By Robert Goldsborough
One of the trends we have been predicting for 2011 is lower expense ratios for exchange-traded funds. On Tuesday, Jan. 11, iShares became the first industry player in 2011 to cut its ETF prices for investors, announcing that it has decreased the expense ratios for 34 of its ETFs, effective Jan. 1.
In the case of all but one of the ETFs, the fee reductions are minimal--between 1 and 5 basis points--and affect only ETFs that invest in foreign-domiciled companies. All 34 ETFs track MSCI indexes.
IShares attributed the price reductions to two dynamics affecting the funds: management-fee breakpoints and foreign taxes. All 34 ETFs' prices saw reductions as a result of management-fee breakpoints. IShares noted that fees apply to asset levels by tier, and when the asset levels of a group of funds exceed or fall below a specified tier, the management fees change based on a tier level. In the case of fee reductions, the asset levels of various iShares groups of ETFs clearly rose to higher tiers, prompting fees to go down. IShares also pointed out that the daily net effective management fee of a fund grouping is calculated daily and is applied to all funds within a group, regardless of the level of any individual fund's assets under management.
In addition, iShares noted that certain iShares ETFs are subject to foreign taxes on income, corporate events, capital gains, or currency repatriation, and that these taxes have an impact on the funds' fees. In the case of five ETFs--iShares MSCI France Index (NYSEARCA:EWQ), iShares MSCI Taiwan Index (NYSEARCA:EWT), iShares MSCI Thailand Investable Market Index (NYSEARCA:THD), iShares MSCI Emerging Markets Index (NYSEARCA:EEM), and iShares MSCI All Peru Capped Index (NYSEARCA:EPU)-- declines in foreign taxes also had an impact on the price reductions. EWT is the lone ETF that is experiencing a significant decline in its expense ratio, which is dropping from 0.82% to 0.71%.