In the last of this series of posts on ETF fees, let’s take a closer look at iShares, the largest ETF provider in Canada and the only one that discloses its funds’ entire management expense ratio (MER) on its website.

I spoke with a representative at iShares to ask whether an investor should expect any other operating costs above and beyond the MER. In most cases, the answer is no: the management expense ratio includes GST, and the fees payable to the independent review committee (IRC) are “a fraction of a basis point.”

iShares ETFs will still incur trading costs that are not included in the MER, but with an index fund these are typically very low. Brokerage costs are itemized in the footnotes of the funds’ financial statements and they appear to be negligible: the S&P 500 Index Fund (XSP) and the MSCI EAFE Index Fund (XIN) have the highest brokerage costs at about $25,000 to $35,000 annually, but these funds each hold a billion dollars in assets.

iShares estimates that currency hedging (used by both XSP and XIN) costs about 0.15% annually, and this won’t be included in the MER either. That’s not a trivial cost, especially when the benefits of currency hedging are dubious. Consider that XSP simply holds the US-listed iShares S&P 500 Index Fund (IVV), which costs a mere 0.09% annually. The Canadian version tacks on 0.15% in management fees, and the hedging adds another 0.15%. That makes XSP four times more expensive than its US counterpart. Unless you expect the US dollar to plummet during the period you hold the fund, think hard about whether that higher fee makes sense.

At the end of the day, what really matters is how closely an ETF tracks its index. If the index returns 10% and your ETF returns 9.5%, your bottom-line cost is 0.5%, whether that drag is a result of management fees, trading costs, currency hedging, or anything else. iShares ETFs are generally excellent on this front: their tracking errors are very low, and sometimes a fund will even return a bit more than the index, either because of a lucky accident or a shrewd bit of arbitrage.

You can learn exactly how well any ETF (not just iShares funds) tracks its index by looking in the Management Report of Fund Performance, which is released twice a year and available on SEDAR. Just follow this link, type the fund company’s name in the search box, then choose “Management Report of Fund Performance” from the pull-down menu. Each report will include a line like this:

For the year ended December 31, the Fund returned 9.5% versus the Index return of 10%. The main reasons for the difference in performance of -0.5% between the Fund and the Index were management fees (-0.30%) and other miscellaneous factors (-0.20%).

As long as those miscellaneous factors are kept low, you’re accomplishing the ultimate Couch Potato goal of tracking the index as closely as possible.

Part 1: Unpacking ETF Fees

Part 2: Claymore

Part 3: BMO