# Reputation of Vanguard vs Blackrock



## serious7 (Feb 18, 2016)

I am having a hard time deciding between which company to go with for etfs in terms of safety and reputability. From what I found, here are the points that I gathered so far:

Vanguard:
- Structure of fund is apparently investor owned 
- Does not provide any information on securities lending revenue in annual report
- Does not disclose daily holdings

Blackrock:
- Structure of fund is apparently management owned (not investor owned)
- Disclose daily holdings of investments
- Provides information on securities lending revenue in annual report

So far, I came to the conclusion that Blackrock is more reputable. Is this the right choice?


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## james4beach (Nov 15, 2012)

As far as Canadian ETF providers, I think Blackrock/iShares, Vanguard, and BMO are all considered very reputable.

But consider the details of the individual ETF. Daily trading volume and bid/ask spread can be a real concern. Personally I also stick with ETFs that have a large enough asset base, and I'm usually looking for at least $100 million in assets.


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## humble_pie (Jun 7, 2009)

serious7 said:


> Blackrock:
> - Structure of fund is apparently management owned (not investor owned)
> - Disclose daily holdings of investments
> - *Provides information on securities lending revenue in annual report*
> ...



i've investigated fairly extensively & to the best of my knowledge, blackrock canada does *not* provide any information on securities loaned out from its stated/claimed portfolios.

since the blackrock US ETF annual financial statements do contain minimal, hieroglyph-like markings that indicate loaned securities - albeit a hundred pages or more deep into the document - my tentative working conclusion is that canadian regulators do not require that canadian funds disclose this information, therefore canadian ETF managers do not publish it.

in a 2015 interview with a blackrock manager, i was informed that limited, generalized ETF loan information is provided to financial advisors but never to individual canadian investors in blackrock ETFs. The reason for this, explained the manager, is that ordinary investors would not be capable of understanding such lending operations, therefore only the advisors are to be informed, so that they, in turn, can enlighten retail investors in language the retail investors would be able to grasp.


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## james4beach (Nov 15, 2012)

iShares Canada annual reports do include information on securities lending, though it's more obscure than the US ishares.

I am able to sniff it out, and it's in there. If you read all 100+ pages of the annual report you will find out the $ amount of the securities on loan, the value of their collateral, and you can figure out what % of the fund they have loaned out.

I don't like the securities lending, personally, but it's not unique to ETF. Mutual funds do it too.


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## serious7 (Feb 18, 2016)

So which company did you end up choosing and why?


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## humble_pie (Jun 7, 2009)

james4beach said:


> iShares Canada annual reports do include information on securities lending, though it's more obscure than the US ishares.
> 
> I am able to sniff it out, and it's in there. If you read all 100+ pages of the annual report you will find out the $ amount of the securities on loan, the value of their collateral, and you can figure out what % of the fund they have loaned out.
> 
> I don't like the securities lending, personally, but it's not unique to ETF. Mutual funds do it too.



could you let us know where blackrock canada does show its canadian loan statistics? i don't mean vague generalized summary statements, i mean each & every security on an audited list of holdings should bear a clear indicator as to whether it is out on loan or not. 

re mutual funds, of course they loan securities, but how is that reference either here or there? few cmffers hold mutual funds any more, many cmffers hold ETFs & what's being discussed are ETFs.

james4 u are a critic of deutsche bank, no? think how big they are in the custom-built derivatives index field, think how many specialty ETFs might go down if deutsche bank were to sink ...


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## james4beach (Nov 15, 2012)

I've held both iShares and BMO ETFs. Why? I read the financial statements and they seemed OK to me. Vanguard funds at the time were too small and had too low trading volume for my taste.

Currently I don't own any but that's because the IRS makes it very unpleasant for me to own Canadian ETFs.


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## james4beach (Nov 15, 2012)

humble_pie said:


> could you let us know where blackrock canada does show its canadian loan statistics? i don't mean vague generalized summary statements, i mean each & every security on an audited list of holdings should bear a clear indicator as to whether it is out on loan or not.


I have never seen data like that. I've only seen totals of $ out on loan, but not broken down by individual holdings.

This by the way is why I hold Government of Canada bonds individually. I'm not going to trust a bond funds to hold those for me 



> james4 u are a critic of deutsche bank, no? think how big they are in the custom-built derivatives index field, think how many specialty ETFs might go down if deutsche bank were to sink ...


Critic, yes! And I agree that exotic derivatives based ETFs could be in danger when Deutsche Bank goes down. As you know humble_pie I have warned, at every opportunity, against holding exotic ETFs.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I have never seen data like that. I've only seen totals of $ out on loan, but not broken down by individual holdings.



the above is exactly what i mean. Blackrock's US ETFs show an annotation on each & every individual security to indicate whether it is or is not out on loan at the time the "picture" was taken for annual audited financial statement purposes.

granted the annotation is obscure, buried hundred pages inside, only an asterisk with explanation delivered on a subsequent page in the tiniest of fonts. Nobody except a super-sleuth could find or decipher the information.

however, in the best of all possible worlds, such info would be easily & transparently disclosed, to every ETF holder or prospective buyer, across all of a fund's public literature. The problem is that the regulators are not yet calling for this.

james4 we had a preliminary go-around with this issue over a year ago. You might remember haroldCrump - who agrees that the loan information is being masked - saying that nothing will be widely recognized until a major bank fails, taking its derivative products down with itself.

so this really is an issue whose time has not yet come. Even here in cmf forum, it looks like 99% of investors still want to believe that their ETFs are holding - in their distinct, separate, professional custodial possession - each & every stock, bond or other security that they say they are holding.

investors want to believe that, even when professional custody costs at least .50% of a portfolio's assets in north america & certainly costs far more than .50% when the assets are foreign or located in unstable 3rd world countries.

investors profoundly want to believe that, even when common sense should be telling them that a fund like XIC - with more than 250 alledged different individual holdings - would cost so much to hold, re-balance frequently (it's a weighted ETF) & manage that its MER could never come down to anywhere near the ultra-low .05% MER which XIC is, in fact, charging. Common sense should be telling investors that XIC is being subsidized somewhere, somehow. 

james4 it's not just the exotic custom-built ETFs that are at risk, imho. My take would be that the highest lending rates occur among the highly liquid mainstream big-cap stocks & bonds, because these are the easiest securities to hedge, proxy, track & mirror.

for example, when looking at loaned securities in some US ETFs more than a year ago, i noticed that Vanguard's emerging index ETF had very few stocks out on loan. I assumed that was because it would be difficult to hedge or cover nigerian, peruvian or polish securities ... very prudent of Vanguard, which may do less lending & may in fact be acting more cautiously than other ETF managers .each:


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## serious7 (Feb 18, 2016)

humble_pie said:


> investors profoundly want to believe that, even when common sense should be telling them that a fund like XIC - with more than 250 alledged different individual holdings - would cost so much to hold, re-balance frequently (it's a weighted ETF) & manage that its MER could never come down to anywhere near the ultra-low .05% MER which XIC is, in fact, charging. Common sense should be telling investors that XIC is being subsidized somewhere, somehow.


Is my understanding correct that you are skeptical about the safety of XIC for investors?




humble_pie said:


> for example, when looking at loaned securities in some US ETFs more than a year ago, i noticed that Vanguard's emerging index ETF had very few stocks out on loan. I assumed that was because it would be difficult to hedge or cover nigerian, peruvian or polish securities ... very prudent of Vanguard, which may do less lending & may in fact be acting more cautiously than other ETF managers .


What are your ETF picks and why?


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## humble_pie (Jun 7, 2009)

serious7 said:


> Is my understanding correct that you are skeptical about the safety of XIC for investors?



not particularly XIC, it's only one example among thousands. It's an easy example to use, because if anyone thinks about this fund's profile - it's a weighted fund, therefore requires balancing - one will see that it is *not* possible to hold more than 250 individual securities in professional custody, meanwhile frequently trading them in & out to "re-balance" the portfolio, all for a next-to-nothing MER cost of .05%.

keep in mind that the latter third of XIC's holdings are thinly-traded small canadian caps, often of the venture exchange type. These are not liquid. They usually have killer bid/ask spreads. It would cost a mint to have to re-buy & re-sell those stocks continually, in some attempt at re-balancing a weighted fund.

the loan activities of ETFs - not to speak of mutual funds - are extensive. ETFs get paid for lending out their securities. That's how they can drive MERs down, by subsidizing costs with the loan revenues. Lower & lower MERs are what are bringing the customers in.

so far, the above is not a widely-understood issue. The regulators are not requiring transparent disclosure. They won't until widespread demands for better disclosure come from investors - a process that will take many years.

as for picking ETFs, me i hold individual stocks. I'm not against ETFs, i simply believe the high-powered mutual fund wizards moved themselves to the ETF industry decades ago, when they saw the pressure building up against the high costs of traditional mutual funds & they saw the writing starting to appear on the wall. I also believe that the lending risks of ETFs are not fairly disclosed to retail investors.


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## Eclectic12 (Oct 20, 2010)

serious7 said:


> So which company did you end up choosing and why?


When I bought ... the choices I recall were Barcley's iShares (since bought by BlackRock), TSE TIPS (TSE 35 and 100), SPDRs and something else. I went with iShares as they had the liquidity/volume in the Canadian market (Vanguard hadn't started ETFs yet, let alone Vanguard Canada '11 or so).


Interestingly according to wiki, a couple of US exchanges launched Index Participation Shares in '89 (ASE & PSE) but the Chicago Exchange's lawsuit stopped US sales. The TSE TIPS that started trading in '90 proved popular enough to prompt the ASE to try to build something the SEC would accept. The result was the SPDRs that started trading in Jan '93. Barclays WEBs, later renamed to iShares started in '96.


Cheers


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> ... keep in mind that the latter third of XIC's holdings are thinly-traded small canadian caps, often of the venture exchange type.


What is an example of one of the venture exchange stocks?

The "download all holdings" spreadsheet seems to be all TSX stocks.


Cheers


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## humble_pie (Jun 7, 2009)

please look for yourself. I said "venture exchange type." There are stocks towards the end of the XIC list that barely trade.

my point was/remains that these stocks traditionally have wide B/A spreads. They are impossible to continuously "re-balance" on an economic basis.


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## serious7 (Feb 18, 2016)

humble_pie said:


> please look for yourself. I said "venture exchange type." There are stocks towards the end of the XIC list that barely trade.
> 
> my point was/remains that these stocks traditionally have wide B/A spreads. They are impossible to continuously "re-balance" on an economic basis.


Arent these stocks also held in very small quantities? They don't even constitute a large portion of the fund anyway so it makes sense that they can be re-balanced as they are small in quantity and will be barely traded.

For example, BRP SUBORDINATE VOTING INC is held by XIC with the following nominal values at dates: 

February 17, 2016 = Nominal Value: 713,181.04 Stock Price: ~$16.00 #Stocks: ~44,573
January 29, 2016 = Nominal Value: 668,617.12 Stock Price: $15.09 #Stocks: ~44,308

So in one month, XIC must have bought 265 shares of the company for re balancing purposes. That doesn't sound a lot too me. Especially since the stock has daily volume in the thousands.


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## humble_pie (Jun 7, 2009)

serious7 said:


> Arent these stocks also held in very small quantities? They don't even constitute a large portion of the fund anyway so it makes sense that they can be re-balanced as they are small in quantity.



quantity of stock holding means absolutely nothing. There are costs to re-balancing, even for one share.

the cost is the commission to buy or sell to re-balance (usually a flat fee) plus also the custodial cost to de-list even one share of a holding from custody. Or to re-list a custodial holding when new shares are bought.

of course, XIC is likely *not* holding each & every one of its more than 250 stocks in professional custody. The costs would be insupportable. It's likely holding a proxy for most of the small stuff.

this is another aspect of ETFs that investors don't want to deal with, at least not yet. Many stated ETF holdings are "representational" only. All this is declared, in black & white, in the prospectuses. Substitutes can be held when their net effect will be to reproduce the return of the benchmark index.

my favourite is the blackrock India fund. Its holdings page shows just over 50 leading stocks from the Bombay sensex. Everything sounds very proper, impressive even.

but in reality, the blackrock india ETF doesn't hold a single stock. All it holds is an index managed for its benefit on the island of Mauritius.


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## serious7 (Feb 18, 2016)

humble_pie said:


> quantity of stock holding means absolutely nothing. There are costs to re-balancing, even for one share.
> 
> the cost is the commission to buy or sell to re-balance (usually a flat fee) plus also the custodial cost to de-list even one share of a holding from custody. Or to re-list a custodial holding when new shares are bought.
> 
> ...


If I were to purchase those 250 stocks through TD, it would've costed me the $10 to complete the trade?

Could you do a rough calculation and show it here on how you are coming to the conclusion that the costs are very high? I am curious to know how you are mathematically thinking this.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> please look for yourself. I said "venture exchange type." There are stocks towards the end of the XIC list that barely trade.


I asked because I looked at the last one on the list, Just Energy Group Inc which is supposedly a weight of 0.05%. It shows on Yahoo Finance as being listed on the TSX and the NYSE, with recent TSE volume numbers of 137,800 through 1,422,500.

AutoCanada shows as TSE and OTC listed, has a weight of 0.02% with recent TSE volumes of 0 through 354,900.


I guess was I expecting the Venture Exchange type to be actual Venture Exchange listings like stocks I've looked at in the past.


Cheers


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## larry81 (Nov 22, 2010)

From my perspective, Vanguard is the most investor friendly of all the Canadian ETF's providers, cant go wrong with them.


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## serious7 (Feb 18, 2016)

larry81 said:


> From my perspective, Vanguard is the most investor friendly of all the Canadian ETF's providers, cant go wrong with them.


Can you explain this in more detail how you came to that? I heard that Vanguard does not provide daily holdings to their investors whereas Blackrock does.


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## humble_pie (Jun 7, 2009)

serious7 said:


> If I were to purchase those 250 stocks through TD, it would've costed me the $10 to complete the trade?



if you were to purchase 250 stocks at TD, it would cost you $2,500.00.

your idea that a giant weighted fund buys 250 stocks once & once only is not quite accurate.

a weighted fund, by its very definition, is re-balancing all of its holdings all of the time.

i think we should leave this topic now? as i said, investors are not willing - yet - to believe that any cloud could mar the fail-proof mathematical perfection of their couch potatoes.

it would take a collapse of a giant global money-centre bank to flush out & expose all of its collapsed derivative positions. This is what some have wondered about, with respect to deutsche bank.

the probability of an armageddon global financial failure is low, but nevertheless a certain risk is present imho.


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## slacker (Mar 8, 2010)

While Vanguard USA is a mutual company (ie company is owned by its funds, which are in turn own by fund holders), there is no information to suggest that Vanguard Canada has the same structure.


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## james4beach (Nov 15, 2012)

humble_pie, I think your concerns are legitimate and I worry about the same thing as you. There is counterparty risk when the securities are out on loan to some hedge fund or investment bank.

But may I remark that you don't sound like the most bullish person out there. If you have a significant concern about counterparty failure and large international banks collapsing, then shouldn't you also be somewhat bearish-to-neutral on the stock market as a whole?

Or perhaps you are actually a conservative or even bearish investor, and maybe I never picked up on that before.

P.S. I'm a bear (lol)


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## humble_pie (Jun 7, 2009)

james4beach said:


> P.S. I'm a bear (lol)



P.P.S. i'm both. This is why i like options. Maybe yes, maybe no. On the one hand this, but on the other hand that. Options are never having to say you're right or wrong ...


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## GoldStone (Mar 6, 2011)

humble_pie said:


> a weighted fund, by its very definition, is re-balancing all of its holdings all of the time.


This statement is false for any fund that uses *market-cap* weighting, e.g. any Vanguard ETF and most Blackrock ETFs.


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## serious7 (Feb 18, 2016)

humble_pie said:


> if you were to purchase 250 stocks at TD, it would cost you $2,500.00.
> 
> your idea that a giant weighted fund buys 250 stocks once & once only is not quite accurate.
> 
> ...


How does it cost $2500 to buy 250 stocks? One trade = $10 at TD. Am I missing something here that's obvious?


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## cn_habs (Oct 27, 2015)

serious7 said:


> How does it cost $2500 to buy 250 stocks? One trade = $10 at TD. Am I missing something here that's obvious?


:eek2:

You guys do have a valid point which I've never thought before. I'd assume BMO is probably doing the same in order to keep the MER under 10 basis points.


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## humble_pie (Jun 7, 2009)

i forgot to mention that there was a time when blackrock was keeping all of the roughly 2% monies it was receiving for securities lending for itself.

then a US pension fund sued blackrock over the lending revenues. Blackrock settled & thereafter loan income was divided between blackrock & the applicable ETFs.

apparently, the lawsuits over lending fees haven't stopped, though. Blackrock is accused of keeping a greater proportion of lending fees for itself than other fund companies. This article from england's Financial Times says european regulators are concerned about the sheer size of the lending fee pools:

http://www.ft.com/cms/s/0/4f5002de-6c5c-11e2-b774-00144feab49a.html#axzz40ZtHHpo1

meanwhile, one is told that all of vanguard's revenues from lending securities are paid directly into the ETFs. I don't know if this is true.


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## serious7 (Feb 18, 2016)

humble_pie said:


> i forgot to mention that there was a time when blackrock was keeping all of the roughly 2% monies it was receiving for securities lending for itself.
> 
> then a US pension fund sued blackrock over the lending revenues. Blackrock settled & thereafter loan income was divided between blackrock & the applicable ETFs.
> 
> ...


can you answer my earlier question on how you are doing that calculation?


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## Video_Frank (Aug 2, 2013)

james4beach said:


> ... you can figure out what % of the fund they have loaned out.


There's an interesting article in the G&M regarding this.



> State Street Corp., BlackRock Inc.’s iShares and Vanguard Group Inc. all have small-cap ETFs – with more than $30-billion (U.S.) in collective assets – whose extra revenue from securities lending leads to returns that top those of the indexes they track.


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## Spudd (Oct 11, 2011)

serious7 said:


> How does it cost $2500 to buy 250 stocks? One trade = $10 at TD. Am I missing something here that's obvious?


250*10 = 2500

If you bought 250 shares of a single stock (e.g. 250 shares of BCE) it would cost $10. But HP is talking about buying 250 different stocks, which would indeed cost $2500.


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## GoldStone (Mar 6, 2011)

ETF management companies don't pay $10 per trade.


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## humble_pie (Jun 7, 2009)

GoldStone said:


> ETF management companies don't pay $10 per trade.



definitely true, all they'd pay is the exchange ticket plus possibly a low institutional commission per trade


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## humble_pie (Jun 7, 2009)

Video_Frank said:


> There's an interesting article in the G&M regarding this.




thankx video frank for an article that helps flesh out a hidden issue that most couch potatoes know nothing about.

your article focuses on how positive tracking error can be created when ETF lending fees beat the return of an index, even after costs are netted out.

the article doesn't treat what concerns me the most, which is that the loaned securities are not being held in any kind of professional 3rd party custody whatsoever, instead they are simply being lodged at the brokers who have married the ETF lenders to the hedge fund borrowers.

most brokers are owned by big banks. In one sense, assets borrowed from funds & held at brokers are giving the parent banks certain kinds of access to capital that is not on their books, ie it exists outside banking regulations.

here is a scholarly paper from INSEAD (the harvard business school of europe) which helps to explain how ETFs benefit their parent banking groups. 

http://www.insead.edu/facultyresearch/research/doc.cfm?did=52040


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