Investing: Avoid the Fees

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Low cost should never be the sole criterion for choosing an investment. Sometimes, superior management can overcome the handicap of a high-cost fund. But high fees add up and expense ratio should certainly be a consideration in your selection process.

It appears that more Canadians are finally figuring that out. Let’s set up a scenario to illustrate this point. In the chart to the right, I compare two mutual funds and one Exchange-Traded Fund (ETF) that invest in exactly the same securities. (Unlikely, but some funds come pretty close.) We’ll invest $10,000 in each fund and assume a constant return over 10 years, leaving sales commissions out of the mix.

After a decade, Mutual Fund A is worth $20,325, Mutual Fund B is worth $23,350 – almost 15 per cent more. And the ETF? It’s grown to $25,010 – 23 per cent more than Fund A and seven per cent ahead of Fund B.

RELATED POST: Investing on the cheap

This may explain why, in July, Vanguard Canada announced that its family of ETFs had passed the $1 billion mark in assets under management. Vanguard’s unique selling point is ultra-low costs. As of the start of this year, the company’s Canadian-domiciled ETFs had an average management expense ratio of just 0.27 per cent. That compares to an average MER of 2.03 per cent for mutual funds. Other ETF providers also offer some low-cost funds although none have across-the-board fees as cheap as Vanguard. Blackrock Canada, which dominates the industry with its iShares brand, has a few funds with MERs below 0.2 per cent including the iShares S&P/TSX 60 Index Fund (XIU), the oldest ETF in Canada, which weighs in at 0.18 per cent. The BMO S&P/TSX Capped Composite Index ETF (ZCN) is slightly cheaper at 0.17 per cent.

Gordon Pape’s new books are Money Savvy Kids and an updated edition of Tax-Free Savings Accounts, available in all bookstores as well as in electronic formats.

Zoomer magazine, Dec/Jan 2014 issue