Comparing rates of return

If a mutual fund’s rate of return is 4% and an ETF’s is 4%, are they equal?

  0

by

Online only.

  0

Click here to see more personal finance questions answered.

Q: I get confused when comparing rates of return. If a mutual fund’s rate of return is 4% and an ETF’s is 4%, are they equal? I understand that ETFs have lower fees, but aren’t both posted rates net of fees?

—Patrick Fisher, Victoria

A: Comparing apples to apples isn’t easy when it comes to investment products. You’re right that the rates of return for most mutual funds and ETFs are net of fees. But you need to factor in how you pay for the products you invest in and the services that may come alongside those products.

Research and Statistics Manager at Investment Funds Institute of Canada, Alykhan Surani explains, “mutual fund returns include the trailer fee paid to the dealer for fund distribution and advice. Most ETFs don’t include a trailer fee and, if purchased through an advisor, the advice and distribution charges are paid separately and not reflected in the posted rate of return.” For example, a fee-based advisor, using ETFs, might charge a fee between 1% and 1.5% of the assets under management; a cost that impacts the performance of the portfolio, but not the performance of the ETF itself.

Then there are the trading costs. Even if you buy ETFs through a discount broker that has low transaction fees, these fees aren’t included in the posted return.

One rudimentary and imperfect way to compare mutual funds and ETFs is to go to Morningstar.ca and compare each fund to the relevant benchmark index over a long period of time, say five to 10 years. If the mutual fund is more than 1% below the index, the associated ETF probably did better because of its lower MER. Remember to compare a fund to an ETF that is in the same asset class and region.

The reality, however, is that based on pure performance it’s difficult for an actively managed mutual fund to do as well as its benchmark over longer periods of time, as multiple studies have illustrated. But advisors justify that gap based on the advice, financial planning and client services they provide. A bowl of freshly prepared fruit salad will cost more than an apple from the supermarket, and it’s up to you to decide whether the cost is worth the benefit.

We are considering taking a capital loss on an underperforming stock and using it to offset capital gains. The suggestion is to buy a similar stock, but not the identical stock. But is there anything stopping us from buying the identical stock in a spousal investment account?

Ask Bruce: Leave a question for Bruce Sellery »

Leave a comment

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