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