Management Expense Ratio (MER)

Friday I read an article at GenYMoney Don’t Be Afraid of DIY Investing: It’s Really Not That Scary about her sister and a nice mutual fund lady and then Saturday morning on A Greater Fool Big Alpha Garth turner wrote an article on how Canadians own $1,467,000,000,000 in High cost mutual funds. Both excellent reads. I thought I would do a breakdown of the cost of MER on your portfolio’s.

When I started investing in the early 90’s we started investing in mutual funds.  IN THE BEGINING  there was very little talk about index or ETFs. Later as our portfolio grew we switched to a more passive/cheaper couch potato portfolio. My Portfolio Structure.

Management expense ratio in Canada (MER)

All mutual funds and exchange traded funds (ETFs) charge their shareholders an expense ratio to cover the fund’s total annual operating expenses. This can include costs such as administrative, compliance, distribution, management, marketing, shareholder services, record-keeping fees and other costs.

You can expect to pay in Canada

Equity mutual funds is 2.35%-2.5% for actively managed funds.
Low cost ETFs 0.06% and for the fancy Hybrid ETFs up to 0.85%.
Index funds MER 0.33% up to 0.72%

What this means for a $100 000 portfolio

Mutual funds
$2,350-2,500 per year
ETFs
$60-$850 per year
Index investor
$330-$720 per year

Final Thoughts

As you can see MER can make a significant difference to your portfolio performance over the years. With ETF investing there is a cost per trade and that can add up to significant dollars especially with a small portfolio or if you do monthly contributions. Index funds work well for investors with smaller accounts (under $100,000) since you do not have to pay transaction fees per trade and can easily make small monthly contributions.

 

Comments

  1. Steve, I read and enjoyed GYM’s article too. Similar to you Steve, I started my investing in the late 80s/early 90s when open end mutual funds were really coming of age. When the US tax laws changed in 2004 lowering the top rate on dividends, I became a dividend stock investor. I now supplement my holdings with ETFs. I do think, however, that traditional mutual funds can still have a place in one’s investment portfolio. Some funds get at areas in the market I’m just not capable of and I think active management can add value there too. For example, small cap international stocks. As with anything though, let the buyer beware.

    My point here is this (and I know I’m singing to the choir). With a little effort, an investor can build an extremely low cost portfolio of stocks and ETFs. Going back to your post a couple days ago where Bob Brown gave his forecast for equity returns of about 6% (3.2% after tax and inflation), if you give up another 2%+ in expense ratio, an investor might as well put their money in long term certificates of deposit and eliminate risk. Tom

    • Tom, I kept one of my Global equity mutual funds for a few years after I switched to an ETF portfolio. I liked the fund manager(brilliant guy) and the fund consistently performed well. I eventually sold and moved to an international ETF.. I have not done a comparison to see which out performed , it would be an interesting comparison. (Active vs passive after fees) Thanks for the comment Tom

  2. Mutual funds in Canada have ridiculously high fees compared to their counterparts in the U.S. Hopefully, increased competition and choices will continue to put a downward pressure on fees, and by extension an increase in the returns experienced by the average investor.

    • Hi Enoch, the fees are ridiculous in Canada, I have been waiting a long time for price competition and lower fees especially compared to the US mutual fund MER. That will eventually happen as more people start investing in ETF and index funds.

  3. Expenses can be a killer to any investment class, stocks, bonds, real estate. Painful to see some people get into such bad products. Front end load fee plus large expense ratios and high turnover ahhhhh!

    • Yes your right DM, all asset classes that have high fees can make huge difference in your portfolio. Thanks for stopping by.

  4. Awe thank you so much for the mention!! 🙂 🙂 🙂
    I didn’t know that mutual funds are higher in Canada than the US, but I do know that they are very high. Most people don’t realize that it eats into their returns.
    With the expected rate of return at a modest 5-6% and funds being 2-2.5% and inflation being 2-3% you’re not left with very much at the end of the day.

    • Your welcome GYM. I just googled US mutual fund MER and the average is 1-1.5% but there seems to be some hidden cost with some equity funds. But to your point after costs,inflation and taxes there isn’t much left.

Leave a Reply

Your email address will not be published. Required fields are marked *