Mutual Funds vs ETF's
Mutual Funds and ETF’s. Which is better? A simple question, but are there ever simple answers in personal finance? Well in this case, yes actually! The only time I would recommend mutual funds over an ETF is if you don’t know how to trade, you don’t want to learn, and you are happy with paying a premium to avoid it. How much is the premium? Extensive. What is the difference between a Mutual Fund and an ETF? Let’s see.
I have attached the data sheets for a Scotiabank mutual fund, and an iShares ETF. Before I say anything about them, take a look and see what you can find.
Did you see anything? I’ll give you a hint: Check the holdings. After you check the holdings, check the management fees. On the Scotiabank sheet the fees are posted as MER %, for iShares they post it as an expense ratio.
Do you see it? The top 10 holdings for each fund are exactly the same 10 companies, with slightly different weightings. The top 10 holdings of each both make up very close to 25.5% of the total portfolio. You would have to take a closer look, but at the surface these funds are very similar. Why does it matter that they are very similar? It doesn’t. Unless you also found the fees like I mentioned. Scotiabank charges 1.07% of your portfolio in management fees per year. iShares? 0.04%. Thats over 25x the cost for a very similar looking portfolio. What are you paying 25x the cost for? The ease of being able to buy a mutual fund at your bank without having to learn or do anything. If you have a portfolio worth $100,000, you are paying over $1,000 a year for that convenience. And this is a cheap mutual fund from Scotiabank! A quick look (literally the second fund I clicked on) and I found funds with management fees as high as 2.21% annually! Scotiabank isn’t an exceptionally bad bank either, they all have fees like this. You will also have to do research to find which ETF’s to purchase, but there are a few popular ones that are widely recommended that you can learn about pretty quick. Vanguard and iShares are the two main companies providing these funds at the moment. Is this more work than mutual funds though? No. You should be doing the same research with mutual funds, it is just easier to not do it because the person selling you the funds can just say “ah yea I think this one has done good in the past” and then call it a day. If you already own mutual funds that you like and have performed well for you but lowering your management fees interest you, do what I did. Find the ETF that follows the same index as your mutual fund and has very similar holdings. The example funds here both follow the S&P500, that is why they have similar holdings.