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.
