Are you aware of the negative impact of fees on your investments? Even low-cost index funds or ETFs can end up costing you thousands of dollars. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode, we're going to cover four topics. I'm going to start first with what is the MER fee. Next, i'm going to talk about why are you charged a fee, and then we are going to look at the true cost of fees to you and to your investments. And then we'll look at, lastly, our topic of how you can eliminate fees in your investment portfolio. So let's get started with the first one What is the MER fee? So the MER stands for Management Expense Ratio. So here are some typical MER fees.
01:08
Now, whether you have mutual funds or index funds or ETFs, they all carry fees and different types of fees. So let's take a look at some examples here. So mutual funds typically on average anywhere from 1.5% to 3% a year. So that is calculated on the value of your portfolio, and then every year, that amount is deducted from your portfolio, and we're going to see some examples of that later on. Now there are some mutual funds that charge more than 3%, 3.5%, maybe a little more than 3%, and there's mutual funds that charge less than 1.5%, but this is sort of the ballpark typical average fees And you can see that up on the screen here. Next, we look at index funds. So typically their fees are a little bit lower and they range anywhere from 1.5% a year to 1.5% a year, and again there's index funds that have fees that are slightly higher and fees that are slightly lower than that. And lastly, we have ETFs. These are exchange traded funds And they have fees which are a little bit lower, ranging anywhere from 0.03% to 1%, and again, some of them are harder than that, some of them are lower, but that's sort of the approximate ballpark average. Now, as you know, with any of these types of funds, what they do is, when you invest in it, they take your money and then they take money from other investors and they pull that money together and they turn around and they buy stocks with it. So I've heard people say they're afraid to invest in the stock market, they don't want to buy stocks, but then they happily turn around and invest their money in mutual funds, index funds or ETFs. So if you're doing any of those investments, you are indirectly buying stocks, because that's what these funds are doing. So the only difference here with the mutual funds typically will have a portfolio manager who's responsible for managing the investment. So this person decides what to buy, when to buy it, when to sell the stocks, and so they make those decisions.
03:30
An index fund does not have a portfolio manager. This is a fund that's not actively managed. An index fund will generally buy all of the stocks in the index. So if you have an SNMP 500 index fund, it is buying 500, there's 500 stocks in the index. It's buying all the stocks in that index. Right, a small piece of it, but it buys all the stocks in the index. So the only time an index fund is going to sell a stock or buy more is when a company in the index is removed and another company is added. Otherwise the funds going to hold that. Of course they're going to buy more as more investors put money into it, but otherwise they're going to hold on to the that bucket of stocks that are in there.
04:17
An ETF is an exchange traded fund. It's kind of like an index fund, but it's traded on the stock market as a stock, so it's much more liquid. You can buy and sell during, sort of, when the stock market's open, you can buy and sell immediately like you would with a stock, and the price changes like a stock. When you look up a stock quote, you can look up a price quote for an ETF and you can see what it's worth at any time, any day. But anyway, our focus for this episode is to talk about the fees. So you can see the fees listed up on the screen here.
04:56
I'm going to give you one more example. These are some real life examples. I just pulled some of these stocks just to take a look at them online. So, for example, the first one on the list is the BMO Global Small Cap Fund. Today this fund, as of this recording, has an annual MER fee of 2.59%. The next one up on the screen is the BMO US Dollar Equity Index Fund And you can see it has a fee of 0.98%. And then we have the Vanguard SNMP 500 ETF And again you can see the fee is 0.03%. So I'm not endorsing any funds here. I'm not recommending any of these funds. These are just shown as examples of actual funds And I just wanted to show you what the fees look like.
05:48
Now, keep in mind you don't pay the fee directly, ok. So we're not talking about a front-end fee or a back-end fee that you would pay to an advisor or to a mutual fund company. We're talking specifically about the management expense ratio, the MER fee. So you don't pay the fee directly. How it works is when you invest in the fund, they will automatically, at the end of the year, deduct that fee from your investment. So let's see what that looks like.
06:20
So here I'm going to give you an example of a SNMP 500 fund, and in this example let's assume that the MER is 2%. Ok, it might seem high to most of you, but for example, in Canada the average MER is 2.2%. So we'll stick with 2% here. So let's assume the annual fee is 2% And let's assume the stock market returned last year 5%. We're just making up a number here. The stock market goes up and down every year. Some years you get a positive return, some years it loses money and you get a negative return, and some years it just breaks even and you get a 0% return. So in this example, let's say the stock market returned 5%. So let's assume the SNMP 500, the 500 companies that are in this fund By the end of the year, after one year they had a total return of 5%, which is not bad. But if you were invested in this fund in this example, your return would be actually 3% And that's what your statement would show at the end of the year. It would say here's how much money you invested and here's how much money you have left over at the end of the year. And in this example it would say you had a return of 3%. So in fact, the market returned 5%, the company deducted its 2% fee and you were left with 3%. So let's see what that looks like when we put some real numbers behind it.
07:59
So, as an example, let's say you invested $100,000 in this fund. At the end of the year you would be left with the fund. The portfolio would be worth $103,000. So you started with $100,000 investment and you ended up with $103,000. That's a 3% return. So that's what you ended up with. However, if the fee was gone, if there was no fee, you actually would have been left with $105,000. So you can see here the cost was you lost out on $2,000. You would have made more money if there was no fee.
08:39
Now let's take a look at one more example. We're going to stick with the same SNMP 500 fund. We're going to stick with the same MER 2%. But in this example, let's say, the stock market didn't have a good year, didn't have a bad year, just the return was zero. So if you invested directly into the stock market with these 500 stocks, your return would be zero. However, with this fund and the fee of 2%, your statement at the end of the year would show that you actually lost money And it would show that your return for your investment was negative 2%. So how did that happen? So what they do is they take the stock market return, which was, in this case, 0%, and then they deduct their fee and you end up with negative 2%.
09:27
Now, if we put numbers to it, we're going to