Mackenzie Financial’s marketing brochure “I thought I wanted an ETF” purports to clear up some of the assertions surrounding Exchange-Traded Funds but instead turns out to be an easily-ridiculed piece of propaganda. The brochure clarifies the following assertions about ETFs:

Price: It is galling to hear a purveyor of pricey mutual funds point out that ETFs have “hidden” costs such as transaction fees and cost of advice. Pot calling a kettle black comes to mind. An example is trotted out showing how an investor buying $1,500 worth of a 0.70% MER ETF and paying $24 in trading commissions ends up paying a total cost of 2.30%. The implication is clear: “And you thought our 2.50% fee for doing some real work is too much!”

I’m amazed that Mackenzie didn’t come up with the example of a client buying $100 worth of ETFs every month and paying $24 in trading commissions. It would have allowed them to go for the see-how-reasonable-our-fees-are angle.

Let’s talk real numbers, not made up examples. I’m mostly invested in ETFs. The weighted average MER of the funds is 0.22%. Trading commissions cost another 0.10% to 0.20% every year. I don’t pay for investment advice but even if it costs another 1%, the total cost is still a full percentage point less than Mackenzie’s mutual funds.

Performance: Claiming active strategies provide investors an opportunity to outperform is a bit like saying lottery tickets provide players a chance to become millionaires. Of course, they do. The question is what are the odds? John Bogle estimates that the odds of an active fund outperforming its benchmark are 15% over 5 years, 9% over 10 years and 5% over 25 years. Better than lotteries would be a charitable way of characterizing those odds.

Interestingly, the brochure features a table showing 8 out of 10 global equity funds outperforming the index in the 10-year period to July 31, 2009. We’ve discussed this table at length in an earlier post on Active Management versus Index Shootout. I won’t rehash the arguments again but suffice it to say that such “evidence” should be treated with caution.

We’ll look at Transparency, Tax Efficiency and Diversification in future posts. You may be interested in Larry MacDonald’s and Jon Chevreau’s take on this subject.

You can find Part 2 of this post here.

This article has 13 comments

  1. Charles in Vancouver

    Good old survivorship bias regarding those global equity mutual funds.

    Hey, I’m curious though, how would one go about locating the 10 largest global equity funds from roughly 10 years ago? And then to track which ones were terminated, which ones were merged into others, and overall how an investor would have done in those funds.

  2. Nice article. It would seem that going with an actively managed fund would result in taking a big risk at under performing the market and having a larger chunk of earnings taken by MERs.

    One thing you didn’t mention is the Trading comission is one time cost. If it’s $24 for that $1,500 you are putting into the ETF and you keep the ETF for 10 years, the cost is down to $2.40/year or 0.16%. So an ETF thats kept for a long time has it’s costs dropping and getting closer to the limit of the MER, if you include the trading comission cost of aquisition, whre as the actively traded mutual fund is up at 2.3% every year.

    Even if it costs another $24 to sell at the end of the 10 years, the cost per year would have been 0.32% per year, with the MER of 0.70% per year the total cost per year is 1.02% still way less then Mackenzie’s mutual fund MERs.

    You have a great blog here.



  3. Aw shucks, saw your headline then figured they had hit back by lowering their fees.

  4. Canadian Capitalist

    @Charles: It is interesting to see that the “10 Largest Funds” table is already different between Jan. 31, 2009 and July 31, 2009. It is not clear to me which funds the 8th and 10th Largest competitor refers to. But Dynamic Global Value (#9 in the July 31st list) did not show up in the Jan 31st list. Unfortunately, I don’t have access to a database of largest funds 10 years ago. It would certainly be an interesting exercise.

    @Jason: We’ve discussed amortizing trading costs many times, so I skipped it for the sake of brevity. Instead of tracking trading costs of each ETF separately, I calculate it as:

    trading expenses = total trading costs of portfolio / year-end market value of portfolio

    It gives a rough idea of the impact of trading commissions on the portfolio.

  5. Another curious person here: Do you folks practise buy and hold with the mainstream ETFs, and then play with the more specialized ones?

  6. One of my pet peeves is that Cundill Value uses the wrong benchmark. Cundill Value invests in emerging market stocks as well as developed market stocks. Since the 2003 launch of MSCI All Country World Index (ACWI) that includes both developed and emerging markets, Cundill Value’s benchmark should have been changed from MSCI World Index (no emerging market stocks) to MSCI ACWI (emerging market stocks included.

    My gut feeling is that Cundill Value underperforms MSCI ACWI in Canadian dollars, since emerging markets performed really well in the last few years.

  7. Canadian Capitalist

    @Henry: According to MSCI, the All-Country World Index (ACWI) returned -1.07% in USD over the 10-year period to July 31, 2009. MSCI World Index returned -1.66% in USD over the same time period. The ACWI did better than MSCI World but not that much better.

    But I agree with your point. As Cundill holds emerging market equities, the benchmark to be used should be MSCI ACWI.

    @Matt: I avoid the specialized ETFs.

    @CanadianInvestor: I suppose it is easier spreading misinformation than actually competing by cutting fees.

  8. The benchmarks should be those indexes in CANADIAN dollars since that is the currency the Canadian funds have to report in.

    The alternative strategy is to look at the US$ versions of the funds and compare those to the US$ version sof the benchmark.

    This is something Morningstar and Globefund haven’t really figured out yet since they give the Canadian $ and US$ versions of the same fund different rankings.

    It is very tough to find MSCI data in Canadian dollars – you can make it your self of course but that is time consuming.

  9. CC: I am really surprised that the Emerging Market stocks did not improve ACWI returns significantly. I guess that market timing must be used with Emerging Market stocks.

    Rob: I have no idea how to find MSCI data in Canadian dollars. I don’t understand why Morningstar and Globefund do not provide MSCI ACWI in CAD.

  10. Here’s another “real-world” example: I pay an average MER of 0.20% and $5 a trade . The chance of Mackenzie outperforming the index by well over 2% per year in the long run to make up for their 2.50% MER, is, well, let’s just call it ZERO.

  11. exactly mj, I agree 100%.. It’s kind of easy to make examples with 25$ commissions and monthly trades..

    I had published this 5 year return comparison between Index, ETF and mutual fund (on TSX60.. which is a lot easier to follow than MSCI world indexes)..

    Index: SPTSX60 = 56.73%
    ETF: XIU = 55.70%
    Mut fund: ALTAMIRA = 52.80%

    check out more at:

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