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An entirely justified cynicism about the investment industry has prompted investors to question the fees charged on balanced ETFs.

These exchange-traded funds, also called asset allocation funds, bundle a diversified mix of underlying ETFs into a single product. You can buy balanced ETFs suited to investors who want a conservative, balanced growth and aggressive growth approach. It’s a simple, but brilliant product innovation that has pulled in billions of dollars from individual investors.

The No. 1 question I get from people researching these ETFs: Does the posted management expense ratio include the MERs for the underlying funds, or do those fees apply as well? The answer is that the posted MER includes the cost of the ETFs in the portfolio. In fact, securities regulations prohibit the duplication of MERs.

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Why are investors unclear about the duplication of MERs when it shouldn’t even be an issue? Because of the investment industry’s long history of secretiveness, even furtiveness, about fees and disclosure. ETF companies broadly do good work in fee disclosure, but they’re not perfect.

For one thing, they are clearly out of touch with their clientele in not being crystal clear that the published MER for balanced ETFs includes the cost of the underlying funds. There should be a note about this in the fee information provided in ETF profiles for investors.

Another fee issue in the ETF business is the publishing of management fees in a few cases, not MERs. The management fee accounts for the bulk of the MER, but not all of it. It’s hard to see why investors would care about the management fee on a fund – it’s the all-in MER that matters. As for ETF companies, their motivation in publishing management fees would appear to be making the cost of their products look smaller than it actually is.

Here’s another fee-related question that investors should be asking about balanced ETFs: Does the MER include a “convenience cost” that makes them more expensive than building an identical portfolio yourself using the individual funds? The answer is yes. Figure on a balanced ETF’s MER being as much as 0.1 of a percentage point higher than the aggregate cost of owning the underlying funds individually.

There’s no need to be cynical about this particular fee. In light of the fact that it helps buy you a low-cost, well-diversified portfolio that looks after itself, it’s a good value.

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