benefits. For instance, an F series mutual fund is geared to investors with fee-based accounts (the fee is predetermined and paid to the advisor directly), while an A series mutual fund compensates advisors in a different way (there’s usually a one-time sales charge and an ongoing trailing commission).

From a broader perspective, mutual fund and ETF series fees also vary according to an asset manager’s specialty, underlying strategy, or asset class (equity, bond, or alternative investments are all subject to different pricing).

Looking ahead

For those looking to access popular mutual fund strategies in another structure, an ETF series offers added flexibility, intraday liquidity, and a host of other benefits; however, investors also need to be aware of the drawbacks associated with an ETF series. Despite the growing number of ETF series coming to market in Canada, it’s important to note that they aren’t for everyone. As always, investors should take the time to assess their particular situation, weigh the pros and cons of investing in an ETF series, and, most important, seek out their advisor to help sort through any questions they may have.