Dan Hallett is the director of asset management for Oakville, Ontario-based HighView Asset Management Inc.
A recent Globe and Mail article suggested that investors can improve their returns by replacing mutual funds with exchange-traded funds. This argument hinges on minimizing fees with ETFs, thereby adding fee savings (over more expensive mutual funds) to bottom line returns.
But if you think that dumping your mutual funds for ETFs is the path to riches and higher returns, think again.
The average mutual fund investor pays about 2 per cent annually in management fees, operating expenses and taxes. The average investor in TSX-traded ETFs pays closer to 0.4 per cent a year. The average potential cost savings, then, are about 1.6 per cent per annum. But this is only available to do-it-yourself (DIY) investors. Otherwise, investors who need professional advice have to pay for it either through higher product fees or fees paid to an adviser in addition to ETF expenses.
The 2 per cent average mutual fund fee generally includes compensation for advisers, whereas ETF fees do not include the cost of obtaining advice. So-called fee-based or fee-only advisers charge a fee equal to 1 per cent to 1.4 per cent of your portfolio value. Add that to ETF fees and taxes and you’ve got total annual fees of 1.5 per cent to 1.9 per cent annually. Wave goodbye to that fee advantage.
For those who need advice, there is great value in the design of a custom asset mix. In addition, selecting a handful of ETFs from among the 1000-plus trading in North America is challenging for most. But if you expect to fully benefit from low ETF fees, you’ll have to jump into the driver’s seat of your portfolio and become a DIY investor.
A problem for some DIY investors is that there is a significant barrier to realizing the full cost benefits of ETFs. In the hands of DIY investors, the ETF fee advantage usually vanishes thanks to poor portfolio construction and frequent trading.
