What you pay in Mutual Fund Fees

Mutual Fund Fees

Management expense ratio (MER)

All mutual funds and exchange traded funds (ETFs) charge their shareholders a management 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

Mutual Funds Fees

In 2016, the number of Canadian mutual funds that focused on US stocks that outperformed the index was zero. Investors in these funds are still paying the full MER. Remember, the average management expense ratio in Canada is 2.53%
It is important to note that all rates of return are published net of fees. For example, if the fund shows a 10% return, it actually earned 12.50% but the MER was removed already. You will never see this fee as it is taken off the fund usually on a monthly basis.

Front end load

This fee comes right off your investment. For example, if you are investing $10,000 and you pay a front-end fee of 2%, you will pay $200 for the purchase and $9800 will get invested. Paying a front-end fee means you have less money at work.

Back end load

A back end load is different in that you do not have to pay anything up front. You still pay the MER usually monthly. However, the mutual fund company has locked you into a 6, 7, or 8 year time frame where, if you leave their company before a certain time, you will have to pay a penalty for leaving early. The longer you stay with the fund company, the smaller the fee. Typically, you can still move your funds around within the same company without triggering fees.

Final Thoughts

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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.
Some would argue, that for the 2.5% fee you are getting financial/tax advice from professionals, and that is fine as long as you understand what fees you are paying.

Don’t wait for retirement to enjoy life !!

Comments

    • Hi Tom,

      I had a financial advisor for years and he was extremely helpful and well worth the money. He helped me on taxes and accounting and saved me thousands of dollars over the years.
      My beef is when people get put into mutual funds for the wrong reason and watch the fees erode the portfolio without knowing how much they are paying.

  1. Steve, very helpful information. The mutual fund fees are something many people don’t pay attention to. But it could really eat a nice portion of the fund returns. And the fees add up over the years. I never tried ETFs. I just stay with the traditional low cost index funds.

    • Hi Helen,
      low cost index funds are great ! I do use ETF and I also trade them a bit in my “fun” accounts but for my retirement accounts I stick with the low cost broad index funds.

  2. With all the no-load funds, ETFs, and index funds around, it’s surprising that mutual fund fees are still so high in Canada, compared to the U.S. I guess with the majority of Canadians still holding on to mutual funds as the easy-peasy way to invest, fund companies don’t have enough incentives to slash their fees.

    • Hi Enoch,

      I am also surprised mutual fund fees haven’t reduced with the loss of market share from ETF, and index funds. The fund companies must still be making a huge profit or they would have reduced there fees by now.

  3. Nice article Steve. One thing to keep in mind is MER compounds as well as returns 🙂 I am surprised that Canadian funds have such high expense ratios. 0.33% is high for index funds.

    • Excellent point DG, the MER compounds as well as returns and over the years it sure adds up, I am surprised also that mutual fund fees haven’t been reduced with all the ETF and index options out there.

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