Index Funds vs. Mutual Funds – Mortgage

My Mortgage Blog

Index Funds vs. Mutual Funds

Despite numerous studies showing that Canadian mutual fund fees are among the highest in the world and that actively managed mutual funds usually to perform worse than low cost index funds, many Canadians continue to invest their money in expensive funds – which is really good for bank profits but not so good for investment returns…

The equity mutual funds offered by the Canadian big banks have management expense ratios (MERs) average about 2.41 percent (some lower, some much higher). They are sold to investors to “beat the market” with professional managers trying to pick what they consider to be the best performing stocks at the most opportune time.

Index funds are designed to track a specific index, minimize fees, and deliver market returns.

The banking industry has led Canadian investors to believe that paying higher investment fees will result in superior returns for their portfolios. Yet each of the five banks Canadian Equity Funds returns from the high MER equity mutual funds lagged the returns from the same bank’s index funds, often by a wide margin (resulting in investors having 10-15% less money over 10 years).

For decades, low cost index funds, have provided higher returns when adjusted for investment risk. According to the 2019 SPIVA Canada Scorecard report, which tracks the performance of actively managed Canadian mutual funds versus that of their benchmarks, more than 75 percent of Canadian equity fund managers trailed the S&P/TSX composite index benchmark in 2018. The results get worse over time for active managers. More than nine in every 10 funds under-performed their respective benchmark over the 10-year period.

Unfortunately, index funds are not marketed very well by the financial industry, as traditional advisors and banks have little incentive to sell them to you.

The major reason why actively managed mutual funds in Canada lag their respective benchmark is fees. A deeper look at their make-up explains why. Canadian equity mutual funds are, for the most part, closet index funds. They hold the exact same stocks that make up the S&P/TSX composite index. So it is no wonder they can’t beat their benchmark index. They charge active management fees for a portfolio of index-hugging stocks. Not a great recipe for success.

You don’t have to settle for the expensive equity mutual funds recommended by your bank financial advisor!!

I offer Vanguard index funds (with average MER of 0.1%) to my clients through Wealthsimple’s investment platform – saving my clients thousands to tens of thousands in fees each year!!

Don’t let your portfolio get eaten up by unnecessary fees.  Call (or email an investment statement) to learn how you can save.