Low fees are your ally as an investor, but not 100 per cent of the time.
The $19.9-billion RBC Canadian Dividend Fund is one of these exceptions. This actively managed mutual fund produced returns over the past decade that consistently tied or beat a heavyweight among index-tracking exchange-traded funds holding Canadian dividend stocks.
RBC Canadian Dividend’s management expense ratio is 1.76 per cent for the widely available Series A version, which in mutual fund terms is not unreasonable. This fund’s ETF challenger is the $1.6-billion iShares Canadian Select Dividend Index ETF (XDV-T), which has an MER of 0.55 per cent.
Low-cost index investing through ETFs, like XDV, has surged in popularity because minimizing costs is a key way to position yourself for investing success. The counter argument is that performance is what matters, not fees.
There’s no question that low fees help investors get good results. A report from indexing giant S&P Dow Jones shows that only 5.4 per cent of actively managed Canadian equity funds outperformed the S&P/TSX Composite Index over the 10 years to June 30. There’s a cost to owning the index via ETF that is not reflected in the S&P report, but it’s minimal. Low fees do matter.
But they don’t always deliver a better result. Over the 12 months to Dec. 31, RBC Canadian Dividend Series A and XDV both made 7.9 per cent. Over the three-year period, RBC Canadian Dividend made 10.8 per cent and XDV made 9.1 per cent. The two were even again for the five years, with gains of 9.4 per cent, and then diverged over the 10-year period. RBC Canadian Dividend’s 6.7-per-cent return over that time frame beat the 5.7 per cent delivered by XDV.
It’s arguably more fair to compare XDV to the Series D version of RBC Canadian Dividend, which is designed for DIY investors and has an MER of 1.04 per cent. The lower fee helped boost the one-year return to 8.7 per cent, and the five- and 10-year returns to 10.2 and 7.4 per cent, respectively.
Low-cost index investing with ETFs is a proven way to generate the investing results you need to reach your financial goals. Higher cost funds are more likely to disappoint, but there are exceptions.
One final note here concerns the MER for XDV – it’s high by index-tracking ETF standards. XDV would be more competitive if its MER was closer to, say, the 0.06 per cent charged by a sister fund, the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T).
Rob Carrick