Tuesday, 2 December 2008

Comparison of Canadian Growth Portfolio ETFs from Claymore and iShares: XGR vs CBN, Which is Better?

A few days ago I posted about iShares new Portfolio ETF funds. stating my opinion that the XGR iShares Growth Core Builder Fund is reasonably good. There is existing competition for this fund in the one-stop shopping growth fund space in the form another ETF from Claymore, the CBN Balanced Growth CorePortfolio ETF.

I decided to have a look inside, do a comparison, see which is better and whether either is a great product that you and I should rush to buy now.

The Scorecard — my bottom line opinion summarized for those who want it all now

The winner by a narrow margin is XGR with 70 points out of 100, while CBN has 64. Call me a tough marker but that’s a passing grade for both, not a fund-of-the-year score. Unlike most schools, in the right-most column, I dare to say exactly for what I would have given a perfect 10 (and I would be interested to hear other opinions too!).

Some Details

CBN’s expense ratio is the sum of its own 0.25% plus that of the funds inside, which I calculated as 0.55% using the proportions of the component holdings. It is interesting that Claymore actually uses four funds of its competitor iShares (IGT, XRE, XRB and XCB) to make up 15% of the portfolio fund. The MER statement is the one critical thing I noticed (is there more?) that is NOT up to date in the Prospectus page 65 and for which I penalized CBN. Unlike the web site summary page on CBN, the Prospectus still says the MER is 0.7% for everything including the Claymore subsidiary funds; this is what was changed on Nov.18 .

Diversification is broader and better in the XGR contents when one looks at the constituent funds. For instance, XIC is the total TSX 300 fund within XGR while the CBN equivalent content is CRQ which only contains 69 companies (more or less parallel to XIU, which I consider to be a large cap fund, not the broad total market). The same situation exists with XGR’s holding of EEM a broad emerging markets ETF while CBN contains CBQ, which is confined to BRIC countries (Brazil, Russia, India, China).

In addition, the equity market funds used by CBN follow the fundamental indexing approach for their weighting, as opposed to market-cap weighting of iShares’ funds. Fundamental indexing used various accounting measures to select and overweight companies considered to be better value and it is an investment strategy that I slot (though it doesn’t apply the limited price to book definition proven by the research) into a Value asset class and not a whole of market holding that the true passive investor seeks.

The too-large Bid/Ask spread and Premium/Discount to NAV are surely mostly the result of these two ETFs both being quite small (both are less than $10 million in assets) and thinly traded. If the funds got a lot bigger that disadvantage of both would decline but in the meantime it’s not good for the investor.

XGR’s vague investment policy statement, which as I said in my previous post, implies an active management approach that is likely not the way they will actually manage the fund. Still one must take note of what is written, caveat emptor.

With about half its holdings in fixed income XGR is more like a balanced fund than a growth fund. With 80% equity, CBN is just a little above the usual maximum of 75%- it is in the aggressive growth zone.