(Mostly) updated for February 2017

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ETF Judgement

I’ll be using this ETF as an example: FTSE Canada All Cap Index ETF (VCN). It tracks the general stock market behavior of Canada, thus buying it sort of means you are buying the whole country. Remember from my other post that ETFs and mutual funds are both packages that hold multiple stocks within. Buying one share of an ETF is like buying all the stocks within it. You only really need to know a few things about them:


1. Management Expense Ratio (MER)


Like any product, a company won’t bother selling it if they can’t make a profit. The MER is how they make that profit. The total value of all shares in an ETF is called the market cap, and the ETF provider(Vanguard in our example) earns money by taking a small percentage of the total market cap. By charging a percentage rather than a flat fee per share they eliminate fluctuations that would arise from the fund changing in value as it’s bought and sold.

The MER covers all expenses related to the fund. Fund expenses include paying management, market fees, transaction fees, and company overhead. Mutual funds have to pay a manager to actively trade throughout the year, but ETFs have no such manager, and thus have one less expense. The savings are passed onto you in the form of a massively smaller MER!

Ok ok but what makes a good MER? I believe that under 0.5% is good, and under 0.1% is great. Lower is almost always better considering how small reductions in fees can mean many thousands of dollars over a lifetime. Luckily the best products with the most diversification are also the cheapest, like our VCN that supplies most of Canada for a mere 0.06% fee.

Sometimes a fund has multiple fees like the 0.05% management fee shown above. Don’t worry, you only need to know the MER, which combines all the the random fees into a total. In our example, VCN’s market cap is $264.4 million, of which Vanguard will take about $15,864,000 per year with the 0.06% MER. Seems like a lot for them to be earning in fees but for you, dear investor, you’ll only lose $6 per year on a $10,000 investment. Not to mention the average yearly return of 7%, or $700.


2. Total Returns




The total return is the percentage that your investment will rise or fall in a given time period. The normal timeframes to report are the Year-To-Date (YTD), 1 month, 3 month, 1 year, 3 year, 5 year, 10 year, and return since inception (i.e. total return since the fund was created). In the example above there are three rows:

  • Market price – the return based on the exact price you’d pay on the stock market
  • Net Asset Value (NAV) – the market price minus the fund liabilities. NAV is a fairly complex thing and for your purposes it’s irrelevant.
  • Benchmark – the expected return if you owned all the fund’s holdings directly instead of through the ETF. Theoretically if the ETF had no fees it should follow the benchmark exactly.

VCN is a relatively new ETF with an inception date in February 2013 making it 4 years old so the 5 year return is blank (such a cute little toddler ETF!). Had the ETF existed five years ago it would have roughly matched the benchmark and returned 7.3%. Therefore you can used the benchmark to estimate historic returns for new ETF products. And ETFs are all the rage right now so you better believe there will be many new ones coming.

Fun tip – Go to the performance tab on any ETF page, change the display to cumulative. and look at those juicy multi-year returns! As of this writing the benchmark returned 34% over 3 years. Had the fund existed and you had put $10,000 in, you would have roughly $13,400 today.


3. Sector Weighting




Sector weighting tells you what industries the fund invests in. VCN holds 37% in Financials, and 18.8% in Oil & Gas, and a bunch of other crap. As you can see the Canadian economy is mostly banks and oil sands. When you are buying multiple ETFs you’ll want to consider the sector weighting so you aren’t too invested in any one sector. Diversification people come on!


4. Top Country Exposure

Kinda self explanatory. VCN is 100% Canada. You can’t only invest in one country! You’ll need an international ETF to be properly diversified. I got a good one picked out for you: FTSE Developed All Cap ex North America Index ETF (VIU), lets use it from now on:


Lots of different countries here! VDU holds stock in 22 different countries. If you buy multiple international ETFs (which you shouldn’t for simplicity) make sure you aren’t too heavily invested in any one (except Canada because you get tax savings).

The ratio of country holdings is based roughly on the size of their economies and stability of the country. USA has the largest and you might as well get an ETF just for them. China is the second largest but they can be unstable and aren’t normally included. Japan is third, and has a stable economy, so they make up the largest portion of VIU above. Germany, UK, and France are fairly close and thus they make the next three.



Now you know the basics of ETF evaluation. If you’ve read up to this point I’m sure you’ll browse around some of the ETF profiles. ETFs are exploding in popularity these days and many investment companies are jumping on the bandwagon:

  • Vanguard has their V line
  • Blackrock has their iShares line
  • BMO has their BMO line
  • Horizon has their H line (side note, Horizon sells Swap ETFs which are a little different, read more here before you go buying them)

There is no “best” ETF or ETF company, it depends on you as an individual. Some ETFs pay dividends, some are very specific like US healthcare, and some target specific regions like all of Europe. As long as you invest SOMEWHERE instead of NOWHERE the differences will be marginal.


Comparing ETFs to Their Mutual Fund Counterparts


In case the title of this page didn’t give it away, I’m not a fan of mutual funds. Let me explain by comparing VCN to a similar mutual fund, IGI832 (link: Investors Core Canadian Equity Fund A), If you walked into Investors Group and asked for Canadian equity I assume they’d give you this one. They might also recommend Investors Canadian Equity Fund which seems good until you find out it holds 25% US stocks. WHY DOES A FUND THAT SAYS CANADIAN EQUITY HOLD 25% US EQUITY? Ugh, it was surprisingly difficult to find one of their funds that had CANADIAN  in the name but did not hold international funds. Even IGI832 only has 94% Canadian funds. Anyway lets compare:







 MER 0.06% 2.68%
1 Year Return  24.34%  14.89%
Management Passive Active

They aren’t identical, but they share 9/10 of the top holdings. Look at the difference in returns! The ETF beat the mutual fund by 9.45% this year! How did this happen?? Much of it is them holding slightly different stocks, but should that really account for a 9% difference? It could be three other things:

  1. Maybe the returns given on Investors Group’s website are out of date…….. checking google finance….. IGI832 returned 17.4% last year. That’s slightly better than their reported 14.89%.
  2. Mutual fund dividends are different in that they reduce the total share price but increase your number of shares, therefore you break even but google reports a lower return (since dividends on google aren’t reflected in the share price)…… checking Investors Group for distributions… 3% dividend yield. But wait, VCN has a 2% yield which is not incorporated into google’s chart either. Let’s just add the difference between the dividents. We get 18.4%.
  3. Now lets add on the MER…..adding….. we get 21.4% expected return. Why did I add the MER? because the total fund will be reduced by exactly the MER when they take their fees for the year, unlike the much smaller MER on the ETF

How to account for the last 3%? Maybe it’s because the mutual fund advisor was actively trading to enhance the return, but instead made things worse.

Lets check the funds over a longer time period with google. We will start when VCN was born in 2013:

Well that doesn’t seem so bad, with the 1% dividend difference the return would be roughly 3% less over the three years, or 1% per year. But 1% per year is not zero, multiply that by your investing lifetime of 30 or 40 years and you’re looking to reduce your savings significantly. Along with that IGI832 has a Deferred Service Charge, which means that if you want to sell your shares anytime within the first SEVEN YEARS of acquiring them you’ll have to pay an EXTRA fee that ranges from 1%-5.5%.

Sure it seems that IGI832 is only marginally worse than VCN, but along with the lack of flexibility and lower return you’re potentially missing out on thousands had you chosen VCN.

Lets check a few more ETFs compared to their nearly equivalent mutual funds:


US Equity


The USA is the worlds largest economy and you’d be right to include them in your portfolio. VFV is an ETF and the other two are mutual funds provided by Royal Bank and Investors Group. If you forgive the two drops in RBF, 10.79% and 22.28% (I’m not sure why google shows them), you get this comparison:

VFV 52.03%
RBF263 32.10% -19.93%
IGI836 37.03% -15.0%


How is there such a difference between these three funds? How does the ETF return 15-20% more over three years not including dividends? If you’ve read this far you should have an idea:

  1. FEES – The mutual funds each charge over 2% in annual fees. That’s an immediate 2% loss compared to the ETF with a 0.08% annual fee.
  2. ACTIVE TRADING – The managers of these funds clearly are not performing well. They’re making poor trades that don’t justify their own fees. If they were, the funds would be outperforming the ETF, not trailing by 20%.

Have I convinced you yet? If you had invested $10,000 in each of these three you’d have roughly $15,000 with the ETF, and $13,000 with each mutual fund. Are you okay with throwing away $2000? Yes? Then keep reading.


China Equity


“Hey the mutual fund in this example is doing better than the ETF! I’m going to disregard everything you said!” – The main point of mutual funds is to deliver returns that are higher than the index to justify the higher fees. This one is succeeding, but only in the past year has it really pulled away from the ETF. A few times in 2011 and 2013/2014 the mutual fund did better but the ETF always caught up, and there’s no reason to believe it won’t catch up again.

Before I concede defeat and start praising mutual funds lets check the underlying holdings in these two funds:

XCH (ETF) IGI565 (mutual fund)
China ETF Holdings China MutFud Holdings

I’ll save you the trouble of reading the lists: the mutual fund holds +5% more Tencent Holdings and 10% more Alibaba. Now let’s check how these two stocks did last year:


Wow! 42% and 67% gains! No wonder it outperformed the ETF! So yes, occasionally the mutual fund will perform better, but normally it’s because of a handicap like the ETF missing out on 60% gains.

Lastly, here are my three reasons to use mutual funds (yes I’m encouraging you to use them for these reasons):

  1. Niche Markets – Sometimes you can only buy into a specific market via mutual funds (or buying the stocks directly) since no ETF is available for said niche. This might change as ETFs continue to grow in popularity.
  2. Partial shares –  Mutual funds allow you to hold fractional shares as opposed to ETFs where they must be held in whole numbers. Thus if you invest with very little money (<$2000) and the share price is high (>$100) then owning a partial share will be a significant part of your investment, and the higher fees will be offset by gains from having more money investesd.
  3. Your employer gives you no choice.

Lastly-lastly, some mutual fund providers (RBC for example) offer “passive mutual funds” which are basically index funds with higher fees (normally 0.75% to 1%). Use these if you can. They’ll likely accept partial shares too.

How I Justified Losing $900 to Ditch Mutual Funds


The Deferred Sales Charge(DSC) is a fee that some mutual funds have to prevent you from prematurely selling out. The fee typically starts at 5.5% and drops every year eventually reaching zero after 7 years.

I believe that most mutual fund salesmen will talk unsuspecting clients into buying a fund with a DSC because many beginners(my former self included) don’t understand it. When I found out about DSCs I thought “there must be a good reason for it. It must give higher returns in the long run!” Nope. It’s purely for them to make money. The salesman will sometimes make a higher commission if he sells you a DSC fund. And worse, sometimes they REQUIRE you to own DSC funds.

They might claim the fee will encourage you to “buy and hold” but really the mutual fund companies are ensuring they earn money from your investment. Either from the immediate DSC, or from the MER over the 7 years it takes for the DSC to drop to zero. If there is a cash penalty to leave their company you won’t do it right? HAHA SUCKERS, I’m dumb enough to suck it up and pay the full 5.5%! Leaving Investors Group cost me around $900 because of these fees. “But Mr. Moose, why didn’t you just leave your money there until the fee drops to nothing?” Because math:

Question: With a $10,000 investment in mutual funds, is it better to lose 5.5% to the DSC up front and reinvest in cheaper ETFs? Or leave the money in the mutual fund till the DSC drops to zero? The table uses the average return of each mutual fund and each ETF to calculate the net value after 7 years of returns. If the difference is positive, the mutual fund is a better choice.

DSC Fees

The immediate loss is 5.5%, so $550. Starting with a smaller investment you can see that the ETF wins in 2/3 cases


If you own a US or Canadian equity mutual fund, it is absolutely in your favor to switch to an ETF. In this example the initial loss of $550 to exit the fund is pennies compared to the $13,000 or $2,000 I would have gained over the 7 year timeline! Of course I’m still down $534 in the Chinese funds but it may just take a few more years for the ETF to catch up.

Have I convinced you not to use mutual funds yet? Now if you look really really hard you might find a few mutual funds that outperform their equivalent ETF, but typically 80% of mutual funds will under-perform the ETF. If you still insist on using mutual funds make sure you ask if they have an index fund with a lower MER.

The only reasons to own mutual funds:

  • Investing very small amounts (<$2000) – you can avoid some transaction fees and reinvest with partial shares
  • Your employer restricts your group RSP account to mutual funds
  • You aren’t willing to put a few hours into picking ETFs
  • You aren’t willing to open a self directed investing account at a discount brokerage(If you can open a mutual fund account, you can open a self directed account)

There you have it! If you’ve read this page you likely know more than the average mutual fund owner! Investing really isn’t scary and I believe in you! Sell your mutual fund and buy ETFs, your future self will thank you.

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