Is My ETF Double-Dipping?

11/04/2011 10:00 am EST

Focus: GLOBAL

John Heinzl

Reporter and Columnist, GlobeInvestor.com

Investors are only charged one MER if an exchange traded fund owns units in a sister ETF, explains John Heinzl, reporter and columnist for Globe Investor.

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% and XYZ, in turn, holds ABC, which has an MER of 0.3%, does the 0.5% I pay for XYZ cover the MER for ABC as well, or do I also pay the 0.3% 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% charged by the first fund, and not the 0.3% 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 Web site and information. We have disclosure on this on each Web site for each fund that does hold another ETF."

For example, the Claymore Global Monthly Advantaged Dividend ETF (Toronto: CYH) has an MER of 0.83%, 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 US affiliate, and each of the underlying funds charges its own fees, but a Canadian investor would still pay no more than 0.83% in expenses, 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 (Toronto: XTR), which invests in nine other iShares ETFs. An investor pays only a single management fee of 0.55%, plus taxes, for an estimated MER in 2011 of about 0.62%.

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 (Toronto: CBD), which invests in a basket of ten ETFs that have a weighted average MER of about 0.5%. The Balanced Income CorePortfolio…s MER…s is higher, at 0.71%, reflecting an additional management fee of 0.25% that Claymore charges for "asset allocation."

But the fact remains: The investor pays the listed MER of 0.71%, and is not charged a second time on the underlying MERs.

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