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As you eluded to, there have a been a few recent press reports about fee increases, but much of this has been misreported by media outlets. A recent annual SEC filing updating over 40 iShares funds was misinterpreted by several news outlets and is now being widely retracted.
The key point is that iShares has not changed the management fee schedule for any of these funds. The referenced expense ratio changes are the result of management fee breakpoint schedules that have been in place for years. As I’m sure you know, breakpoints are designed to return economies of scale to investors that may result as asset levels rise, so that every dollar over the breakpoint threshold is charged at the new, lower rate. However, when assets decline, the expense ratios can go back up in accordance with the breakpoint schedule described in the fund’s prospectus. As soon as a breakpoint threshold is reached (or when assets decline below a breakpoint threshold), the fee is adjusted right away, so the actual management fee being applied for a fund may not match the fund’s web site or prospectus fee tables on a given day.
It is important to note that reported expense ratios (such as on iShares.com) are backward looking and do not necessarily reflect the actual current expense ratios since asset levels in each fund change daily. For example, based on current asset levels, the breakpoint-adjusted expense ratio for iShares MSCI Emerging Markets ETF (EEM) was 0.66% as of December 31, 2012. The expense ratio reported in the recent SEC prospectus filing of 0.69% was based on net assets during the fund’s most recently completed fiscal year of September 1, 2011-August 31, 2012. In addition, the expense ratio of EEM is actually capped at 0.68% under any circumstances, as-per a voluntary fee waiver disclosed in the fund’s Statement of Additional Information.
We realize this issue can cause confusion, and therefore, we are working to provide further clarity by reporting current expense ratios more frequently.
Methinks they doth protest too much. What they are saying amounts to: We report stale numbers; so we're not raising the fee now, we already raised it. (The numbers are for older AUM and fees last year.)
Does it really matter to your wallet whether those fees went up automatically (due to AUM declining with a breakpoint fee schedule) or manually (because BlackRock decided to make up for lost revenue due to declining AUM)?
Finally, it is worth observing that the particular cap they write about is voluntary and "may be eliminated by BFA [BlackRock Fund Advisors] at any time". (From prospectus.) I'd hardly call that "capped ... under any circumstances."
Contrast that with another fee waiver, to which they are contractually obligated, through June 2014. That one forces BlackRock to waive fees attributable to the management fees it receives for underlying funds (so that they don't effectively get paid twice for managing the same asset). That latter waiver remains in place under any circumstances, and is thus incorporated into the ER that is presented in the prospectus. The voluntary waiver isn't.
Concerning EEM, I really can't understand how an ETF with $50B in AUM (#4 ETF by AUM) has such a high expense ratio of the capped 0.68%. I suspect that EEM is a cash cow for iShares that must be milked. Institutions and high frequency traders probably like the much higher daily trading volume of EEM compared with the much less expensive VWO (ER 0.20%) and SCHE (0.15%). It is amazing that iShares is increasing expense ratios while Vanguard and Schwab continue to press on in reducing expenses.
Knowing that EEM tracks the MSCI EM index (15% South Korea) while VWO is transitioning to the FTSE EM index (no South Korea) tracked by SCHE, I would favor VWO due to the expense ratio and daily trading volume.
The aggregate management fee is calculated as follows: 0.75% per annum of the aggregate net assets less than or equal to $14.0 billion, plus 0.68% per annum of the aggregate net assets over $14.0 billion, up to and including $28.0 billion, plus 0.61% per annum of the aggregate net assets over $28.0 billion, up to and including $42.0 billion, plus 0.56% per annum of the aggregate net assets over $42.0 billion, up to and including $56.0 billion, plus 0.50% per annum of the aggregate net assets over $56.0 billion, up to and including $70.0 billion, plus 0.45% per annum of the aggregate net assets over $70.0 billion, up to and including $84.0 billion, plus 0.40% per annum of the aggregate net assets in excess of $84.0 billion. Based on assets of the iShares funds enumerated above as of August 31, 2012, for its investment advisory services to the Fund, BFA is entitled to receive a management fee from the Fund, based on a percentage of the Fund’s average daily net assets, at an annual rate of 0.69%.
Based on that formula, and $50B, one gets a management fee of 66.08 basis points (if my arithmetic is correct).
So I can understand how they come up with the figure. Whether it is reasonable is an entirely different question Just because every emerging market index fund (except ING) has a lower expense ratio, don't let that confuse you.
Fidelity Spartan Emerging Markets: 0.12% to 0.33% (depending on share class) Northern Emerging Markets: 0.61% Schwab Fundamental Emerging Mkts Large Co: 0.61% TIAA-CREF Emerging Markets: 0.25% to 0.64% (depending on share class) Vanguard Emerging Markets Stock Index 0.10% to 0.33% (not counting its ETF share class) (all data from M*)
Reply to @kevindow: Assets were flowing from EEM to VWO while both ETFs were indexed to MSCI. Now that Vanguard dropped MSCI, institutions that insisted MSCI will stay with EEM. In fact, as far as I remember, Blackrock recently came up with cheaper 'core' emerging market ETF in which they renamed some of the older ones as 'core' but not this one. They started a new ETF. So, the only way for holders of EEM to experience lower costs is to sell their shares and buy the new one which would cause a taxable transaction for taxable accounts. So, Blackrock is milking a captive audience as much as possible. Bad wall street behavior!
Update: The new ETF is IEMG. To be fair this new one is using MSCI 'Investable' Market Index which may give slightly different exposure but not enough to make a huge difference (IMHO)
Thanks for the information on IEMG. I actually like this more than EEM due to greater exposure to MC and SC, although the average daily trading volume is a smallish 91K shares. The folks at iShares better be thinking about reducing the ERs of all of their ETFs otherwise they will lose assets right quick, as ETF investors are very price conscious and assets are very fluid.
In the LC/MC diversified EM equity ETF space, my preference continues to be EEMV.
Reply to @kevindow: Not a game I usually play, but it's interesting to compare the premiums and bid/ask spreads on those three ETFs. In general, it looks like iShares and Vanguard have the same bid/ask spread but that iShares has about twice the volume and sells at twice the premium.
As soon as I write that, of course, both the premium and spread change. But at least on four of the five occasions I checked today, that pattern was roughly true.
institutions prefer MSCI benchmark and they need liquidity. hence, they use this product. they also check for tracking error. finally, if a mutual fund invests in this thingy, it is subject to a certain 3/5/10 rule which is easier to adhere to when the float is huge, like in the EEM case. ishares is printing money...
Comments
Does it really matter to your wallet whether those fees went up automatically (due to AUM declining with a breakpoint fee schedule) or manually (because BlackRock decided to make up for lost revenue due to declining AUM)?
Finally, it is worth observing that the particular cap they write about is voluntary and "may be eliminated by BFA [BlackRock Fund Advisors] at any time". (From prospectus.) I'd hardly call that "capped ... under any circumstances."
Contrast that with another fee waiver, to which they are contractually obligated, through June 2014. That one forces BlackRock to waive fees attributable to the management fees it receives for underlying funds (so that they don't effectively get paid twice for managing the same asset). That latter waiver remains in place under any circumstances, and is thus incorporated into the ER that is presented in the prospectus. The voluntary waiver isn't.
Knowing that EEM tracks the MSCI EM index (15% South Korea) while VWO is transitioning to the FTSE EM index (no South Korea) tracked by SCHE, I would favor VWO due to the expense ratio and daily trading volume.
Kevin
So I can understand how they come up with the figure. Whether it is reasonable is an entirely different question
Fidelity Spartan Emerging Markets: 0.12% to 0.33% (depending on share class)
Northern Emerging Markets: 0.61%
Schwab Fundamental Emerging Mkts Large Co: 0.61%
TIAA-CREF Emerging Markets: 0.25% to 0.64% (depending on share class)
Vanguard Emerging Markets Stock Index 0.10% to 0.33% (not counting its ETF share class)
(all data from M*)
Update: The new ETF is IEMG. To be fair this new one is using MSCI 'Investable' Market Index which may give slightly different exposure but not enough to make a huge difference (IMHO)
http://seekingalpha.com/article/966661-ishares-introduces-core-etf-lineup
Thanks for the information on IEMG. I actually like this more than EEM due to greater exposure to MC and SC, although the average daily trading volume is a smallish 91K shares. The folks at iShares better be thinking about reducing the ERs of all of their ETFs otherwise they will lose assets right quick, as ETF investors are very price conscious and assets are very fluid.
In the LC/MC diversified EM equity ETF space, my preference continues to be EEMV.
Kevin
As soon as I write that, of course, both the premium and spread change. But at least on four of the five occasions I checked today, that pattern was roughly true.
David