Search Blog
  • Alan Fustey
  • Becky Wong
  • Bert Griffin
  • Blair MacDougall
  • Blake Goldring
  • Brett Baughman
  • Camillo Lento
  • Chris Delaney
  • Cynthia Kett
  • Darren Long
  • Desmond Jordan
  • Don Shaughnessy
  • Doug Lamb
  • Ed Olkovich
  • Eva Sachs
  • Evelyn Jacks
  • Gail Bebee
  • Gerald Trites
  • Gordon Brock
  • Guy Conger
  • Guy Ward
  • Heather Phillips
  • Ian Burns
  • Ian R. Whiting
  • Ian Telfer
  • Jack Comeau
  • James Dean
  • James West
  • Jeffrey Lipton Fairmont Gloucester
  • Jim Ruta
  • Jim Yih
  • Joe White
  • Jonathan Chevreau
  • Kenneth Eng
  • Larry Weltman
  • Malvin Spooner
  • Mark Borkowski
  • Marty Gunderson
  • Michael Kavanagh
  • Monty Loree
  • Nick Papapanos
  • Norma Walton
  • Pat Bolland
  • Patrick O’Meara
  • Paul Brent
  • Peter Deeb
  • Peter Lantos
  • Riaz Mamdani
  • Richard Crenian
  • Richard Warke
  • Rick Atkinson
  • Rob Peers
  • Robert Bird
  • Robert Gignac
  • Sam Albanese
  • Stephane Ruah
  • Steve Nyvik
  • Steve Selengut
  • Tammy Johnston
  • Terry Cutler
  • Trade With Kavan
  • Trevor Parry
  • Trindent Consulting
  • Wayne Wile
  • Categories
    January 2014
    M T W T F S S
    « Dec   Feb »


    Lifting the veil on ETFs – Part 4 of 4

    Ian Whiting

    Warning about the fees and costs of ETFs
    The expense ratio is not the only cost of investing in exchange traded funds. ETF shares must be purchased through a regular stock brokerage account. There will be commissions to both buy and sell ETFs. The commissions on buying and selling ETFs are the same as for buying and selling individual stocks. An investor who does a lot of trading in and out of ETFs will see a greater impact from brokerage commissions than from the expense ratios of the funds.

    Unfortunately, the costs of Canadian ETFs are not as straightforward as one might think. Most investors don’t realize that iShares, Claymore and BMO (to name a few), disclose their fees in different ways, making apples-to-apples comparisons difficult.

    The first point to understand is that Claymore, BMO and others only list their ETFs’ management fee on their websites. iShares, on the other hand, lists each ETF’s management expense ratio, or MER. The two terms are not synonymous. The management fee is only part of a fund’s overall MER. It’s usually the largest part, for sure, but it’s not the whole picture.

    The management fee typically covers all of the administrative costs, the manager’s compensation, index licensing fees, all fees paid to the custodian (the investment firm that holds the securities), the registrar and transfer agent (the firm responsible for keeping shareholder records). These make up the vast majority of an ETF’s expenses. However, the management expense ratio or management fee also includes some additional costs, such as GST and the fees payable to the fund’s independent review committee (IRC), a legal requirement designed to protect investors from conflicts of interest. Read the Prospectus carefully to avoid unpleasant surprises!

    There is also a Transaction Expense Ratio or Trading Expense Ratio (TER) that is not quoted in the Prospectus as it is only determined in arrears. Most Prospectus’ provide an estimate of this cost – but you only learn the exact amount at the end of the year and it reduces the value of your investment. This could add up to an additional 1% or so to your costs. These expenses are primarily the costs involved with trading commissions paid by the managers of an ETF as they shuffle the portfolio to keep it in line with a target index. It is important to add the TER to the MER for a more accurate picture of the fund’s costs.

    Other fund expenses may not be included in the management fee, something you may only learn if you scour the funds’ regulatory filings and Prospectus. These may not add up to much, but ETF providers trumpet their low fees as a selling point and four or five basis points is enough to make a competitive difference and cost is cost. Remember, NOTHING is free!

    Visit with me again in future issues of Money Magazine and this blog as I explore many of these issues in more detail including the difference between an INDEX FUND and an ETF.

    With courtesy to:

    Wikipedia, The Wall Street Journal, Morgan Stanley, iShares, Claymore, BMO, The Vanguard Group and the International Monetary Fund.

    The MONEY® Network