Mutual fund companies argue that F-class shares are a reasonable alternative to ETFs. A closer look casts some doubt.
Rob Carrick’s November 7 article entitled ETFs a frugal choice for fee-based accounts does a good job, albeit unintentionally, of illustrating why mutual fund fees under CRM2 are going to take a massive haircut.
Vanguard’s Canadian arm has recently run ads comparing the difference in fees between F-class shares and ETFs using a fee-based advisor. Vanguard suggests the spread between then is as high as 112 basis points with ETFs clearly the lower-cost alternative. In this scenario Vanguard uses an F-class average MER of 1.36% compared to 0.24%, the average MER of Vanguard ETFs in Canada.
That’s a cavernous gap; one that needs further exploration before declaring ETFs the clear-cut winner.
To do this, WP has taken an apples-to-apples approach using an ETF/F-class comparison of two funds offered by one company following a similar investment strategy. By doing this we’ve tried to eliminate some of Vanguard’s natural bias towards low-cost funds. It’s not a criticism mind you, just an attempt to be fair to mutual fund companies.
In October Carrick discussed top 20 funds in Canada. From this data we found our case study.
Scenario
The largest fund in the country, among both mutual funds and ETFs, invests in Canadian dividend-paying stocks with above-average yields. Its F-class shares come with an MER of 0.93%. The same people behind the dividend mutual fund also sell an ETF investing in high-quality Canadian dividend-paying securities.
Sharing a similar investment strategy, the mutual fund has a total of 91 holdings compared to 54 for the ETF. Sure, the weightings in each fund are different, but they’re both attempting to achieve the same thing, which is to generate income and growth.
The big difference?
The ETF charges an MER of 0.44%, 49 basis points less than the mutual fund. Adding in the 1.25% advisory fee, clients purchasing the F-class mutual fund shares pay a total of 2.18% in fees annually compared to 1.69% using the ETF.
If someone offered you the same exact advice at a 22% discount, what would you do?
Vanguard’s Canadian arm has recently run ads comparing the difference in fees between F-class shares and ETFs using a fee-based advisor. Vanguard suggests the spread between then is as high as 112 basis points with ETFs clearly the lower-cost alternative. In this scenario Vanguard uses an F-class average MER of 1.36% compared to 0.24%, the average MER of Vanguard ETFs in Canada.
That’s a cavernous gap; one that needs further exploration before declaring ETFs the clear-cut winner.
To do this, WP has taken an apples-to-apples approach using an ETF/F-class comparison of two funds offered by one company following a similar investment strategy. By doing this we’ve tried to eliminate some of Vanguard’s natural bias towards low-cost funds. It’s not a criticism mind you, just an attempt to be fair to mutual fund companies.
In October Carrick discussed top 20 funds in Canada. From this data we found our case study.
Scenario
The largest fund in the country, among both mutual funds and ETFs, invests in Canadian dividend-paying stocks with above-average yields. Its F-class shares come with an MER of 0.93%. The same people behind the dividend mutual fund also sell an ETF investing in high-quality Canadian dividend-paying securities.
Sharing a similar investment strategy, the mutual fund has a total of 91 holdings compared to 54 for the ETF. Sure, the weightings in each fund are different, but they’re both attempting to achieve the same thing, which is to generate income and growth.
The big difference?
The ETF charges an MER of 0.44%, 49 basis points less than the mutual fund. Adding in the 1.25% advisory fee, clients purchasing the F-class mutual fund shares pay a total of 2.18% in fees annually compared to 1.69% using the ETF.
If someone offered you the same exact advice at a 22% discount, what would you do?
