The Best ETF Ever?

I see the new BetaPro Management Inc. BetaPro S&P/TSX 60 ETF (TSX-HXT) traded about 9 million shares at the close September 30, 2010. The big cap industry leader the iShares S&P/TSX 60 Index Fund (TSX-XIU) traded about 15 million shares. So how come a new S&P/TSX 60 ETF that is only 12-days old can draw so much capital away from the long established iShares S&P/TSX 60 Index Fund?

Please don’t tell me it is all about the Management Expense Ratio (MER) of just 0.07% undercutting the 0.17% of the iShares S&P/TSX 60 Index Fund (XIU). I refuse to believe the street is that stupid. Surely any reasonable advisor knows the “cheap” MER is not permanent – and there is counterparty risk because the money invested in the ETF goes into cash which is pledged as collateral to the swap so the counterparty bank (currently National Bank) is obligated to give the total return of the index. In other words – financial engineering. Pile on the questions on tax treatment as gains in derivatives are treated as income, not capital gains. An important investment rule – if your don’t understand an investment product – walk away.

Of course you could take a breath and look at the big picture – you see the S&P/TSX 60 Index is a bad idea because here in Canada we do not have enough big diverse names to create a big cap index. Remember the better predecessor was Canada’s original ETF (the original TIPs35). Currently the S&P/TSX 60 is loaded with repetition and small cap issuers that are in survival mode. Why do we need six banks – the DOW has two. Why do we need six gold stocks? Why two railroads and two potash companies? Why are there five income trusts when we know they will convert and change their business models? Why are there three telecom companies? The Dow has two. I could easily eliminate 15 issuers from this blotted repetitious beast

Our chart is that of the iShares S&P/TSX SmallCap Index Fund (XCS) plotted above the iShares S&P/TSX 60 Index Fund (XIU) and one can clearly see the smaller cap product outperform vs. the larger cap product. Let us name this chart Growth vs. Stagnation.