It was once possible to invest in a small, wholesome portfolio of exchange-traded funds and see your fees going down on a regular basis.
But there’s evidence that years of fierce ETF fee competition has stalled. In some cases, fees have ticked a tiny bit higher.
For years, I have kept track of ETF costs using what began in 2015 as the Freedom 0.15 Portfolio – a small group of ETFs that provided a 60-40 stocks-bonds portfolio with a weighted average management expense ratio of 0.15 per cent. I retooled in 2018 and came up with the Freedom 0.11 Portfolio, with a weighted average MER of 0.11 per cent. Then came the Freedom 0.10 Portfolio in 2019.
Unfortunately, a Freedom 0.09 Portfolio will have to wait. While fees for bond ETFs have fallen a bit, ETFs in other core asset classes have either stayed the same or risen modestly.
In the Freedom 0.10 Portfolio, the 40-per-cent bond weighting came from the Vanguard Canadian Aggregate Bond Index ETF (VAB-T), with an MER back then of 0.09 per cent. That’s still the cost of owning VAB, but you can get an MER of 0.08 per cent with the BMO Aggregate Bond Index ETF (ZAG-T). A small win for bond ETF investors, then.
Freedom 0.10′s 20 per cent Canadian equity weighting came from the BMO S&P/TSX Capped Composite Index ETF (ZCN-T), which continues to have an MER of 0.06 per cent. A similar fee can be had with competitors such as the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T), the Vanguard FTSE Canada Index ETF (VCE-T) and the TD Canadian Equity Index ETF (TTP-T).
With an MER of 0.08 per cent, the Vanguard S&P 500 Index ETF (VFV-T) was used for 20 per cent U.S. market exposure. But today, the Vanguard Canada website shows this ETF fee at 0.09 per cent. That’s the same MER as competitors like the BMO S&P 500 Index ETF (ZSP-T).
The TD International Equity Index ETF (TPE-T), with an MER of 0.2 per cent, accounted for the Freedom 0.10 Portfolio’s final 20 per cent. TPE’s fee remains the same, with some competitors at 0.22 per cent.
ETFs remain a fantastic way for investors of all ages and profiles to build sound, simple, low-cost portfolios. But the lower-and-lower fee narrative that helped the ETF sector build support among investors has faded, at least for the core index-tracking products that best make the case for ETF investing. In fact, it’s time to start looking out for ETF fee increases.
Example of a recent stealth increase: Horizons ETFs announced at the end of last year that a longstanding rebate on the MER on the $2.4-billion Horizons S&P/TSX 60 Index ETF (HXT-T) will be reduced. The MER for HXT is 0.07 per cent, but Horizons has been rebating part of that back to investors in recent years.
The rebate for 2021 will be 0.03 of a percentage point, which reduces the actual cost of owning HXT to 0.04 per cent. Last year, a slightly larger rebate of 0.04 of a point slashed the cost to 0.03 per cent. HXT is still amazingly cheap, but not as cheap as before.
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