If an exchange-traded fund owns units in another ETF in the same fund family, do you pay the management expense ratio twice – i.e., once for the ETF you own and then again for the MER of the ETF held within the first ETF?
For example, if XYZ has an MER of 0.5 per cent and XYZ, in turn, holds ABC, which has an MER of 0.3 per cent, does the 0.5 per cent I pay for XYZ cover the MER for ABC as well or do I also pay the 0.3 per cent on top?
ETF, MER, ABC, XYZ – that's a lot of letters. Fortunately, the answer is simple: No, you don't pay two layers of MERs. You would pay only the 0.5 per cent charged by the first fund, and not the 0.3 per cent charged by the second fund.
The three ETF providers I contacted – iShares, Claymore Investments and Bank of Montreal – all said they don't double-dip on expenses. Securities laws prohibit ETFs and mutual funds from charging twice, said Som Seif, president of Claymore.
"This is critical as there is a growth of fund-of-fund products in the market," he said. "We have been trying to properly make this clear on our website and information. We have disclosure on this on each website for each fund that does hold another ETF."
For example, the Claymore Global Monthly Advantaged Dividend ETF has an MER of 0.83 per cent, which represents the percentage of the fund's assets used for management, administrative, marketing and other expenses (but not trading costs). The fund comprises two ETFs managed by Claymore's U.S. affiliate, and each of the underlying funds charges its own fees, but a Canadian investor would still pay no more than 0.83 per cent in expenses, Mr. Seif said.
Oliver McMahon, director of product management for iShares Canada, said investors are "only charged once with iShares, and I'm not aware of any exceptions to this statement with other firms' products."
As an example, he pointed to the iShares Diversified Monthly Income Fund , which invests in nine other iShares ETFs. An investor pays only a single management fee of 0.55 per cent, plus HST, for an estimated MER in 2011 of about 0.62 per cent.
It's worth noting, however, that the MER of an ETF could be higher than the MERs of the underlying funds. A case in point is the Claymore Balanced Income CorePortfolio, which invests in a basket of 10 ETFs that have a weighted average MER of about 0.5 per cent. The Balanced Income CorePortfolio's MER's is higher, at 0.71 per cent, reflecting an additional management fee of 0.25 per cent that Claymore charges for "asset allocation."
But the fact remains: The investor pays the listed MER of 0.71 per cent, and is not charged a second time on the underlying MERs.
John Heinzl