Q&A With Gordon Pape: Mutual Fund MERs
Do mutual fund MERs really matter?
Q – I have a question related to mutual fund MERs. Hypothetically, let’s say there are two mutual funds in a portfolio. Fund A has a MER of 2.5 per cent and Fund B has a MER of 1.5 per cent. Both funds report exactly the same return for every year after fees and expenses. My question: In this hypothetical example why should I care about mutual fund MERs if the net return is the same? Actually, why would I care about MER at all? Should I only focus on the return? — Minh T.
A – I’m glad some people understand what I’ve been saying for years. The only number that should matter when judging mutual funds is the net return to you. If a mutual fund with a 2.5 per cent management expense ratio returns 10 per cent a year after expenses and an ETF with a 0.5 per cent MER gains just 8 per cent, which would you choose? Clearly, the mutual fund puts more money in your pocket, even if its costs are higher. This is not to suggest people should ignore costs. However, judge them against returns before deciding. – G.P.
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