Most read: ETFs vs. F-Class: there’s no comparison

Most read: ETFs vs. F-Class: there’s no comparison

Most read: ETFs vs. F-Class: there’s no comparison
Rob Carrick’s November 7 article entitled ETFs a frugal choice for fee-based accounts does a good job, albeit unintentionally, of illustrating why mutual fund fees under CRM2 are going to take a massive haircut.
 
Vanguard’s Canadian arm has recently run ads comparing the difference in fees between F-class shares and ETFs using a fee-based advisor. Vanguard suggests the spread between then is as high as 112 basis points with ETFs clearly the lower-cost alternative. In this scenario Vanguard uses an F-class average MER of 1.36% compared to 0.24%, the average MER of Vanguard ETFs in Canada.
 
That’s a cavernous gap; one that needs further exploration before declaring ETFs the clear-cut winner.
To do this, WP has taken an apples-to-apples approach using an ETF/F-class comparison of two funds offered by one company following a similar investment strategy. By doing this we’ve tried to eliminate some of Vanguard’s natural bias towards low-cost funds. It’s not a criticism mind you, just an attempt to be fair to mutual fund companies.
 
In October Carrick discussed top 20 funds in Canada. From this data we found our case study.
 
Scenario

The largest fund in the country, among both mutual funds and ETFs, invests in Canadian dividend-paying stocks with above-average yields. Its F-class shares come with an MER of 0.93%. The same people behind the dividend mutual fund also sell an ETF investing in high-quality Canadian dividend-paying securities.
 
Sharing a similar investment strategy, the mutual fund has a total of 91 holdings compared to 54 for the ETF. Sure, the weightings in each fund are different, but they’re both attempting to achieve the same thing, which is to generate income and growth.
 
The big difference?
 
The ETF charges an MER of 0.44%, 49 basis points less than the mutual fund. Adding in the 1.25% advisory fee, clients purchasing the F-class mutual fund shares pay a total of 2.18% in fees annually compared to 1.69% using the ETF.  
 
If someone offered you the same exact advice at a 22% discount, what would you do?

 
11 Comments
  • Mike 2014-11-14 3:50:12 PM
    F-Class should really be referred to as F-Series, as many may interpret F-Class as a reference to Corporate Class funds which is a whole separate discussion in itself.
    Post a reply
  • Donald G. Demchuk 2014-11-14 4:06:52 PM
    Is there a corporate class ETF? As well how long will it take at 49 basis points to pay off the $5000 fee that a fee-based advisor charges.
    Post a reply
  • Bob White, CLU 2014-11-14 4:53:47 PM
    Re your comment " for the same advice".

    It is not the same advice. You did not discuss planning, you did not discuss tax issues if changes are required, which corporate class can address. You did not talk about income needs, or the correlation of ETF's. ETF's may play a role in planning, but they can not replace funds, as they can not replace stock and bond purchase, because if no stocks and bonds are sold, there will be no ETF's, as they are base on an index and if that index disappears or diminishes, then so goes the ETF.

    My issue is that too much is presented out of context or compared in an inappropriate manner, and advisor act on such information with out due consideration of cause and effect. The biggest effect is if you give up tax dollars that can never be gotten back, because you thought you would save dollars on fees.

    Any advisor worth their salt have to look at the big picture of all aspects of a clients life to determine what is the best value to them and their families and business at a given point in time and the direction their life is moving. That is the value of fees being paid, who is charging the fees, and what those fees are, are they tax deductible and if so then the net spread may not be as significant as illustrated.

    Clients who have common sense work on value for service, not on the "cheep" pitch.

    Cheers

    Bob
    Post a reply