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iShares not as transparent as they used to be

The change in ownership of the iShares family of ETFs may turn out to be a good or at least neutral thing for investors, but right now there's room for doubt.

The investment firm BlackRock has kept the iShares brand intact after buying it last year and a recent conversation with the company's new managing director in Canada, Bill Chinery, suggests there will be some interesting products coming in the months ahead.

But right now, we have a small problem. True, it's to some extent symbolic. But it speaks to a cardinal benefit of exchange-traded funds, which is transparency.

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Recently, BlackRock stopped publishing the management expense ratio for its ETFs on the iShares Canada website. Instead, investors are shown the management fee for iShares ETFs.

Management fees are just one component of the costs that investors pay to own ETFs and mutual funds. There are also operating expenses (administrative and legal costs, for example), and taxes.

We like transparency. I'm a big transparency person. But this just gives us more flexibility. Bill Chinery, BlackRock managing director

Management expense ratios, usually called MERs, capture all of these costs. They are the standard measure of how much it costs to own a fund of any type, and the mutual fund industry is very good about publishing information about them prominently.

The ETF industry? Not so much. Bank of Montreal and Claymore Investments publish management fee info on their websites. To find out about MERs, you have to look at their semi-annual management reports on fund performance (download them at

The iShares family used to be different. It published the MER, not the management fee, which is to say that it gave investors the definitive measure of how much it cost to own their products. Now, it's telling investors how much they'll pay for management of their ETFs, while leaving taxes and operational expenses open-ended.


"We like transparency. I'm a big transparency person," Mr. Chinery, a onetime actuary who was working for Barclays Global Investors when it was taken over by BlackRock, said in an interview. "But this just gives us more flexibility."

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The difference between the management fee and the all-in MER isn't huge with exchange-traded funds - maybe several hundredths of a percentage point. But the gap is growing for residents of some provinces as a result of the introduction of a harmonized sales tax that includes the GST plus the provincial sales tax. Previously, only the GST was paid on fund fees.

It happens that when Barclays was running iShares, it ate the GST on its ETFs and did not charge it to investors. BlackRock ended that practice earlier this year and now conforms with fund industry practice of including taxes as part of the fees that unitholders pay.

"We were an anomaly," Mr. Chinery said. "And now, with the HST, it just doesn't make sense for us to keep eating these costs. We said 'Let's clean it up, let's do what everybody does.'"

Positive Points

Meantime, there are a few positives for investors in BlackRock's takeover of the iShares brand. For one thing, the firm announced June 30 that it will cut fees on the iShares Comex Trust by 0.15 of a percentage point. IGT is a way to get exposure to gold bullion.

BlackRock is also looking at a number of new products, including a replacement for the iShares S&P/TSX Income Trust Index Fund . Most income trusts are converting into dividend-paying corporations with a new tax on trusts scheduled to kick in next year. BlackRock is proposing to replace XTR with a diversified package of income-paying investments that will do a similar job to the monthly income mutual funds the banks sell, but at a lower cost.

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Like many in the investment industry, BlackRock believes income will be a big investing theme in the years ahead. (The concept: With share prices up and down, investors will be looking for reliable dividends and interest from bonds). So look for more income-oriented products in the months ahead.

The firm is also looking at active ETFs and alternative strategies, an area that Claymore has staked out in a preliminary filing with regulators. The Claymore Managed Futures ETF would invest in a wide range of commodity and financial market futures (read my recent column on the managed futures strategy).

Mr. Chinery said BlackRock is also looking at bringing some of its U.S. mutual funds to Canada, notably sector funds in areas such as health care. Mutual funds from an ETF company?

"We all know that mutual funds are going to exist alongside iShares," he said. "As long as we can delineate why one is better than the other, I think we'll be fine."

ETF Fee Primer

Companies offering exchange-traded funds in Canada typically provide management fees

for their products. But management fees are not the whole story on what it costs to own


Example #1: The Claymore Canadian Fundamental Index ETF

Management fee: 0.65%

~covers the cost of managing the fund

~data is published on the Claymore website at

Last year's management expense ratio: 0.68%

~covers operating expenses and taxes as well as management fees

~data comes from the latest management report on fund performance, dated Dec. 31,2009

Estimated 2010 management expense ratio: 0.73%

~Claymore supplied this number for illustration purposes only and has not yet finalized this year's


~includes the impact of HST

Example #2: The iShares S&P/TSX Capped Composite Index Fund

Management fee: 0.25%

~covers the cost of managing the fund

~data is published on the iShares website at

Last year's management expense ratio: 0.25%

~iShares used to pay the GST itself and not charge it to unitholders

~data comes from the latest management report on fund performance, dated Dec. 31,2009

Estimated 2010 management expense ratio: 0.28%

~iShares supplied this number for illustration purposes only


~includes the impact of HST

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