Often criticized as a high-cost investing option, the mutual fund industry has impressively lowered its costs over the past 10 years.
The average asset-weighted management expense ratio for all mutual funds designed to be held for the long term fell to 1.47 per cent from 2.06 per cent between 2013 and 2023, says a study of the mutual fund industry by the Conference Board of Canada. That’s a significant improvement, even if it still leaves mutual funds well above the asset-weighted average MER of 0.32 per cent for exchange-traded funds as of last year. Asset-weighted numbers mean the funds with the most assets have the biggest influence on the data.
Consider these numbers a definitive illustration of how much cheaper ETFs can be than mutual funds. Of all the things you can do as an investor to position yourself for good long-term results, keeping fees under control is one of the most worthwhile. But there are some nuances to ETF and mutual fund fees that must be considered.
One is that mutual fund MERs include a large component covering the cost of advice and service, whereas ETF fees do not. In theory, mutual funds come packaged with the services of an adviser, whereas you’re all on your own with ETFs. In reality, there are situations where mutual funds are sold by people whose job it is to sell products rather than advise.
There has been a long-standing trend in the advice business of moving clients to fee-based accounts where an all-inclusive percentage of assets is charged, typically 1 to 2 per cent. In these kinds of accounts, advisers use F-class mutual funds with advice fees stripped out to prevent “double-dipping.”
The Conference Board of Canada report says the average asset-weighted MER for mutual funds meant for fee-based accounts fell to 0.89 per cent from 1.05 per cent over the past 10 years. For the most accurate comparison of mutual funds with ETFs, these are the best numbers to use.
One more nuance in this comparison is the cost of buying and selling. Mutual funds are typically sold with no buy or sell commissions these days, but some online brokers charge as much as $9.99 to trade ETFs. You can duck these costs as an ETF investor by using trading apps or brokers that offer free trading of stocks and ETFs, free ETF purchases only or a limited menu of commission-free ETFs.
One more thing to consider in weighing ETF and mutual fund fees is the value of advice. Paying an adviser through a fee-based account, or through mutual fund fees, is worth every dollar if it reduces your money stress, saves you time and drives your success in meeting financial goals.