Your Complete Guide to Index Investing with Dan Bortolotti

Unpacking ETF Fees: Part 1

2018-06-16T10:10:08+00:00February 22nd, 2010|Categories: ETFs and Funds|11 Comments

Keeping costs low is one of the pillars of Couch Potato investing. Even if fans of actively managed mutual funds remain oblivious to the corrosive effect of fees and expenses, index investors know better. That’s why the first thing they do when choosing an ETF is look at its cost.

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

The first point to understand is that Claymore and BMO list their ETFs’ management fee on their websites. iShares, on the 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 covers all of the ETF’s administrative costs, the manager’s compensation, the index licensing fee, and all fees paid to the custodian (the investment firm that holds the securities), 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 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.

The good news is that these added costs are typically small. GST adds 5% to the management fee: for example, a 0.40% fee becomes 0.42%. (This cost will rise in June when Ontario brings in its 13% harmonized sales tax, or HST.) The IRC fees are less than one basis point, which makes them negligible.

Other fund expenses may not be included in the management fee, something you may only learn if you scour the funds’ regulatory filings. 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.

I contacted Claymore and iShares to ask some questions about how they calculate and disclose their fees. Turns out this is a contentious issue: both expressed frustration with what the other was doing. In a series of posts over the next few days, I’ll walk you through how each ETF provider calculates and reports their fees and expenses, and I’ll show you where to find the information you need to make fair comparisons.

Part 2: Claymore

Part 3: BMO

Part 4: iShares


  1. DM February 22, 2010 at 9:25 am

    Thanks Dan, I am looking forward to learning more about this topic, great topic. I was happy to learn about some of the components of MER pricing, above. To be honest, I hadn’t even noticed that Claymore didn’t use MER! This question may be slightly off topic, but it speaks to the point of transparency – when I review the financial performance of an ETF (or mutual fund for that matter) on Yahoo Finance, Globefund, etc., is the performance net of the MER? And how do they treat distributions ? (e.g. do they assume automatic reinvestment in the fund??)

  2. Jason February 22, 2010 at 10:42 am

    Thanks, I look forward to your next post on this topic!

  3. Canadian Couch Potato February 22, 2010 at 11:29 am

    DM: Good questions. All reports of ETF (and mutual fund) performance are given net of fees. So you never have to subtract the MER to get the true return.

    Mutual fund performance reports assume the reinvestment of dividends and interest, but ETF reports do not, because ETFs pay out their distributions in cash. This is particularly important to keep in mind when you look at bond ETF performances. They may only show a 1% or 2% growth in net asset value, which sounds grim, but if they also throw off 4% or 5% in distributions, that’s obviously a decent overall return.

  4. Melissa February 22, 2010 at 9:52 pm

    Thank you from an ETF newbie. I’m looking forward to your next posts.

  5. brad February 23, 2010 at 7:40 am

    Now I’m confuzzled (a word I made up that means “seriously confused”).

    I thought the selling point of ETFs as opposed to, say, TD’s eFunds, was their low MERs — in fact you wrote on your Basics page that “Using only ETFs, it’s possible to build an extremely well diversified portfolio for under 0.25% in fees.”

    Yet when I compare, for example the Claymore Canadian Fundamental Index ETF with an MER at 0.65 with TD’s eSeries Canadian Index fund at 0.31, it seems like the eSeries would be the winner. The highest-MER eSeries fund in my portfolio is the International Index, with an MER of 0.48. All the Claymore offerings seem to be considerably higher than this.

    I must not be understanding the whole picture here and am probably not doing an apples-to-apples comparison — what am I missing?

  6. Canadian Couch Potato February 23, 2010 at 8:55 am

    Brad: In general, ETFs have lower fees than index funds, and it is indeed quite easy to build a portfolio for less than 0.25% using iShares and Vanguard ETFs. However, not all ETFs have lower fees than all index funds. In the example you give, you’re comparing the cheapest mutual funds in Canada (the TD e-Series) with some of the most expensive ETFs from Claymore.

    You’re right that it’s not an apples-to-apples comparison, because Claymore ETFs and TD e-Series funds do not track the same indexes. Several Claymore ETFs use what is called “fundamental weighting,” which means the index includes stocks based on factors such as dividend payout, cash flow, sales and price-to-book value. iShares and most index mutual funds simply weight the stocks based on company size (or “market capitalization“). The fundamental weighting technique is almost always more expensive, since it requires more maintenance. That’s why Claymore’s equity ETFs are quite a bit more expensive.

    Sorry if this is confuzzling: if you have a portfolio of e-Series funds, you’re doing great, so don’t sweat it!

  7. brad February 23, 2010 at 9:13 am

    Thanks for your reply, now I get it. I may eventually move everything from my TD eSeries funds over to one of the model ETF portfolios you listed, but for now my portfolio isn’t really big enough to warrant the hassle.

  8. […] Canadian Couch Potato compared the fees of ETFs from iShares, Claymore and BMO. […]

  9. Michael James February 26, 2010 at 10:05 am

    Great work! I’m looking forward to more details.

  10. Randy January 23, 2015 at 2:30 pm

    Thanks for the info.

    I have one question that perhaps you could help with in your follow up information.

    Some iShares ETF holdings show that they are just a consolidation of 2-3 other iShares ETF’s (ie. ishares MCI MSCI World Index, symbol is XWD).

    Does this mean that the MER for XWD is charged on top of the MER that is already baked into the other ishares ETF that make up the holdings for this fund?

  11. Canadian Couch Potato January 23, 2015 at 2:59 pm

    @Randy: Don’t worry, MERs are never “double-dipped” on these wrap funds.

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