# iShares slashes fees



## leeder (Jan 28, 2012)

Some fantastic news from iShares: http://ca.ishares.com/portfolio_strategies/investment_strategies/core_products.htm

With this change, I think new investors initiating positions should take a hard look at XIC, XUS, XEF, and XEC for their Canadian, US, EAFE, and Emerging market exposure, respectively. Until Vanguard steps up, iShares have now assumed the title of cheapest index ETFs!


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## james4beach (Nov 15, 2012)

There seems to be two news releases. One is regarding changes to investment strategies impacting the type of underlying securities the ETFs may hold
http://www.marketwired.com/press-re...-changes-to-certain-ishares-funds-1891824.htm

The second is a drop in MER for several ETFs
http://www.marketwired.com/press-re...-tsx-capped-composite-index-5-bps-1891815.htm

Notice they're using the words Management Fee which isn't the same as MER. For instance XIC's MER last year was 0.27%. So maybe add 0.02% onto this management fee to get the MER.

If I'm reading this right, then XIC now has an MER of around 0.07%. That's awfully good, wow. This is great news all around!


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## Guban (Jul 5, 2011)

This is great news!
I'm thinking of a couple of points, though. The cynic in me is wondering how much Vanguard's appearance had to do with this substantial decrease. Also, to be able to afford such a drop, Blackrock must have been making a healthy margin before.


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## CanadianCapitalist (Mar 31, 2009)

james4beach said:


> Notice they're using the words Management Fee which isn't the same as MER. For instance XIC's MER last year was 0.27%. So maybe add 0.02% onto this management fee to get the MER.


Management Fee is pretty standard in ETFs. To get an upper bound on MER, add 13 percent for HST.


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## Ostracized (Feb 7, 2014)

Very nice. Can anyone comment if XIC is now a cheaper equivalent replacement for VCN?


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## Eclectic12 (Oct 20, 2010)

^^^

Are you sure that the S&P/TSX Capped Composite Index is similar enough for your liking to the FTSE Canada All Cap Index?

I haven't delved into it a lot but a quick check shows the S&P version being driven off of the largest Canadian companies, where the FTSE seems to be talking about a broader range (the Vanguard site talks about it using large/mid/small cap).

Then too, the S&P Index is capped at 15% whereas the FTSE is capping at 25%.


These may not matter to you but they appear to be significant differences.


Cheers


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## james4beach (Nov 15, 2012)

So XIC is now the lowest MER fund in Canada?

XIC's MER is lower than XIU?


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## Ostracized (Feb 7, 2014)

Thus my question. I haven't delved deep into their holdings or cap weighting but I own VCN. Superficially they look similar with a similar number of holdings.


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## andrewf (Mar 1, 2010)

I suspect the differences are fairly minor. We're getting into hair-splitting territory here.


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## Eclectic12 (Oct 20, 2010)

Some have argued that going beyond five to ten stocks in the Canadian market is the equivalent of hair-splitting .... :biggrin:


Cheers


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## humble_pie (Jun 7, 2009)

james4beach said:


> So XIC is now the lowest MER fund in Canada?
> 
> XIC's MER is lower than XIU?


i'm suspecting that some of the Core funds are now containing derivative products such as futures & forward contracts, at least in part. It's these products that make an etf so ultra-cheap to run.

holding real shares costs real money!

i'll write more later, i'm in the middle of looking into this issue. Some fund families seem to be opaque, not transparently clear, about declaring whether they hold the actual stocks in certain ETFs or whether they are just holding an index future or proxy. I'll give an example later, so sorry to sound vague at this moment, still waiting on a bit of research.

one fund family that does a good job being transparent about its futures-&-derivatives portfolios, when these are the case, is Horizons BetaPro.

what i'm thinking might have happened with the rush to drop fees for XIC but not for XIU is that XIU is *the* institutional ETF par excellence. All the liquidity is in XIU. All the institutional option trading is on this fund. So i'm wondering whether the institutions said Nyet to your index futures, we want the full Monty of real common stocks in XIU, just the way we've always had it.

pension funds would be especially likely to take this route imho.


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## james4beach (Nov 15, 2012)

humble I had the same initial thought as you, that it smells like derivatives and synthetic exposures are coming.

Keep in mind that first press release I posted is about changes to investment methodology. I didn't parse it in detail but it sound like they're saying, we may now use derivatives and other synthetic tricks to replicate the index.

Personally I strongly prefer an ETF that actually holds underlying stocks. I do not like derivative based ETFs.

Perhaps XIU is being kept pure (I hope) because institutions know the same thing I do, which is that pure equity exposure is superior.

The only way to know for sure is to wait for the audited financial statements... as I keep saying, you've got to read the annual financial statements to see what you REALLY hold. Personally I will only invest in ETFs that hold actual stocks. Plain vanilla.


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## CanadianCapitalist (Mar 31, 2009)

Do you guys have any shred of evidence that iShares ETFs hold derivative instruments? I would be extremely surprised if the popular iShares ETFs hold derivatives since iShares had been among those pushing for a different designation for products holding derivatives. I see the price drop as simply driven by competition.


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## andrewf (Mar 1, 2010)

Yeah, this seems like a bit of a whisper campaign against the ETFs. I haven't seen any evidence that there has been any change to their use of derivatives in these funds.

CC, not only that, but it mirrors iShares US and their range of 'core' ETFs offered at low cost.


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## andrewf (Mar 1, 2010)

I think this is the press release james mentioned. The bolded ETFs are also Core ETFs announced by iShares. XIC does not seem to be affected.



> BlackRock Asset Management Canada Limited (“BlackRock Canada”), an indirect, wholly owned subsidiary of BlackRock, Inc. (NYSE:BLK), has determined to make certain changes to the investment strategy of iShares MSCI Brazil Index ETF (“XBZ”), iShares S&P Global Consumer Discretionary Index ETF (CAD-Hedged) (“XCD”), iShares China Index ETF (“XCH”), iShares J.P. Morgan USD Emerging Markets Bond Index ETF (CAD-Hedged) (“XEB”),* iShares MSCI Emerging Markets IMI Index ETF (“XEC”)*, *iShares MSCI EAFE IMI Index ETF (“XEF”)*, iShares MSCI Emerging Markets Index ETF (“XEM”), iShares S&P Global Industrials Index ETF (CAD-Hedged) (“XGI”), iShares Global Healthcare Index ETF (CAD-Hedged) (“XHC”), iShares India Index ETF (“XID”), iShares U.S. IG Corporate Bond Index ETF (CAD-Hedged) (“XIG”), iShares MSCI EAFE® Index ETF (CAD-Hedged) (“XIN”), iShares Latin America Index ETF (“XLA”), iShares MSCI EAFE Minimum Volatility Index ETF (“XMI”), iShares MSCI Emerging Markets Minimum Volatility Index ETF (“XMM”), iShares MSCI All Country World Minimum Volatility Index ETF (“XMW”), iShares S&P/TSX North American Preferred Stock Index ETF (CAD-Hedged) (“XPF”), iShares S&P 500 Index ETF (CAD-Hedged) (“XSP”), iShares U.S. Small Cap Index ETF (CAD-Hedged) (“XSU”),* iShares S&P 500 Index ETF (“XUS”) *and iShares MSCI World Index ETF (“XWD”).
> 
> The investment strategy of the above-noted iShares funds (the “iShares Funds”) will now allow an iShares Fund to invest in securities of one or more iShares exchange-traded funds managed by BlackRock Canada or an affiliate, and/or in index securities of the applicable index that the iShares Fund seeks to replicate, such that the resulting portfolio will have characteristics that closely match the char
> acteristics of such index. The investment strategy of each of the iShares Funds was previously to invest primarily in shares of one or more U.S. iShares funds managed
> by an affiliate of BlackRock Canada. The investment objective of each iShares Fund remains unchanged. BlackRock Canada expects that the new investment strategies outlined above will be effective March 24, 2014.


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## humble_pie (Jun 7, 2009)

CanadianCapitalist said:


> I see the price drop as simply driven by competition.


but if that were the case, why didn't they drop the management fee for XIU? instead they left it at .17%. That's not competitive.

there has to be some other reason why they chose to make XIC & XIC alone dirt cheap, while leaving all-time popular giant XIU with a fee structure that now appears to be cripplingly high by comparison.

to partially answer your other questions, yes i do have "shreds." One "shred" is the damning structure of black rock's india fund in the US. Its symbol is INDY. Right there on the primary fact sheet the company presents a list of the top 10 holdings which are individual common stocks; elsewhere they list the 50 Indian companies whose shares this fund purportedly holds.

but the fact is neither INDY nor its canadian clone hold any of those shares. All that they hold is an India index, the CNX NIFTY, which trades on indian exchanges & also in singapore & on the chicago mercantle.

the reason is that india is still a country that does not permit foreign investors. Foreign parties holding Indian funds must use overseas traded index & index derivatives or else ADRs that trade stateside or in london or luxembourg. There may be other exchanges where some indian shares trade.

so i am saying to myself, If they can represent the indian fund as holding 50 indian shares when in reality it is holding zero indian shares, then they could apply the same unfortunate communication methodology to any of their funds ...

i'm with james4, i feel that the competitive race to lower MERs to drastically low levels in order to attract investing customers is producing creeping derivativism, as a cost-saver.

the puzzling thing is that these are all first-rate companies with very honourable reputations, so the fact that one can keep the true facts about its india fund buried so deep & so far out of the consumer's sight is a bit worrisome.

there's a sentence in yesterday's Black Rock press release that is fuzzy about the changes they are going to make in the funds. Second paragraph. "IShares Core Series is a suite of low-cost funds specifically designed ... combining competitive pricing with diversified products using established index providers."

i for one find this sentence to be opaque. It could mean that index providers are used as benchmarks. It could also mean that index providers are used, in some proxy or derivative form, as actual holdings.


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## cainvest (May 1, 2013)

humble_pie said:


> but if that were the case, why didn't they drop the management fee for XIU? instead they left it at .17%. That's not competitive.


Simple answer ...
XIU = $12,901,266,132
XIC = $1,361,557,808


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## CanadianCapitalist (Mar 31, 2009)

humble_pie said:


> but if that were the case, why didn't they drop the management fee for XIU? instead they left it at .17%. That's not competitive.
> 
> there has to be some other reason why they chose to make XIC & XIC alone dirt cheap, while leaving all-time popular giant XIU with a fee structure that now appears to be cripplingly high by comparison.


Same reason why iShares decided to keep high-MER EFA and EEM and introduced new lower-priced ETFs that track the same markets. It's a business strategy for dealing with competitive pressures. In this case, their strategy is to reduce MER on a product that has much lower assets under management.

What "damning" structure? India does in fact allow foreign investments by institutional investors. Most institutions route their India investments through Mauritius to take advantage of favorable tax treatment. It looks like this fund does the same according to its prospectus here:

http://prospectus-express.newriver.com/summary.asp?clientid=isharesll&fundid=464289529&doctype=pros

But for the sake of argument let's say INDY does use derivatives to track the underlying index. So, if one ETF uses derivatives, all of them must use derivatives?



> The Fund seeks to track the investment results of the CNX Nifty IndexTM (the “Underlying Index”), which measures the equity performance of the top 50 companies by free float market capitalization whose equity securities trade in the Indian securities markets. The Underlying Index may include large-, mid- or small-capitalization companies, and components primarily include consumer staples, energy, financials and technology companies. The components of the Underlying Index, and the degree to which these components represent certain industries, may change over time.The Fund carries out its investment strategies by investing substantially all of its assets in a wholly-owned subsidiary in the Republic of Mauritius (the “Subsidiary”). The remaining assets will be invested directly by the Fund. The Subsidiary and the Fund will collectively invest at least 80% of the Fund's total assets in securities that comprise the Underlying Index and in depositary receipts representing securities of the Underlying Index. Due to legislative developments in India, the Fund may choose to withdraw from the Subsidiary, which may increase the Fund's India tax expense. BFA will serve as investment adviser to both the Fund and the Subsidiary. Unless otherwise indicated, the term “Fund,” as used in this prospectus (the “Prospectus”), means the Fund and/or the Subsidiary, as applicable.


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## humble_pie (Jun 7, 2009)

cainvest said:


> Simple answer ...
> XIU = $12,901,266,132
> XIC = $1,361,557,808



in what way would the above be an answer?

it would make more sense to reduce the MER of the giant fund, not its small cousin. Nearly always, the bigger the assets under management, the easier it is to shave fees.


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## cainvest (May 1, 2013)

humble_pie said:


> in what way would the above be an answer?
> 
> it would make more sense to reduce the MER of the giant fund, not its small cousin. Nearly always, the bigger the assets under management, the easier it is to shave fees.


Standard sales tactic, lower the price on the ETFs you want people to invest in.


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## humble_pie (Jun 7, 2009)

CanadianCapitalist said:


> In this case, their strategy is to reduce MER on a product that has much lower assets under management.


this makes no sense to me. It's usually easiest to reduce costs when AUM bulks high.




> (1) India does in fact allow foreign investments by institutional investors.
> 
> (2) Most institutions route their India investments through Mauritius to take advantage of favorable tax treatment.


(1) last i looked, which was a few years ago, only giant institutions such as the NYC banks that create ADRs were allowed to enter indian stock markets as foreign investors. All other foreign investors had to remain outside india. Has the situation changed since then? i have not heard so ...

2) it's my belief that what Black Rock buys through mauritius is only the index holding, not any actual indian shares. What i already said in the message above. It's also my belief that the reason the offshore index is used so frequently is to circumvent india's restrictions against foreign investors, not particularly to gain any beneficial tax treatment.




> But for the sake of argument let's say INDY does use derivatives to track the underlying index. *So, if one ETF uses derivatives, all of them must use derivatives?*


CC you are twisting my words horribly. I never said *all* of them are using derivatives, or even hinted at anything so villainous. I said that the presence of one fund that may be camouflaging its true nature suggests that the practice might be found amongst some other funds in this family. I sincerely believe that investors should look carefully to make sure they understand everything that is going on. I specifically mentioned something like creeping derivatism and i do feel that competition is driving this.

it's a wonderful marketing mechanism for an ETF to be able to scream Hey We Got Our Fees Down To 5 Basis Points !!

this instantly attracts & delights investors. But when it means the makeup of the fund's actual portfolio has shifted, even slightly, from a broad universe of actual common stocks to a riskier & narrower group of only a few derivative products, then i believe this fact should be fully explained, in plain language, up front, in fund documentation.

CC in the past you have noticeably argued in favour of this very point, from time to time mentioning that you favour plain vanilla stock ETFs rather than fancy derivative holders such as XHT. So i don't quite understand why you are being so argumentative here.

in closing, may i say that, in my own very limited personal sampling, Horizons BetaPro seems to be putting a foot forward in acknowledging the use of derivative products as holdings in some of its funds. The derivatives are listed among the declarations of holdings. Horizons Beta agents also discuss these derivative holdings articulately & responsibly. So far, i have not found that happening with vanguard or black rock etf products.


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## fatcat (Nov 11, 2009)

XIC is the loss leader
XIU is the cash cow


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> in what way would the above be an answer?
> 
> it would make more sense to reduce the MER of the giant fund, not its small cousin. Nearly always, the bigger the assets under management, the easier it is to shave fees.


Easier from an economy of scale ... harder from a "what does it do to the bottom line" ... unless they figure people are going to leave XIU in numbers based on cost, this strategy allows them to claim low costs for those that want it without impacting the bottom line a lot.


Cheers

*PS*

You said it yourself ...


> ... it's a wonderful marketing mechanism for an ETF to be able to scream Hey We Got Our Fees Down ... this instantly attracts & delights investors.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> ... CC in the past you have noticeably argued in favour of this very point, from time to time mentioning that you favour plain vanilla stock ETFs rather than fancy derivative holders such as XHT. So i don't quite understand why you are being so argumentative here ...


I suspect it is because as I read the post, the request was for what evidence and the evidence seems to boil down to "one fund is misrepresented ... so it might be wide spread".


Cheers


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## AltaRed (Jun 8, 2009)

fatcat said:


> XIC is the loss leader
> XIU is the cash cow


+1 Institutional traders are not moving from XIU any time soon nor will retail folks with a low ACB in XIU in taxable accounts. They have to do something to stem their decrease in AUM in 2013 (down 2%) versus double digit gains for almost everyone else. Target the specific products that are in direct competition elsewnere.


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## CanadianCapitalist (Mar 31, 2009)

humble_pie said:


> (1) last i looked, which was a few years ago, only giant institutions such as the NYC banks that create ADRs were allowed to enter indian stock markets as foreign investors. All other foreign investors had to remain outside india. Has the situation changed since then? i have not heard so ...
> 
> 2) it's my belief that what Black Rock buys through mauritius is only the index holding, not any actual indian shares. What i already said in the message above. It's also my belief that the reason the offshore index is used so frequently is to circumvent india's restrictions against foreign investors, not particularly to gain any beneficial tax treatment.


For a long long time now (at least since the early nineties), India allows what it calls foreign institutional investors to invest directly in its stock markets. Long before index etfs, closed-end India funds (IIF and IFN) holding Indian shares directly traded on the NYSE. I don't know where you are getting the information that INDY does not hold actual shares. 




> CC you are twisting my words horribly. I never said *all* of them are using derivatives, or even hinted at anything so villainous. I said that the presence of one fund that may be camouflaging its true nature suggests that the practice might be found amongst some other funds in this family. I sincerely believe that investors should look carefully to make sure they understand everything that is going on. I specifically mentioned something like creeping derivatism and i do feel that competition is driving this.
> 
> it's a wonderful marketing mechanism for an ETF to be able to scream Hey We Got Our Fees Down To 5 Basis Points !!
> 
> ...


I completely agree that investors should pay attention to what a fund holds, how it is structured etc. I also fully agree that if a fund does hold derivatives, it should be disclosed. But where is the evidence that XIC, for example, has shifted from owning most of the underlying stocks directly to holding derivatives?


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## andrewf (Mar 1, 2010)

I'll say it again. I haven't seen any evidence to suggest iShares uses derivatives for XIC, and it certainly has not recently announced any change to allow it to do so. Seems like a red herring to me.


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## cjk2 (Sep 19, 2012)

Wow, this is pretty great timing--considering I was just about to sell some e-series today (so I can buy some Vanguard ETFs tomorrow). Now I'll have to wait a bit longer so I can look into these iShares ETFs instead...


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## humble_pie (Jun 7, 2009)

CanadianCapitalist said:


> For a long long time now (at least since the early nineties), India allows what it calls foreign institutional investors to invest directly in its stock markets.



as best i can recall, india allows less than a dozen giant global super-banks to enter indian stock markets. It is they who create the indian ADRs & ADSs that trade in US, london & luxembourg stock exchanges. No financial institution of lesser size than the likes of Citibank or the Bank of New York is allowed any access to indian markets, which are otherwise classed as "closed" to foreign investors.

the situation may have changed drastically in very recent years; if so i am certainly sorry; but i am not aware of any such change.




CanadianCapitalist said:


> I don't know where you are getting the information that INDY does not hold actual shares.



the information that the underlying india ETF (symbol INDY) does not invest directly in shares of the indian companies that comprise the offshore Mauritius-based index known as the CNX Nifty India Index comes from the prospectus of this fund.

the prospectus recites that the ETF does not invest directly in the index but rather utilizes a strategy known as "Representative Sampling" to invest in certain securities (not named) which seek to replicate the index, but are not found in the index.

according to the prospectus, the fund also invests in futures, options & swap contracts to achieve its goals of replicating the india index.

please find below the relevant text, from the most recent prospectus dated 1 august 2013:




> *Principal Investment Strategies*
> 
> The Fund seeks to track the investment results of the CNX Nifty IndexTM (the “Underlying Index”), which measures the equity performance of the top 50 companies by free float market capitalization whose equity securities trade in the Indian securities markets.
> 
> ...


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## Avaron (Jan 14, 2014)

Hmm, debating if I should stop buying zcn and go with xic in the future
Cab and xus look interesting


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## CanadianCapitalist (Mar 31, 2009)

humble_pie said:


> as best i can recall, india allows less than a dozen giant global super-banks to enter indian stock markets...
> 
> the information that the underlying india ETF (symbol INDY) does not invest directly in shares of the indian companies that comprise the offshore Mauritius-based index known as the CNX Nifty India Index comes from the prospectus of this fund.
> 
> ...


AFAIK, from the early nineties India allowed foreign institutions to invest in its stock market. Of course, not many foreign institutions were interested back then because BRICs became hot only in the 2000s. Right now, there are thousands of foreign institutions allowed to trade in the Indian market. The list is available here: http://www.sebi.gov.in/sebiweb/

Sampling is a standard strategy in ETFs, especially fixed income where it is not possible to replicate the index faithfully. The prospectus mentions that at least 80 percent of its holdings will be in securities or depository receipts. I'm guessing that the prospectus includes wording that it may invest in derivatives because if the fund becomes very large or if Indian stocks become very popular with foreign investors, it may run against restrictions on how much of an Indian company can be owned by foreign institutions. Right now, the INDY ETF is fully invested in shares of the underlying index according to the list of holdings -- not a derivative in sight.



> The Fund carries out its investment strategies by investing substantially all of its assets in a wholly-owned subsidiary in the Republic of Mauritius (the “Subsidiary”). The remaining assets will be invested directly by the Fund. The Subsidiary and the Fund will collectively invest at least 80% of the Fund's total assets in securities that comprise the Underlying Index and in depositary receipts representing securities of the Underlying Index. Due to legislative developments in India, the Fund may choose to withdraw from the Subsidiary, which may increase the Fund's India tax expense. BFA will serve as investment adviser to both the Fund and the Subsidiary. Unless otherwise indicated, the term “Fund,” as used in this prospectus (the “Prospectus”), means the Fund and/or the Subsidiary, as applicable.


Regardless, I don't see how INDY is relevant to something like XIC.


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## humble_pie (Jun 7, 2009)

CanadianCapitalist said:


> Right now, the INDY ETF is fully invested in shares of the underlying index according to the list of holdings -- not a derivative in sight.


i feel this is a common but naiive interpretation/misconception. Most of the funds i am criticizing - there are several ETF fund families involved - are holding at least some derivatives & synthetics, according to their prospectuses, while presenting the fictitious list of stocks in their index as if they were holding those exact stocks ... when they are not.

i've already mentioned that Horizons BetaPro does a good job making clear where the wild things are? their "holdings" lists don't claim to own lists of securities when Horizons does not hold the list, but instead holds synthetics.

headings on Horizon lists of holdings will instead refer to "index exposure" or some other phrase that will tell the investor/consumer that he's looking at the benchmark, not necessarily the actual holdings, of an ETF.

in the case of the Black Rock ETFs, i submit that some of the headings accompanying lists of alleged holdings are misleading, in that the investor is enticed or induced to believe that the list of securities he is viewing for a particular ETF are, indeed, the actual holdings of that ETF.

please note that the language of Black Rock prospectuses is vague & non-defined enough to allow for inclusion of a wide range of generic synthetic security positions.



> The list is available here: http://www.sebi.gov.in/sebiweb/


link only goes to the sebi & i am *so* not going to read thousands of sebi pages in hopes of finding an obscure list showing hordes of foreign investors who are all allowed to trade in india! i'm sticking to my knitting!! knitting says that india is still a market that's closed to foreign investors!!!


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## humble_pie (Jun 7, 2009)

re XIC & XIU: do they or do they not hold derivative products in lieu of actual shares?

their prospectus says they do.

my working hypothesis is that index ETFs are increasingly holding derivative & synthetic products instead of the actual stocks that form their indexes because the former are more cost-effective. In general, derivative products make a fund cheaper to operate, in part because of the leverage.

derivative products also lower ETF costs by replacing the high costs of buying, selling & rebalancing the numerous tiny holdings that form the rump end of a portfolio with a few low-cost synthetic products.

but derivative products also make a fund riskier. That's why i believe that all derivative & synthetic products associated with a particular fund should be fully revealed & transparently treated across a fund family's entire literature.

the recent slash in XIC management fees to a record low of 5 basis points - the lowest of any ETF in canada - is causing me to wonder whether Black Rock, the issuer, may be tweaking this ETF further along the derivative/synthetic path in order to reduce costs.

black rock's prospectus clearly states that XIC & XIU - just like their cousin INDY as outlined above - both utilize proxies, derivatives & futures contracts in their strategies to track a pair of leading TSX indexes.

the list of XIC holdings, however, does not show any derivative products. Instead, it claims to own 245 stocks outright.

in particular, the "stratified sampling" strategy it pursues is similar to the "representational sampling" strategy employed by Black Rock in its india ETF.

*from the prospectus, pages iii, 36 & 37:

1) XIC "may invest in and hold uniits of other exchange-traded funds."

2) XIC "may also invest in or use derivative instruments."

3) XIC "may also employ a 'stratified sampling' strategy. Under a stratified sampling strategy, an iShares Canadian Equity Fund may *not* hold all of the securities that are included in the applicable index, but instead will hold a portfolio of securities that closely matches the aggregate investment characteristics (eg sector and market capitalization) of the securities included in the applicable index."

4) XIC "may also invest in or use derivative instruments as described in 'Investment Strategies - Use of Derivative Instruments."
*


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## cainvest (May 1, 2013)

humble_pie said:


> their prospectus says they do.


From your post information it says "may invest", not "they do". 



humble_pie said:


> the list of XIC holdings, however, does not show any derivative products. Instead, it claims to own 245 stocks outright.


So they currently hold all the stocks outright but reserve the right to potentially use other methods in the future, at least that's what I'm reading from your post.


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## GoldStone (Mar 6, 2011)

humble_pie said:


> my working hypothesis is that index ETFs are increasingly holding derivative & synthetic products instead of the actual stocks that form their indexes because the former are more cost-effective.


HP, there is no need to rely on a hypothesis. You can open the annual reports and check what each ETF holds. They fully disclose the holdings.

iShares 2013 Annual Report is not out yet. Semi-annual report is here:
http://ca.ishares.com/content/strea...source/semi_annual_report_x_funds_2013_en.pdf

XIC portfolio (pp. 29-31)

Common stocks and Income trusts: 99.55%
Cash and Cash equivalents: 0.11%
Other Assets, Less Liabilities: 0.34%


XIU portfolio (page 35)

Common stocks: 99.61%
Cash and Cash equivalents: 0.05%
Other Assets, Less Liabilities: 0.34%

They disclose the size of each common stock position down to the last share. These are definitely direct holdings - not derivatives.


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## andrewf (Mar 1, 2010)

I'd suggest asking iShares about their derivative exposure rather than speculating. Prospectuses tend to be rather broader than how the fund is typically actually managed to give the manager some leeway in exceptional circumstances.

Edit: Thanks Goldstone. I was looking for that on iShares' site as I recalled looking at it before. I'm not sure I buy the argument that it is costly to directly hold shares since some discount brokerages let you buy and sell for <1 penny per share. Trading within the fund is somewhat limited (to whatever the the portfolio turnover is), with all the trading required to build creation baskets done by market makers paid for by the bid-ask spread.


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## james4beach (Nov 15, 2012)

Yes the annual report (audited financial statements) is the place to look, as well as all the Notes that follow them.

Unfortunately, this isn't going to answer your question for at least another year. Since XIC is slashing its fee as of today, and we suspect they may be stepping up their derivative exposure as of today, you will not see that in the financial statements until they're released in 2015.

I share humble_pie's suspicion on this one


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## andrewf (Mar 1, 2010)

Why not ask them rather than speculate?


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> ... I'm not sure I buy the argument that it is costly to directly hold shares since some discount brokerages let you buy and sell for <1 penny per share ...


+1 ... with so many ETFs to buy & sell for, it would seem likely that a player like this would have a much better economy of scale.


Cheers


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## llagebs (Feb 24, 2014)

On the subject of VCN vs XIC, I wonder why they have significantly different distributions. They seem to hold most of the same major stocks, so you'd expect their distributions to be quite similar.

https://www.vanguardcanada.ca/individual/etf-distribution-history.htm?portId=9561
http://ca.ishares.com/product_info/fund/distributions/XIC.htm

VCN is a new fund, so it only has 2 full quarters to use as data points. They paid 8 cents per quarter, for an annualized yield of 1.1%.
XIC is a lot older so has more data to draw on, but let's use the same 2 quarters that VCN has. They paid 10.4 and 15.3 cents (average 12.8), for an annualized yield of 2.3%

Someone please point out the obvious thing that I'm missing.


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## Spudd (Oct 11, 2011)

It's a thing about new ETFs. They have a bunch of new money flowing into them and that causes their distributions to be lower. 

Here's a page from Canadian Couch Potato where he explains it (using VRE instead of VCN):
http://canadiancouchpotato.com/2013/12/19/why-has-vre-outperformed-its-rivals-in-2013/

Look for the paragraph called "go with the flow".


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## andrewf (Mar 1, 2010)

The important point is that this doesn't impact the total return before taxes.


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## llagebs (Feb 24, 2014)

Spudd said:


> It's a thing about new ETFs. They have a bunch of new money flowing into them and that causes their distributions to be lower.
> 
> Here's a page from Canadian Couch Potato where he explains it (using VRE instead of VCN):
> http://canadiancouchpotato.com/2013/12/19/why-has-vre-outperformed-its-rivals-in-2013/
> ...


That explains it, thanks!


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## doctrine (Sep 30, 2011)

andrewf said:


> Why not ask them rather than speculate?


This development, that XIC can hold a lot of things other than just stocks, is interesting, although on this point I think iShares should be proactively explaining, i.e. pushing not having to pull it out of them.


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## Guban (Jul 5, 2011)

@Humble. Your question as to why XIC and not XIU sounds like the same one that could have been asked about the fixed income side. Why CAB and not XBB? One answer that was given was the size of the fund. The same answer may apply to XBB. Blackrock may want to promote the low fee, but not have to apply it to its largest fund, and thereby loose revenue.


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## off.by.10 (Mar 16, 2014)

Guban said:


> Blackrock may want to promote the low fee, but not have to apply it to its largest fund, and thereby loose revenue.


Yes, it's a different form of a common sales tactic for subscription services: get people in with low initial price and then quietly raise prices, hoping inertia will keep them onboard. Then introduce a slightly different, cheaper (ie. same price the other one used to be) service to grab new clients. Ideally, make it inconvenient for existing clients to switch services (here: possible tax consequences). You see it all the time with telephony, internet, tv, insurance, ...


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## andrewf (Mar 1, 2010)

doctrine said:


> This development, that XIC can hold a lot of things other than just stocks, is interesting, although on this point I think iShares should be proactively explaining, i.e. pushing not having to pull it out of them.


What's to explain? Their most recent financial statements show that the vast majority of their holdings are honest to goodness stocks. It's just internet whispers that iShares has a secret plot to turn XIC into a synthetic ETF loaded with derivatives. When was the last time you proactively denied beating your wife?


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## andrewf (Mar 1, 2010)

Guban said:


> @Humble. Your question as to why XIC and not XIU sounds like the same one that could have been asked about the fixed income side. Why CAB and not XBB? One answer that was given was the size of the fund. The same answer may apply to XBB. Blackrock may want to promote the low fee, but not have to apply it to its largest fund, and thereby loose revenue.


This is exactly it. Everyone who holds XIU and XBB do so despite the fee. Lowering MERS on CAB and XIC are plays for new assets, especially from investors who are more concerned with MER than other considerations like liquidity and optionability.


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