Why ZUT’s Fee and Concentration Quietly Work Against Investors

ZUTBMO’s Equal Weight Utilities Index ETF

Our Buyer Beware series has spent its time on ETFs that sell a comfortable story the numbers do not quite support. Today, we turn that same lens on BMO’s Equal Weight Utilities Index ETF (ZUT), a fund that charges a 61 basis point MER for a basket of slow moving utilities.

Utilities are straightforward. Investors know what they are buying: essential businesses with regulated assets, predictable cash flows, and dividends that show up through every market cycle. The problem is not the utilities. The problem is the packaging around them.

Let’s actually start with the first fact that stopped us cold, and it doesn’t even have to do with fees or MERs. Enbridge and TC Energy are not in this fund. If you asked a hundred Canadian investors to name the two businesses that most belong in a utilities portfolio, those two would top most lists. Neither appears anywhere in ZUT.

Next, BMO’s Equal Weight Utilities Index ETF charges a 0.61% MER to hold a sleeve of just 13 names, with over 80% of the weight in the top ten. That tightness is precisely why the fee becomes so hard to justify. With a cash yield of roughly 2.7%, the MER consumes about 23 cents of every distribution dollar before it reaches an investor’s account.

You are paying for convenience, even when the convenience adds no value. Because the sleeve is so concentrated, investors can replicate the exposure themselves with a simple basket of the same businesses. Same dividends. Same sector. Just without the drag.

0.61%

Management
expense ratio

13

Holdings in
the whole fund

80.2%

Weight in
the top ten

This article walks through that difference: the fee tax, the concentration problem, and what a direct basket of the same sector actually returned. If you want utilities exposure, you can build a better version at home for a fraction of the cost.

The fund tax

Most ETF fees get discussed as abstract percentages. Sixty-one basis points, a rounding error, barely worth the conversation. That framing only works because the fee is measured against the wrong thing. Measure it against the reason people own the fund, and it stops being abstract.

Utilities are bought for income. So the right denominator is not the portfolio value; it is the distribution. On that basis, nearly a quarter of the income investors believe they are buying never arrives. It is consumed by the fund before the first dollar is paid out.

Every $1.00 of distribution at ZUT’s ~2.7% cash yield

77¢ reaches the investor

23¢

The 0.61% MER expressed as a share of the distribution it is charged against. At a 2.7% cash yield the fee absorbs roughly 23% of the income. Illustrative; yields vary with price and distribution policy.

Sixty-one basis points is not outrageous in isolation. It becomes much harder to defend beside BMO’s own broad Canadian index ETF, ZCN, at 0.06%, roughly one-tenth the cost, for many multiples of the diversification, at the same medium risk rating.

This is the “wrapper” tax.

A fund should earn its fee by adding something: diversification an investor cannot build alone, access to a market they cannot reach, liquidity, or implementation efficiency at a scale they cannot match.

ZUT’s packaging adds none of those things. It charges for holding a handful of large, liquid Canadian stocks that any investor could hold directly.

Concentration disguised as comfort

ZUT is presented the way diversified ETFs are presented: a broad, one-ticket way to own Canadian utilities. The holdings tell a different story. Thirteen names in total. Ten of them carry roughly 80% of the weight. BMO rates the fund medium volatility, the same band as a broad Canadian equity index fund, without any of the breadth.

The full roster: Boralex · Capital Power · Brookfield Renewable · AltaGas · TransAlta · ATCO · Canadian Utilities · Emera · Fortis · Brookfield Infrastructure · Northland Power · Hydro One · Algonquin

Because the fund is equal-weighted and only periodically rebalanced, the ranking drifts with price. Boralex and Capital Power had become the two largest positions by August, having been nowhere near the top of the January fact sheet.

The omission that stopped us cold

Enbridge and TC Energy are not in this fund. We checked it twice, because it did not seem possible. Enbridge has paid a dividend for more than seventy years and raised it for the last thirty-one consecutively, with no reduction on record. TC Energy has raised its dividend for twenty-six consecutive years, a streak it maintained through the 2024 South Bow spinoff, though its record is not spotless: it cut roughly 29% in 1999, which is why the current run dates from 2001.

The reason is a classification technicality. The index ZUT tracks screens for companies assigned to the Utilities sector, and pipelines are classified as energy infrastructure: they earn tolling and midstream revenue rather than rate-regulated utility returns. Defensible as a taxonomy. But it means the fund’s definition of “utilities” and the investor’s definition are not the same definition, and nobody is going to discover that from the name on the ticker.

If the two most iconic income-infrastructure names in Canada are excluded by the screen, what exactly is the investor buying?

What they are buying leans considerably further out the risk curve than the label suggests. Five of the thirteen holdings, Boralex, Northland Power, Brookfield Renewable, TransAlta and Capital Power, are renewable developers or independent power producers: businesses exposed to merchant power prices, development pipelines and Alberta spot markets. That is a legitimate sector sleeve. It is not the regulated-monopoly mental image the word utilities conjures, and it is emphatically not a pipeline substitute.

The homemade version

When a fund holds thirteen names, an investor is not buying diversification they could not otherwise obtain. They are buying convenience. Convenience is a perfectly good reason to pay a fee. It is not a good reason to pay sixty-one basis points a year, in perpetuity, on a portfolio you could rebuild in an afternoon.

So we measured it. Three baskets of the same sector, equal-weighted, rebalanced once a year, against the fund itself over identical windows. Two are built on a single mechanical rule, size, with no judgment applied. The third is the one we would actually own, and we come to it next.

Annualized return	ZUT	Top 5 by size	Top 10 by size
5 years	6.62%	11.42%	9.74%
10 years	9.73%	12.79%	11.47%
15 years	8.56%	11.30%	11.42%
$10,000 over 15 years	$34,305	$49,852	$50,626

Frontwater calculations from adjusted-close total-return proxies, equal weight, annual rebalancing, common end date August 13, 2026. Canadian Utilities substitutes for Hydro One in the 15-year top-five window and AltaGas in the 15-year top-ten window, because Hydro One did not list until 2015. Hypothetical, backtested, not client returns.

Note what those baskets are and are not. They follow a single rule, size, and nothing else. No quality screen, no judgment, no selection. That makes the result more interesting rather than less: a purely mechanical basket beat the fund across all three windows without anyone deciding which businesses were better. The advantage came from removing the packaging, not from picking winners.

The five we would actually own

A size rule is not a quality rule, and this is where we would depart from it. If the argument is that you can build this yourself, the natural next question is which names, and we would not simply take the biggest.

Utilities are owned for durable, growing income. So screen on that directly. Five Canadian names have compounded their dividends through every rate cycle, recession and regulatory reset of the past two decades: CU Canadian Utilities, fifty-four consecutive years of increases, the longest streak of any public company in Canada. FTS Fortis, fifty-two years, with guidance for 4% to 6% annual growth through 2030. ACO.X ATCO, thirty-three years. EMA Emera, nineteen years, though the pace has slowed markedly. BIP.UN Brookfield Infrastructure, seventeen consecutive distribution increases since 2010.

That is 175 years of consecutive dividend increases across five companies, none of which has cut. The contrast inside ZUT is the argument for doing so. Algonquin cut its dividend roughly 40% in January 2023 and a further 40% in August 2024, a 64% reduction in nineteen months, and has not raised it since. TransAlta cut twice, in 2014 and 2016. Both sit in the fund at the same weight as Fortis and Canadian Utilities. Equal weighting does not distinguish between a fifty-year compounder and a company that has cut twice in a decade.

The five-name dividend basket	ZUT	The five	Difference
5 years	6.62%	11.94%	+5.31 pts
10 years	9.73%	10.03%	+0.30 pts
15 years	8.56%	11.54%	+2.97 pts
$10,000 over 15 years	$34,305	$51,433	+50%

Same method and end date as page 4. All five names have complete fifteen-year price histories, so this basket requires no substitution rule at all, which the size baskets do.

Where the difference goes

A little to fees. More to the upside cap of equal weighting, which sells a slice of the winner at every rebalance to top up the laggard. The rest to rigidity: an index fund cannot step around a deteriorating name. Individually small; together, the difference between $34,305 and $50,626.

Read the fifteen-year number

The fifteen-year window is the one that matters, and not because it flatters us. A fee is a fixed charge levied on a compounding base. Over one year, 0.61% is a rounding error. Over fifteen, it is deducted fifteen times from a balance that should have been growing the whole time, and the gap it opens compounds alongside the portfolio. Structural costs need time to become visible. Short windows are dominated by which corner of the sector happened to run.

That is exactly what the shorter windows show. Over ten years the five-name basket and the fund finish level, at 10.03% against 9.73%. That decade paid for merchant-power beta: TransAlta returned about 255%, Brookfield Renewable about 280%, Hydro One about 225%, and the size baskets held all three. A dividend-quality screen deliberately excludes exactly that exposure. The five names did not lag because the screen failed. They lagged because it worked.

Over fifteen years, a full cycle of rate regimes, the difference is 8.56% against 11.54%, and $10,000 becomes $34,305 rather than $51,433. That is the horizon a utilities sleeve is actually held for, and it is the horizon on which the cost of the packaging stops being a rounding error.

Why equal weighting hurts in a sector that isn’t equal

Equal weighting sounds fair. It is not always smart. Utilities and infrastructure businesses are not interchangeable. Some compound capital efficiently for decades. Others tread water through rate cycles and regulatory drift.

Mechanical equal weighting forces the fund to hold both in the same size, permanently. And the rebalance is where it bites: when a fund owns a durable compounder and a chronic laggard in the same size, every rebalance sells a slice of the winner to top up the loser. Over a decade, that is a quiet, rules-based transfer from the best businesses in the sleeve to the worst.

Direct ownership does not magically pick winners in advance. It simply removes the machinery that mechanically caps them. An index ETF also cannot lean away from a stretched valuation, respond to a regulatory change, or trim a deteriorating balance sheet. The sector is dynamic. The fund is static, and the investor pays 0.61% a year for the privilege.

The Frontwater view

Where the mandate allows direct Canadian equity ownership, disciplined position sizing and periodic maintenance, holding the names directly has been the better implementation for a total-return sleeve. Every basket we measured finished ahead of ZUT over five and fifteen years, sidesteps the MER entirely, and removes the equal-weight cap on the strongest businesses. Over ten years the margin narrows to nothing on the quality basket, and we say so plainly above.

Our preference is the five-name dividend basket. For an investor who owns utilities for income, that is a more coherent sleeve than a size ranking which weights a serial dividend-cutter the same as a fifty-year compounder.

ZUT still has a role: smaller accounts, operational constraints, or situations where tax-lot management is not worth the administrative weight. What it should not be is positioned as a high-conviction, total-return implementation.

This is also why direct ownership sits at the centre of how we build portfolios. We hold securities, not someone else’s fund-of-funds. We do not run proprietary products, and we are not paid to keep client capital inside a packaged product.

The bottom line

Utilities are fine. The packaging is not. ZUT charges a fee that taxes the yield directly, packages a sleeve so concentrated it can be rebuilt at home, excludes the two names most investors would expect to find in it, and has delivered lower long-term returns than a simple equal-weight basket of the same sector.

Own the exposure, not the packaging around it.

Jeff Kaminker, CFA, CFP, FRM · President, Frontwater Capital Inc.

Implementation guardrails

A direct basket is a discipline, not a shortcut. If it is not maintained, the advantage erodes.

Use equal-weight or capped-weight structures. Not a contradiction of what we said about ZUT. The fund applies equal weighting mechanically and cannot remove a laggard, so every rebalance feeds a dividend-cutter at the same rate as a fifty-year compounder. In a basket you have already screened, the quality decision is made once at the door, and weighting simply stops one name becoming the whole sleeve. Left untouched for fifteen years, Brookfield Infrastructure grows from a fifth of this basket to more than a third.
Rebalance annually or semiannually, not monthly, and expect risk control rather than extra return. Over five, ten and fifteen years, rebalancing this basket landed within about a quarter of a point of buying and holding it, in both directions. It is not a performance technique, and over-trading only adds cost and tax friction.
Pre-define substitution rules for IPOs, mergers and missing history, so the basket survives corporate actions without ad-hoc decisions.
Treat this as a sector sleeve, not a core allocation. One expression within a portfolio, sized to its role.
Mind the tax. Direct holdings give you control over lots and realization, but they add administration. Build that into the decision.

Method and sources

Direct-basket returns are hypothetical, backtested results for illustrative equal-weight baskets built by Frontwater from adjusted-close total-return proxies, with annual rebalancing and stated substitution rules. Not actual client returns. Common end date August 13, 2026.
BMO Equal Weight Utilities Index ETF (ZUT) ETF Facts, dated January 23, 2026; holdings as at November 30, 2025; MER 0.61%, medium risk rating, top-ten concentration 80.2%. The thirteen-name roster and relative position sizes cited in the text reflect fund holdings as at August 2026; because the fund is equal-weighted and periodically rebalanced, top-ten membership drifts with price.
Sector classification. ZUT tracks an index screened on a Utilities sector classification. Enbridge and TC Energy are classified as energy infrastructure and are therefore not constituents. Enbridge reports 31 consecutive years of dividend increases; TC Energy reports 26 consecutive years, a count maintained through its October 2024 South Bow spinoff.
Dividend-growth records per company disclosures as at August 2026: Canadian Utilities 54 consecutive years; Fortis 52, with 4% to 6% growth guidance through 2030; ATCO 33; Emera 19; Brookfield Infrastructure 17. Algonquin reduced its dividend by approximately 40% in January 2023 and by a further 40% in August 2024. TransAlta reduced its dividend in February 2014 and again in January 2016, and has raised it annually since 2020.
Broad-market fee comparison references a broad Canadian index ETF at a 0.06% MER.
Company descriptions reflect each issuer’s public business profile and are provided for context, not as recommendations.

This article is published by Frontwater Capital for educational and informational purposes only. It is not investment advice and is not a recommendation to buy, sell, or hold any security or ETF. The performance figures shown are hypothetical, backtested results for illustrative baskets, not actual client returns, and rely on stated assumptions that materially affect the outcome. Constructing baskets from recently disclosed holdings introduces look-ahead bias; the results are best read as an implementation benchmark rather than a forecast. Backtested performance has inherent limitations, excludes trading costs, taxes and tracking error, and does not represent results any investor actually achieved. Past performance does not predict future results. Direct security ownership involves concentration, transaction and tax considerations that an ETF does not. Frontwater Capital is registered with the Ontario Securities Commission. Speak with a qualified advisor about your specific circumstances before acting on anything in this piece.