Cheap fees are the foundation of index investing, but they're not the rule.
Index investing means buying an exchange traded fund or mutual fund that delivers the return of a particular stock or bond index minus fees (net returns are reported to investors). Those fees vary a lot, depending on whether you're using ETFs or index funds.
Let's use the $773-million RBC Canadian Index Fund Series A as an example. Globeinvestor.com says its three-year annualized return is 5.8 per cent, compared to 6.6 per cent for the S&P/TSX total return index. Why such a gap? Just look to this fund's management expense ratio of 0.72 per cent.
Now check out the $1.1-billion Vanguard FTSE Canada All Cap Index ETF (VCN), which tracks a Canadian market index that is similar to the one used by the RBC fund. VCN's three-year annualized return is 6.3 per cent. The much lower MER for this ETF, at 0.06 per cent, explains the differential.
Index mutual funds have their virtues. You can buy this particular offering from RBC with as little as $500 to start, you can make subsequent investments as small as $25 and there's no cost to buy or sell. Unless you use an online broker offering free ETF trades (National Bank Direct Brokerage, Qtrade, Questrade, Scotia iTrade and Virtual Brokers offer different versions of this service), you'll pay around $10 to buy or sell and ETF. At that cost, making monthly contributions to an ETF portfolio can be prohibitively expensive in small accounts.
And let's give index mutual funds their due. Fees can be less than half what conventional equity funds charge, and this helps boost comparative performance. The average Canadian equity fund made 5.1 per cent over the past three years, a fair chunk less than RBC Canadian Index.
If it's too big a leap from index mutual funds to managing your own ETF portfolio, consider a robo-adviser. A robo firm will typically charge you an advice fee in the area of 0.5 per cent for management of a personalized ETF portfolio. Many firms build portfolios with weighted average MERs around 0.2 per cent. Add that to the advice cost and you're still a bit below index mutual funds in the fees you're paying.