The journey to DIY investing often includes a brush with disappointing mutual funds.
This helps explain why exchange-traded funds are so popular with do-it-yourself investors. ETFs have much lower fees than mutual funds, which means less drag on their returns. Low fees aren’t everything, but they do provide a solid foundation for long-term investing success.
Even while emphasizing low fees, it’s worth keeping an open mind about mutual funds. Occasionally, they put up a strong fight against ETFs. Two examples can be found in the Canadian dividend fund category – RBC Canadian Dividend Series D and Beutel Goodman Canadian Dividend Class D. Both are worth putting on your list of candidates if you’re interested in the diversification of fund investing as opposed to choosing your own dividend stocks.
As a point of comparison, let’s use the popular iShares Canadian Select Dividend Index ETF (XDV). This $1.3-billion fund tracks 30 of the highest yielding stocks in the Dow Jones Canada Total Market Index. Six banks are in the Top 10 holdings, and the management expense ratio is reasonable – but not especially cheap – at 0.55 per cent.
XDV’s returns for periods ended Sept. 30: down 10.4 per cent for the previous 12 months, down 0.5 per cent on an average annual basis over the past three years, up 4.6 per cent annually over five years and up 5.2 per cent over 10 years.
RBC Canadian Dividend Series D is designed for DIY investors and has an MER of 1.05 per cent, which seems a bit pricey compared with XDV. The portfolio is more diverse, with 79 stocks, and there are five banks in the Top 10 holdings. There is also a small 3.5-per-cent weighting to U.S. and international stocks, which is notable because the dividends they pay would not be eligible for the dividend tax credit in taxable accounts.
Returns for this mutual fund for periods ended Sept. 30: down 9.2 per cent for the previous 12 months, up 0.5 per cent on an average annual basis over the past three years, up 4.9 per cent annually over five years and up 6.2 per cent over 10 years.
Beutel Goodman Canadian Dividend Series D has close to 12.5 per cent of its assets in U.S. and international stocks, so it won’t be as tax-efficient in non-registered accounts as the other funds covered here. Also, its MER, at 1.47 per cent, adds a lot of padding to the cost of XDV.
In other respects, this fund compares well. The portfolio includes 30 stocks and there are three banks in the Top 10 holdings. Returns for this mutual fund for periods ended Sept. 30: down 10.1 per cent for the previous 12 months, up 0.2 per cent on an average annual basis over the past three years, up 5.2 per cent annually over five years and up 7.7 per cent over 10 years.
While a low MER is huge in comparing funds (keeping in mind that past performance figures are always after fees), don’t forget to consider the cost of buying and selling. Brokerage commissions to buy and sell XDV can be as high as almost $10 a trade, while you can buy and sell RBC Canadian Dividend and Beutel Goodman Canadian Dividend at no cost. The no-commission advantage would work well for people who want to invest frequently, like every two weeks, or monthly.
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