ETFs with negative running costs

[hiriskpaul]

I have been looking for a passive fund to track Asia Pacific ex-Japan small caps to replace an IT I currently hold with lamentable performance and I came across the iShares MSCI AC Far East ex-Japan Small Cap ETF. At first sight it looks expensive, with ongoing charges of 0.74%. However, from stock lending the ETF is making 0.98%, for a total ongoing cost of -0.25%. The 5 year performance is showing the fund beating its benchmark by 0.23%, so either the latest stock borrowing return was unusually high or returns are leaking away elsewhere, such as through rebalancing. Nontheless, I find it interesting that an ETF with a fairly hefty charge can have the ongoing costs eliminated by stock borrowing.

Has anyone seen ongoing costs wiped out by stock borrowing returns on any other ETFs or funds?

[MartynC27]

I have been looking for a passive fund to track Asia Pacific ex-Japan small caps to replace an IT I currently hold with lamentable performance and I came across the iShares MSCI AC Far East ex-Japan Small Cap ETF. At first sight it looks expensive, with ongoing charges of 0.74%. However, from stock lending the ETF is making 0.98%, for a total ongoing cost of -0.25%. The 5 year performance is showing the fund beating its benchmark by 0.23%, so either the latest stock borrowing return was unusually high or returns are leaking away elsewhere, such as through rebalancing. Nontheless, I find it interesting that an ETF with a fairly hefty charge can have the ongoing costs eliminated by stock borrowing.

Has anyone seen ongoing costs wiped out by stock borrowing returns on any other ETFs or funds?

No but I've also been looking to replace an APAC Region investment trust (Henderson Far East - HFEL) with Vanguard VAPX which I assume is large Cap (0.22%) so this ETF - iShares MSCI AC Far East ex-Japan Small Cap looks interesting.

[Lootman]

Has anyone seen ongoing costs wiped out by stock borrowing returns on any other ETFs or funds?

Yes, it's been routine for a long time with institutional accounts. In fact it was the case even before ETF's - open-ended index funds were sometimes offered to institutional clients at zero cost back in the 1990's. The key was an agreement that the manager and the client would share stock borrowing revenues.

So it's good to see this practice extending into the retail space, and I think that required ETFs to become popular. And in fact ETF expense ratios are approaching zero anyway - there are a few under 0.1% in the UK and the cheapest US ETF has an expense ratio of just 0.04%.

We are almost at the point where investing is free, or even comes at a negative cost.

[hiriskpaul]

Yes, charges on the more mainstream ETFs are incredibly low now. I hold the Vanguard US listed Total Stock Market ETF (VTI) and the ongoing charge on that is only 0.04%. In fact, for the position I have in my SIPP, the foreign currency dividend conversion fee adds 0.03%!

It seems to be small caps that derive the biggest lending fees. I read somewhere (just lost the link) that the ongoing cost (0.24%) of the iShares Russell 2000 Growth ETF is also covered by the stock lending revenue.

[Hariseldon58]

Its worth bearing in mind that when comparing performance of an ETF with an index, it is not uncommon to have a benchmark that is a net benchmark. EG US market with an assumed .3% tax take on dividends , a UK investor in the ETF suffers .15% deduction and thus performance appears to beat the index on a a low charging tracker, e.g. S&P500.

No idea if that applies to the fa east tracker but worth bearing in mind the possibility.

[hiriskpaul]

Its worth bearing in mind that when comparing performance of an ETF with an index, it is not uncommon to have a benchmark that is a net benchmark. EG US market with an assumed .3% tax take on dividends , a UK investor in the ETF suffers .15% deduction and thus performance appears to beat the index on a a low charging tracker, e.g. S&P500.

No idea if that applies to the fa east tracker but worth bearing in mind the possibility.

True, the iShares S&P 500 beats its benchmark every year due to the difference in assumed withholding taxes and actual and this is explained in the annual accounts as a cause of the difference in performance. In the case of the far east index though it is not mentioned as a factor in explaining the performance difference. The performance difference is explained as:

The outperformance of the Fund was due to
differing index treatment in the Fair Valuing
pricing of suspended stocks. In addition the
fund is managed using sampling techniques.

I note that there are some withholding taxes in the accounts for this ETF ($146k), so I suspect the assumed withholding taxes in the benchmark must be reasonably close to actual withholding taxes. The accounts gives stock lending return of $470k versus fees of $428k.