Is Faulty Math at the Heart of the iShares Suit?
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Thursday, February 07, 2013

Is Faulty Math at the Heart of the iShares Suit?

BlackRock's iShares [profile] is being sued by a group of pension plans in Tennessee for the fees related to ETF securities-lending programs.

But what if the math underlying the suit were wrong?

That's the theory posited by Dave Nadig of IndexUniverse. The full numbers are outlined in detail within his story, but here is an analysis he made on one fund noted in the suit to make his point:
One of the funds that the lawsuit calls out as a signal example is the iShares Russell 2000 Value ETF (NYSEArca: IWN).

There’s no doubt that iShares did well lending out IWN. In fact, thanks to SEC filings, we know that BlackRock made exactly $3,258,389 in fees just from lending securities for that fund in the year ending March 31, 2012. Based on the 65/35 split, that means the fund made $6,051,294.

In that same year, the fund paid a total of $10,021,426 in investment advisory fees. In other words, the securities-lending program earned back 60 percent of the fee the fund would otherwise have paid.

He also raises the point: do the fees generate reckless behavior? Also, what kind if impact do they have on performance?

Nadig also suggests you read the suit itself.

For more of his in-depth analysis on the issue, read his IndexUniverse article.

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