iShares Sweetens the Pot for Irish-Domiciled Funds

iShares' latest move is a positive development for investors and should help reduce the tracking error of ETFs engaged in securities lending

Hortense Bioy, CFA 4 November, 2010 | 9:26AM

Only a few weeks after committing to full transparency in its swap-based ETFs, iShares is ingratiating itself to investors again. This time, it relates to the securities lending programme within its physical replication ETFs. From November 1, all European in-kind iShares ETFs will split the net income generated from securities lending within these funds 60/40--in favour of fund shareholders. Previously, only German-domiciled iShares funds enjoyed a 60/40 split, while the vast majority of iShares ETFs--domiciled in Ireland-- received only 50% of the income generated from securities lending.

This initiative, which is aimed at bringing consistency across the product range, is a positive development for investors. It should theoretically help further enhance the return of iShares ETFs which engage in securities lending, and thereby help to reduce tracking error.

Last year, nearly half of all Dublin-domiciled iShares ETFs earned additional income as a result of securities lending. These lending activities helped to partially, or in some cases completely, offset the annual management fee (TER). For example, iShares delivered 40 additional basis points (bps) of performance to its EURO STOXX 50 ETF and 148 extra bps to its MSCI Turkey ETF--more than covering their TERs of 15 bps and 74 bps, respectively. With the introduction of the 60/40 split, we might see even better enhancements going forward, depending on borrowing demand and associated fees.

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About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive funds and sustainability research in Europe for Morningstar

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