Vendors are cranking out ETFs faster than you can keep up with them. iShares Canada has added the following six ETFs to its existing line up:

  1. The iShares MSCI Brazil Index Fund (TSX:XBZ) holds the US-listed ETF of the same name (NYSE Arca: EWZ) and tracks the Brazilian stock market. The MER is 0.75%.
  2. The iShares S&P Latin America 40 Index Fund (TSX: XLA) again holds the US-listed ETF of the same name (NYSE Arca: ILF) and tracks markets in Latin America. The fund has a 61% allocation to Brazil, a 23% allocation to Mexico and 11% allocation to Chile. The MER is 0.65%.
  3. The iShares S&P CNX Nifty India Index Fund (TSX: XID) holds the US-listed iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY). The Nifty 50 index tracks the performance of stocks listed on India’s National Stock Exchange. The MER is 0.98%.
  4. The iShares China Index Fund (TSX: XCH) holds the US-listed iShares FTSE / Xinhua China 25 Index Fund (NYSE Arca: FXI). FXI is a popular ETF with investors wanting to add exposure to the Chinese stock market. The MER is 0.85%.
  5. The other two ETFs introduced by iShares offer currency-neutral exposure to the US fixed income sector. iShares U.S. IG Corporate Bond Index Fund (TSX: XIG) holds the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE Arca: LQD) and offers a currency-hedged exposure to US investment grade corporate bonds. The MER is 0.30%.
  6. The iShares U.S. High Yield Bond Index Fund (TSX: XHY) holds the iShares iBoxx $ High Yield Corporate Bond Fund (NYSE Arca: HYG) and offers a currency-hedged exposure to US junk bonds.

It is interesting to note that the new iShares Emerging Market ETFs do not hedge the currency exposure but still charge a 0.10% to 0.15% extra fee simply to hold another US-listed ETF. Assuming an investor wants to add China or India to their portfolio, why wouldn’t they simply buy the US-listed version and save a fraction of the fees?

This article has 22 comments

  1. It’s nice that iShares is giving investors exposure to new markets via ETF’s, but the prices of some of those LA & India ETF’s doesn’t really inspire me much to invest with them. I thank them for identifying a market need (more investors want EM exposure in their portfolio), but for close to 1% MER?

    I might just stick with my vanguard ETF’s for the moment in my RSP rather than make a switch or addition to see how these perform or what holdings they’ll have.

    Thanks for the heads up CC!

  2. Seems much like proliferation without added value. Not very inspiring direction for new owners Blackrock to take. I’d much rather see DRIP, SWP and PACC like Claymore does.

  3. Bang on CC… first thing I did when I read about this yesterday was to go see what was contained in an ETF like XCH..and they own FXI, the US China ETF. Since there is no hedge, I don’t see why investors would buy it.. but then, why are they even launching it??? Do they think investors will just dive in???

  4. Although I don’t find these offerings very exciting either, I wonder if buying and selling in CAD would help investors? Or do you end up paying the same FX transactions fees indirectly through tracking error anyways?

    They alo might appeal to investors who want to invest in the underlying ETFs outside of an RSP (either TFSA or taxable account) where you would have to pay a 15% withholding tax on dividends. If dividends were 2% on the underlying ETF, this would be a 0.3% drag on the US ETFs. Or would the investor in the CAD versions be somehow exposed to this expense anyways?

  5. Canada is always a year or two behind the U.S. We are seeing history repeat itself up north since the U.S. market was/is flooded with ETFs appealing to various niches. The story will most likely end up the same: a lot of ETFs closing in about 12-18 month’s time and then the beginning of class action lawsuits against ETF issuers. It is like watching a movie where you know the ending when the beginning credits begin to roll. Sigh.

  6. Canadian Capitalist

    @Nurseb911: I guess the reason for the high MER is because the funds provide direct exposure to many of these countries. A bigger reason could be that these products are widely used by the speculating public and they wouldn’t care all that much about fees.

    @CanadianInvestor: I agree. But I also think that many of these products will be successful. After all, investors are enamored with emerging markets these days.

    @Intelligent Speculator: As Returns Reaper points out Canadian investors speculating over the short-term might prefer these ETFs to the US-listed ETFs to avoid currency conversion.

    @Returns Reaper: It could very well be that iShares is hoping to attract Canadian investors wanting exposure to China, India, Brazil in Canadian dollars. And to be fair, these ETFs are much less expensive than mutual funds dedicated to these markets.

    Like you point out, the drag from withdrawal taxes shouldn’t be an issue for taxable accounts. I’m not sure what the dividend yields in these markets are.

  7. Returns Reaper: Page 20 of the prospectus says that withholding taxes from the US reduces distributions.

    This means that you will always pay US withholding no matter which account you hold them in, whereas holding the underlying US ETF in an RRSP will let you avoid US withholding.

    Dan.

  8. @CC – I see that but I would think that such short term traders would be using their US accounts to do this trade, on FXI, etc… but yes, some strategies could use the CAD setup

  9. Hi CC – thanks for the posting. I have a few comments.
    On the higher fees – I doubt most retailers would save going to the US versions, after you factor in FX conversion to USD.
    Also, since the fx exposure is actually to the underlying country currency (ie CNY, INR etc) and not the USD, I would actually want the exposure. Poorer country currencies generally strengthen in step with economic development. Poorer country currencies on a PPP basis are undervalued. eg. China is 50% undervalued vs USD according to The Economist.
    Finally, both India and China, local rules prevent or restrict foreign investment in local shares. That forces foreigners (ie. us) to pay a premium, which gets passed along in the ETF MER.
    Cheers,
    vj

  10. iShares finally realized they should catch up with the banks and charge Canadians excessive, no-value added fees.

    I wonder if this happens in other markets? Do Aussies get pushed the American iShares products, but with added fees for the ‘convenience’ of trading in the home country’s currency?

  11. Does the fact that ishares is now owned by Blackrock affect your confidence in their products?

  12. I agree Sampson, seems iShares is following the same strategy used some 40+ years ago when mutual funds became mainstream for the individual investor.

    Is this the start of seeing some 5,000+ ETF options for investors?
    Time will tell, but I would argue yes.

    Thanks again for an insightful post CC.

  13. Canadian Capitalist

    @Vikash: I have to agree with you that FX saving might be significant compared to the slightly higher MER. The fact, is these products are aimed at investors chasing trends, not long-term serious investors who remember the past history of Japanese stocks, Asian Tigers, Latin America (how history repeats itself) etc. A 0.1% higher MER is a small price to pay compared to a up to 2.5% conversion rate at a discount broker.

    @Sampson: Good question and I don’t know the answer. Australia would be an ideal place to look considering how similar Australia and Canada are.

    @Newbie: Not really. I’m pretty sure that the iShares products I’m invested in (XIU, XSB, etc.) will continue to be good products.

    @Financial Cents: There was a time when the number of ETFs available in Canada could be counted on one’s hand. Now, this week alone we have 15 new ETFs. But I can’t fault BlackRock or BMO for introducing so many ETFs. Vendors will create products that sell and market them. It is investors who need to be careful and say “No, thanks!”.

  14. Holy ETF proliferation, batman! Every market that the talking heads on TV are raving about results in a new ETF from every player in the ETF world.

    CC – Just like a previous posting that you had, just because a country may experience higher growth doesn’t mean that their stocks will outperform those in mature markets.

    I would be more inclined to buy an ETF that is shorting some of these new indices if Horizons would bring them to market. Especially that US junk bond one! In another year or so, US Government bonds can probably qualify for that junk bond fund! Remove that currency hedge and I’d be “all-in” to short that fund – to coin a Poker term.

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  20. It’s good a read such a post.
    I’d have jumped to the chance to buy these ETFs in CAD, not any more.

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