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
$2,350-2,500 per year
$60-$850 per year
$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.
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.
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