Q: MoneySense is always promoting ETFs and other funds with low management expense ratios (MERs). But I recently purchased some mutual funds with 2.5% MERs that I think are worth the high fees. The 10-year returns average out at 8% and better. Isn’t this still a very good investment then?
A: Your new mutual fund may very well be a good investment. But it is difficult to tell without looking at the “relative return.” That is, how much better or worse your money would have done if it had been invested somewhere else, say in a Canadian equity ETF. You can go to morningstar.ca to compare your specific fund’s performance against its benchmark index. Sure, there are mutual funds with high MERs that do outperform the index, but they are the exception. The research firm Lipper found that from 1984 to 2009, the Vanguard 500 Index Fund earned an annualized return of 9.2%, outperforming two-thirds of U.S. equity mutual funds that existed during those 25 years. Data from S&P shows that Canadian funds fared even worse. The bigger the MER, the harder it is for funds to beat the index. And keep in mind that past performance is not a predictor of the future. You need to keep your eye on relative returns over the long haul.
Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal finance question? Write to us at firstname.lastname@example.org