Another reason to stick to low-fee funds

Investors tend to trail fund returns because of how often they buy and sell



Online only.


Fund investors improved their market timing according to a recent study But they still underperformed their funds by an average of 0.54 percentage points annually from 2004 through 2014.

If you’re wondering how investors can underpeform the funds they own, let me walk you through the details. It all has to do with when investors–on average–put their money into, and take it out of, their funds.

Technically speaking, the study considered the difference between time-weighted returns and dollar-weighted returns. Fund companies report time-weighted returns with the assumption being that all of the money is put into the fund at the start and then held there until the end of the period in question. However, most investors put money into, and take it out of, their funds over time. As a result, they earn dollar-weighted returns, which are also sometimes referred to as asset-weighted returns.

To see how it works, it’s useful to think through an example using a volatile fund that gains 40% in the first year, falls 50% in the second year, and climbs 50% in the third year.

An investor who puts all of their money into the fund at the start and holds it there for three years would gain 5% in total. (i.e. $1.00 grows to $1.40 in the first year, drops to $0.70 in the second, and climbs to $1.05 by the end of the third year.) In this case, the investor’s dollar-weighted return is equal to the fund’s time-weighted return because no purchases, or withdrawals, were made during the period.

The second investor puts half of their money in at the start of the first year and then invests the second half at the end of the year. By the end of year three, they would have lost 10% overall. (i.e. $0.50 grows to $0.70 by the end of the first year and then $0.50 is added to the fund. The $1.20 falls to $0.60 by the end of the second year, which then grows to $0.90 by the end of year three.) The second investor didn’t fare as well as the first due to their poorly timed purchases.

It is possible to do better than the first investor. For instance, a third investor who puts all their money into the fund at the end of the second year would walk away with a 50% gain by the end of year three.

But the study didn’t look at individual investors. Instead it calculated average results across all funds and all fund investors in the United Sates. (They also reported results by fund category.) Naturally, some individual investors fared better than average and others fared worse.

The study determined that funds sold in the U.S. gained an average of 5.75% per year based on their time-weighted returns from 2004 through to the end of 2014. But investors in those funds gained an average of 5.21% per year based on their dollar-weighted returns over the same period. That is, investor returns trailed fund returns by 0.54 percentage points per year on average.

The gap between the two returns varies depending on the period in question. For instance, the 10 year period from 2003 through 2013 saw investors trail their funds by a whopping 2.49 percentage points annually. But, generally speaking, the return gap clocks in at roughly one, or two, percentage points annually.

It is also worth highlighting that investors who hold low-fee funds tend to benefit from both higher time-weighted returns and higher dollar-weighted returns. It’s a reason to stick to low-fee funds for the long term.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of Aug. 14. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase–barring some calamity.

Name Price P/B P/E Earnings Yield Dividend Yield
Potash (POT) $34.07 2.51 15.89 6.29% 5.86%
BCE (BCE) $53.76 3.78 18.29 5.47% 4.84%
CIBC (CM) $92.05 1.96 10.48 9.54% 4.74%
National Bank (NA) $45.34 1.68 10.1 9.90% 4.59%
Bank of Montreal (BMO) $72.93 1.41 11.74 8.52% 4.50%
Shaw (SJR.B) $26.78 2.58 16.53 6.05% 4.42%
Bank of Nova Scotia (BNS) $61.49 1.59 10.69 9.35% 4.42%
TransCanada (TRP) $47.22 2 19.35 5.17% 4.40%
Rogers (RCI.B) $45.57 4.29 18.83 5.31% 4.21%
Power (POW) $29.82 1.14 8.15 12.27% 4.18%


Source: Bloomberg, Aug. 14, 2015

Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

New & Noteworthy

Stock buybacks on the chopping block

Politicians in the U.S. are eager to redirect the cash flow of public companies they don’t already control.

A Dose of Optimism

Humans are underrated

Robots aren’t going to take over–just yet.

4 comments on “Another reason to stick to low-fee funds

  1. I tried the mutual fund route paying 2% to 3% annual fees and lost thousands of dollars in months from my non-registered investments. ETF’s are lower cost about 0.5% to 0.75% annually but I don’t trust them like mutual funds but are more easily traded like individual stocks as they are similar.

    I decided to just save much more and accept a lower, long term interest rate but using compound interest to my advantage. I maxed out all my TFSA’s and RRSP’s in the last 12 months, $41,000 and $75,000 respectively. I am all caught up in TFSA, RRSP unused contributions.

    I bought provincial strip bonds that mature in 30 years and basically, my TFSA’s and RRSP’s will mature as follows, $115,078.54, $216,697.51. I am content with the $215,776.05 total compound interest I will earn over the next 30 years. They will mature when I am 53 years old. I will continue to maximize my annual RRSP’s and TFSA’s and reinvest the annual income tax refunds too.


  2. Doug, I know what you mean, I bought some of these similar provincial strip bond yields back in December, 2013 when I got 4.05% to 4.21% yields. I am too can’t sleep at night with volatile stock markets, high cost mutual funds even shopping around 1.10% to 1.75% annual fees.

    I bought many longer term provincial strip bonds and my goal was to get an average of about $18,000 a year compound interest from my RRSP’s and TFSA’s, My $207,000 in RRSP’s will become $701,730 and my TFSA $20,000 will become $67,800. When I did this I was 32 years old so at 62 these will mature with $542,530 total interest which is $18,084.33 interest per year.

    I did invest in some more of these with my remaining $20,000 in TFSA’s back in June-2015 at lower 3.45% to 3.49% yields that mature in 30 years as well at $55,488 when I am 64 years old bringing in another $35,488 total compound interest and $1,182.95 a year. There maybe another opportunity for these same yields or higher but I doubt this will be anytime soon as they are at most 3.10% to 3.15% at most these days.

    ETF’s, I looked into and see it is more similar to holding many stocks and able to trade in and out or buy, sell more easily than mutual funds that give you the end of the day unit price, market value.

    Days like today and last week I could not sleep at night and stomach losing 10%+ in a few days but that is just me.


  3. I have been waiting years for GIC rates to go up as I had my experience with mortgage funds and bond funds but I did not make more than 5 to 7 year GIC rates as I have had a 3.00%, 5 year GIC mature last week.

    I checked out the best rates and 2.5% to 2.6% were the most I found so I bit the bullet and locked in invested in a 25 year provincial strip bond with my RRSP. I got a 3.32% yield to maturity and my $50,000 RRSP will be a $113,130 RRSP when I am 58 years old.

    I do own some REIT’s in my non-registered accounts worth about $100,000 that are paying me 5% currently and has risen 10% since 2014. I see them as a good investment with medium risk.


  4. Amanda, my CFP back in 2010 helped me alot with my RRSP’s which was mainly in higher fee mortgage, bond, high yield mutual funds costing me 1.65% to 2.00% a year. I told him I was conservative and did not want much risk.

    So for a fee of $850 he drew up a small financial plan at the time as I only had RRSP’s and a decent medium mortgage balance. We also made sure that I was up to date and did my will, 2 power of attorney documents, proper insurance for my house, $200,000 life insurance policy and a regular, auto monthly savings plan of $1,000 a month,

    We also did my Basically, he split my $150,000 into many longer term Canada, provincial strip bonds, 12 to be exact which is now averaged 4.5% yield to maturity or 9.15% with compound interest by 2040. This will mature worth $561,797 when I am 62.

    He also told me how pay off my mortgage balance of $103,000 in 5 years instead of 6 years and saved me $6,000 interest by 2015. I just finished meeting with him today and for a $250 fee he should me and helped set up my unused RRSP room and TFSA room of $35,000, $41,000 into some corporate and provincial strip bonds, TD Bank, Canadian Tire Corp, Nova Scotia Power Corp, Bell Canada, Sun lIfe Financial, Intact insurance, Manulife Insurance, Telus, CIBC, Bell Aliant, BC, Hydro-Quebec, Nova Scotia, Ontario, Saskatchewan.

    He showed me that I will be making a 4.3% average yield to maturity and my $35,000 and $41,000 unused RRSP’s and TFSA’s will be worth $100,207 and $117,461 by the time I retire in 25 years by the time I am 62.

    He has determined that mutual funds and ETF’s are not suited for me but I must confess I just make sure that I have my $1,000 set aside in my 1.4% savings account and just let it build up. He did make sure that I always have 1 years of savings, $12,000 in that account which I do. I did not contribute to my RRSP’s and TFSA’s for years now.

    I know I am debt free now and based on my CFP’s financial projections, if I keep this up and I am disciplined, sticking to this, I should have $1,700,000 by retirement in 25 years.


Leave a comment

Your email address will not be published. Required fields are marked *