In the short time since Toronto-based BetaPro Management Inc. introduced its BetaPro S&P/TSX 60 Exchange-Traded Fund in mid-September, establishing a new low for management fees in the ETF business in the process, more than $150 million has flooded into the upstart ETF.

“We’re Canada’s lowest-cost ETF,” says BetaPro president Howard Atkinson, “and that’s an attention grabber right there.”

With a scant management expense ratio of seven basis points, the new BetaPro ETF’s MER is less than half that of the giant iShares S&P/TSX 60 Fund sponsored by Toronto-based BlackRock Asset Management Canada Ltd. , which has more than $11 billion in assets under management and is the most popular Canadian ETF. The iShares ETF has an MER of 17 basis points.

Another competing offering is Bank of Montreal’s BMO Dow Jones Canada Titans 60 Index ETF, with an MER of 15 basis points.

While the BMO product has slightly different weightings than the S&P/TSX 60 index, all three ETFs represent the 60 largest and most liquid companies trading in Canada. Until the autumn of 2009, iShares had an exclusive licensing agreement on the S&P/TSX 60, but its expiration has opened the door to competitors.

“We’ve seen price competition in the U.S.,” says Kevin Gopaul, vice president and chief investment officer with BMO’s ETF division, “and it’s now coming to Canada.”

Dan Hallett, vice president and director of asset management with Oakville, Ont.-based Highview Financial Group, says BMO started the price competition when it deliberately set its fees below those of i-Shares’. He says BetaPro’s new ETF is “even more aggressive,” although it would need to garner a large level of AUM to be profitable. “The [BetaPro ETF] has riled the competition,” he adds. “It’s possible we’ll see increased pressure on ETF fees.”

The BetaPro ETF has a different structure from its competitors, which allows it to keep costs lower but also poses additional risk related to the possibility of counter-party default. Essentially, the product replicates the total return of the S&P/TSX 60, including reinvested dividends but minus fees and applicable taxes, by using a derivative called a “total return swap” that is managed by a third party.

In contrast, the competing ETFs actually hold the stocks that make up the index.

“It’s not just about cost; there’s much more to the story than fees,” says Oliver McMahon, head of product management at iShares. “Investors must look at the structure of the product and the risks.” IE