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Now it’s time for bond ETFs to follow their equity peers toward lower fees.Fanatic Studio

ETF companies have put on a clinic in the past couple of years showing how intense competition between big players can reduce costs for investors, but there's still work to do.

A good selection of Canadian and U.S. equity exchange-traded funds can now be had with management expense ratios of roughly 0.06 to 0.12 per and less. Crazy cheap, in other words. Now, we need a similar wave of price-cutting to be brought to bear on bond ETFs. In today's world of rock bottom bond yields, many of them seem expensive.

First, some good news. Vanguard, the low-cost U.S. fund company that ramped up fee competition when it arrived in Canada a few years ago, has a broadly diversified, all-you-need bond fund with an estimated management expense ratio of 0.13 per cent. The Vanguard Canadian Aggregate Bond Index ETF (VAB-T) is about two-thirds weighted to government bonds, with the rest in corporates. It's investment grade all the way and has an after-yield to maturity of about 1.5 per cent. Sure, that's low. But you're at least getting both modest yield and hedging against a stock market crash at a fair price.

Comparable bond ETFs to VAB have published MERs ranging from 0.23 per cent to 0.33 per cent, which would pass without comment if bond yields were higher than they are now. Yields will rise eventually, but there's little upward pressure thanks to mild inflation levels. That's why it's now time for ETF companies to do with bond ETFs what they did with U.S. and Canadian equity funds. Take the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T), with a management expense ratio of about 0.06 per cent. A few years back, this and other ETFs like it had MERs in the 0.25 per cent range. A three-way duel on fees between BMO, iShares and Vanguard is responsible for the decline.

U.S. equity ETFs used to be in the 0.25 per cent range or more. Today, they're in the 0.10 to 0.12 per cent range not only for plain-vanilla S&P 500 ETFs, but also for total market funds that wrap small, medium and large stocks together.

Investors, you have to do your part to encourage lower bond ETF fees. Check what you're paying and compare it to the competition. I'll do my part by covering bond ETFs in the next instalment of my updated ETF Buyer's Guide. Here's the first instalment on Canadian equity ETFs, and the second on U.S. equity funds.

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