By Scott Ronalds

The world’s largest provider of exchange-traded funds (ETFs) is launching its first mutual funds in Canada. BlackRock (the parent of iShares) announced this month a suite of seven balanced funds, the BlackRock Strategic Portfolio Series, which will be built using iShares ETFs.

ETFs are the “pumpkin spice” of the investment world these days – they’re everywhere. BlackRock’s foray into the mutual fund space prompted us to look under the hood of the new products. Below are a few observations.


The fees on the BlackRock funds will range from 1.15% to 1.60%. The company notes that the funds are “competitively priced, with Management Expense Ratios (MERs) anywhere from 0.09 – 0.75% lower than the respective fund’s corresponding category asset-weighted average.”

The MERs are undeniably lower than those of the average actively-managed balanced fund in Canada (which doesn’t say much, but that’s another story). Yet, those familiar with ETFs will note that the fees on the Strategic Portfolios aren’t cheap for an indexing strategy. All but one of the funds will have MERs of 1.50% or higher, which is expensive for passive management. Indeed, the MERs on the underlying iShares funds range from 0.25% to 0.50%. An advice component, or trailer fee, is built into the MERs of the Strategic Portfolios, however, which increases the fees considerably (by 0.5% to 1.0%).

Consider the four prominent no-load, direct-to-client fund companies in Canada that offer a globally diversified balanced fund: Mawer, Leith Wheeler, PH&N and Steadyhand. Each firm offers an actively managed balanced fund with MERs ranging between 0.89% – 1.34%, and importantly, each firm provides investors with advice.

Leith Wheeler Balanced Fund 1.23%
Mawer Balanced Fund
PH&N Balanced Fund
Steadyhand Founders Fund
BlackRock Balanced Portfolio


Because the BlackRock funds are new, they have no performance history. Yet, the underlying ETFs have been in existence for a number of years and past performance can be simulated with reasonable precision. We took the BlackRock Balanced Portfolio and simulated its returns over the past five years (ending September 30, 2013)*. We chose this fund because it has a traditional balanced asset mix of 60% stocks / 40% bonds, and a similar geographic mix to the above balanced funds.

Annualized Returns as of September 30, 2013

1 Y
3 Y
5 Y
Mawer Balanced Fund 15.5% 10.1% 8.6%
Steadyhand 60/40 Portfolio (Hypothetical)** 12.3% 9.0% 8.1%
Leith Wheeler Balanced Fund 11.8% 6.4% 5.8%
PH&N Balanced Fund 9.6% 5.1% 5.5%
BlackRock Balanced Portfolio (Simulated) 7.7% 4.8% 4.0%

The results show that investors would have done better over the past five years by investing in any of the actively-managed funds, and considerably better in the case of Mawer and Steadyhand. (Note: we use a hypothetical portfolio of Steadyhand funds in the comparison because we launched the Founders Fund in 2012 and it does not have a 5-year history. All performance numbers are after fees.)

Most performance comparisons used by advocates of indexing use pre-fee returns for indexes and post-fee returns for actively-managed funds. Indexing often comes out favourably in such comparisons. When fees are factored in, and the comparison is narrowed down to low-fee, direct-to-client funds, the numbers tell a different story.

Final Thoughts

The BlackRock press release states: “Our number one goal is to make a better mutual fund … As advisors and investors continue to face increasing pressures from ongoing market uncertainty and an ever-evolving investment landscape, our Strategic Portfolios will provide the answer they need: greater value.”

The BlackRock funds may be a better alternative to the average balanced fund in Canada, but the fees and performance figures above suggest that investors looking for greater value should turn their attention to the no-load, direct-to-client, plain vanilla fund families. Besides, pumpkin spice gets tiring after a while.

*The BlackRock Balanced Portfolio has the following target mix, according to its prospectus: 40% Canadian fixed income; 30% Canadian equity; 20% International equity; 10% U.S. equity. In our calculations, we used the returns of the iShares DEX Universe Bond Index Fund (Canadian fixed income), S&P/TSX Capped Composite Index Fund (Canadian equity), MSCI EAFE Index Fund CAD-Hedged (International equity) and S&P 500 Index Fund CAD-Hedged (U.S. equity). This mix of funds has a weighted MER of 0.34%. We added an additional annual fee of 1.21% to replicate the BlackRock Balanced Portfolio’s estimated fee of 1.55%. The portfolio was rebalanced annually to the target mix.
**The Steadyhand 60/40 Portfolio (Hypothetical) is comprised of: 50% Steadyhand Income Fund; 20% Steadyhand Equity Fund; 20% Steadyhand Global Equity Fund; 10% Steadyhand Small-Cap Equity Fund (rebalanced quarterly to the target allocation).
Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The annualized rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.