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moneysense.ca, 5/05/10
iShares ETFs becoming more expensive
BlackRock Asset Management is sending a notice to unitholders of iShares exchange traded funds that, effective July 1, 2010, the management expense ratio of a long list of iShares Funds are increasing by 0.01% to 0.03%:
An iShares Fund’s management fee is the fee paid by the fund to BlackRock Canada for acting as the trustee and manager. It does not include any applicable taxes or other fees and expenses of the iShares Funds. For any iShares Fund which invests in other iShares ETFs, the management fee does include any fees paid to BlackRock Canada or its affiliates by such fund(s).
While all iShares Funds are legally responsible for the payment of applicable GST on their expenses, historically, BlackRock Canada has paid this cost on behalf of the iShares Funds listed below. To bring its practice in line with industry practice, effective July 1, 2010, BlackRock Canada will no longer pay GST on behalf of its family of iShares Funds. There will be no change to the amount of management fees paid by any iShares Fund. However, the change in practice to cease paying for the iShares Funds’ GST liability will result in an iShares Fund’s respective management expense ratio (which includes GST) increasing slightly, by between 0.01% and 0.03%. The increase depends on an iShares Fund’s management fee and will vary from fund to fund.
All iShares funds in the Canadian Equity, Canadian Fixed Income, International Equity and Portfolio Builder categories that are not listed below are affected by this change:
- iShares S&P/TSX 60 Index Fund (XIU)
- iShares MSCI Brazil Index Fund (XBZ)
- iShares China Index Fund (XCH)
- iShares S&P Latin America 40 Index Fund (XLA)
- iShares S&P CNX Nifty India Index Fund (XID)
- iShares U.S. IG Corporate Bond Index Fund CAD-Hedged (XIG)
- iShares U.S. High Yield Bond Index Fund CAD-Hedged (XHY)
My Take: BlackRock probably feels that the introduction of the HST is an opportune moment to stop paying out the GST out of its management fee. Investors will be on hook for another increase of 0.02% to 0.05% when the HST kicks in on July 1.
moneysense.ca, 5/05/10
Interesting that they’re not raising the fee on XIU. I guess their flagship has such economies of scale ($11 billion in assets) that they don’t need to squeeze out another basis point or two. I use XIC now, but if the gap between the fees of these two ETFs keeps widening, I’ll probably switch to XIU.
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Thanks for the heads up. This demonstrates a serious problem with ETFs (as opposed to holding individual stocks). Management can raise the fees at their leisure, and the long term investor has little choice but to pay them. Sure, you could sell the ETFs, but that would likely trigger an even more costly capital gain.
Despite the plethora of ETFs in Canada, there is a lack of competition among ETFs that investors need. IMO, most investors need a Canadian stock index ETF, a Canadian bond index ETF and foreign stock index ETF exposure; the latter usually comes as an American stock index ETF, an EAFE stock index ETF and an emerging markets stock index ETF. How many broad market capitalization weighted ETFs meet this criteria in Canada? If you don’t want currency hedging, the numbers become smaller yet. Blackrock can get away with this due to the lack of competition.
I’m not impressed by this move by BlackRock. Like we weren’t already paying the GST already via the current MER. I can understand them wanting to increase the MER to cover the HST, but I’m guessing we’ll get hit again on that one on July 1st.
I’m considering dumping my XIN for VEA. MER is lower, the only problem is that I can’t DRIP on VEA, but can on XIN. And I’m also considering swapping my XIC for XIU.
I’d caution people not to overreact to a fee hike of one to three basis points. To be fair to BlackRock, they have been eating the GST for some time, and now they’re passing it along to investors, which is what everyone else has been doing all along. One basis point is $1 on $10,000.
Personally, I use VEA rather than XIN. But if you currently hold XIN, twice about switching because of a couple of basis points in MER. The currency hedging that XIN provides will have a far bigger effect on the fund’s performance, and that should be your number one concern. In any case, the trading commissions you’ll pay to sell XIN and buy VEA, plus the forex fee your broker will charge, will immediately overwhelm whatever small amount you save on MER.
Paul: you can DRIP your iShares ETFs? Do you mind if I ask which brokerage you use? Mine doesn’t allow it.
@Canadian Couch Potato: I own XIU but even if I did own XIC, I wouldn’t switch because the MER difference widened a bit more. As you note in your second comment, 1 to 3 basis points is still a very tiny fee increase. Still, boy am I glad that I didn’t put all my ETF eggs in the iShares basket. Among my holdings, only XSB is affected and bonds make up just 20% of our portfolio.
@Chris: Yes, ETF holders are at the mercy of the vendor. It’s not just fee increases, the esoteric, low-volume ETFs are at risk of closing and forcing a disposition. Still, for broad-market indices I don’t see a solution. Perhaps, investors can assemble a portfolio of stocks by sampling but then they are responsible for monitoring and keeping their portfolio in balance.
@Doug: I do wish a new vendor like BMO will introduce unhedged broad-market ETFs. There might be a good market for such a product, especially from those Canadians wishing to avoid US Estate Tax headaches.
@Paul: Like Canadian Couch Potato mentions, you have to weigh carefully the long-term implications of switching from one ETF to another. For instance, I hold XIU in a taxable account and I’d think twice about switching because I’ll then have to worry about capital gains / losses.
A few years back, when Vanguard introduced VEA, it was a no-brainer to switch from EFA, which I held in a RRSP account. I’m not sure the choice is as clear cut here.
@Canadian Couch Potato: my account is with CIBC. They pay out the $$$ into my account, and then purchase the shares up to a max of the div payout.
@Canadian Capitalist and @Canadian Couch Potato to respond to your points:
- All of my investments are in an RRSP, so there are no tax implications.
- My trade fees would be $7.90 on each trade (sale of XIN, purchase of VEA) so that is pretty trivial.
- I’m not too concerned about the hedging. Hedging a non-US equity (XIN is holding 95.5% of the US Ishares fund EFA) seems unnecessary. EFA is holding non US$ stocks, so EFA is going to move with currency movements when the US$ fluctuates against world currencies. Then to own XIN, hedged against US$ makes no sense to me. If we were talking about XSP, then that would be a different matter. I would (potentially) want to hedge my CAD investment in US stocks held in the XSP ETF.
- I’m holding long term. My retirement is 30 years off, but I’d love to shorten it if my investments do well enough
For now, I’m going to hold on. I’ll have to crunch the numbers first, but as XIN (currently 0.49% before the recent increase) drifts further in MER from VEA (currently at 0.15%), VEA starts looking very attractive. I’ll wait to see what they do about the upcoming HST, which I’m betting will be passed on to clients.
@Paul: Thanks for the tip about CIBC. Wish Scotia McLeod did the same thing, but no dice.
RE: “EFA is holding non US$ stocks, so EFA is going to move with currency movements when the US$ fluctuates against world currencies. Then to own XIN, hedged against US$ makes no sense to me.” I don’t think this is correct. XIN is not hedged against USD, it’s hedged against euros, pounds, yen and Australian dollars
If you own a US-denominated fund that holds non-US stocks (like EFA or VEA), then USD-CAD fluctuations should not make any difference to the performance. Canadian Financial DIY wrote the definitive explanation of this idea:
http://canadianfinancialdiy.blogspot.com/2007/05/clarification-of-foreign-exchange-risk.html
@Paul: All my ETF’s in TD Waterhouse can be synthetically drip’ed by TD.
@Canadian Couch Potato: I always assumed (incorrectly it seems) that XIN was hedged against US$. That never made any sense to me. Thanks for setting me straight.
@slacker: I think that’s what CIBC calls it as well. I have my whole investment account setup for DRIP. Most of the CAD stocks I have will DRIP. Almost none of my USD stocks DRIP.
@Paul: That’s the first thing I did when the Government got rid of the 30% foreign content rule. Switched XIN for EFA (VEA wasn’t available then). XIN also has a very poor tracking error record.
Like Couch Potato explained, VEA/EFA is exposed to CAD-EUR/Yen/Pound fluctuations. Canadian Financial DIY’s post is excellent. I wrote about this as well as I get asked about this often enough.
http://www.canadiancapitalist.com/currency-effects-of-buying-foreign-stocks-or-etfs-on-us-exchanges/
When I got the letter the first thing I gravitated to was their reason about being inline with industry practice. The industry is full of problems so setting yourself apart was probably a good thing. Glad industry practice isn’t killing puppies and crushing the dreams of children…..or is it? There might be another letter coming from BlackRock soon.
Yeah, I got this news from BlackRock in the mail the other night. Oh well, a very small hit. All my ETFs are in registered accounts.
@CC – Won’t the HST affect mutual funds as well? Or did they get an exemption?
Yup, another reason I wish Vanguard would offer ETFs this side of the border…
Canadian Couch Potato: RBC Direct also Drips Canadian iShares.
@BC Doc: Called Scotia McLeod and got them to DRIP my iShares holdings. I had asked several months ago and they told me they couldn’t. Thanks for the tip.
Unless I’m misreading this, I’m not sure why this is such a huge deal. On a $10,000 investments in one Ishares ETF, isn’t .01% exactly $1 per year increase in fees? A whole lot cheaper paying that small amount annually (plus CG considerations of course) than paying dozens of dollars in commissions to switch into another fund.
Please correct me if I’ve done the math incorrectly but this does seem to have generated a lot of controversy over nothing if I’m right.
@Mark: By itself, a 0.01% to 0.03% MER increase is nothing to cry about. But it is almost certain that another increase is in the offing with Ontario moving to a HST regime. Add another 0.02% to 0.05%. That’s still less than a rounding error compared to what investors in active funds are being charged but is this the start of a new trend now that iShares is in the hands of BlackRock?
Unless I’m misreading this, I’m not sure why this is such a huge deal. On a $10,000 investments in one Ishares ETF, isn’t .01% exactly $1 per year increase in fees? A whole lot cheaper paying that small amount annually (plus CG considerations of course) than paying dozens of dollars in commissions to switch into another fund.
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