As most of you may know, mutual funds can be very expensive, especially in Canada. What do I mean by expensive? As a typical mutual fund sold by a bank involves a fund manager, s/he needs to be paid along with other associated costs. This results in a Management Expense Ratio (MER) that takes a percentage of the investment returns given to investors. The problem is that MERs can be quite large which can add quite the drag on the portfolio over the long term.
In a past article about the long term cost of a high MER, I calculated that over a 30 year period, a 1.7% difference in portfolio MER resulted in a 61% difference in portfolio size. Yes, that’s right, 61% of your total portfolio value and that’s not counting the fact that most mutual funds do not beat an index investment strategy over the long term.
However, not all mutual funds are a bad deal. In fact, using index based mutual funds with low MERs are an efficient way to invest for new and experienced investors alike. This leads into why this article was written in the first place.
A beginner investor emailed me to ask my opinion on the ING Streetwise mutual funds. She is very new to investing but already has an ING mutual fund TFSA setup. I’ve read relatively positive feedback about the funds, but lets take a closer look.
The Mutual Funds
The ING Streetwise funds keep it simple by offering three basic funds that are each all in one portfolios. Each fund is index based and with the same MER of 1.0%. What do I mean by “all in one”? Each fund is a portfolio of index equity/bonds, so there is no need to re-balance, the investor simply needs to choose the appropriate fund that suits their risk profile (ie. less risk means greater bond allocation) and buy more units when cash is available.
Although the contents of the funds are the same, the main differences lie in the equity/bond allocation to correspond to the investor risk profile. The bond portion replicates the DEX Universe Bond Index (same as iShares XBB), Canadian equity replicates the S&P/TSX 60 index (same as iShares XIU), U.S equity replicates the S&P500 (same as iShares XSP), and international equity seeks to replicate the MSCI EAFE Index (same as iShares XIN).
- Balanced Fund – This fund is likely the most popular of the three with its common 60% equity, 40% bond asset allocation. It is the middle of the road fund that will chug along over the long term. Their fact sheet indicates that along with the 60/40 allocation, they are 60% in Canada (40% of which are from the bonds and 20% equity), 20.6% U.S and 19.4% other.
- Balanced Income Fund – This fund has a higher bond allocation for those with reduced risk profiles. Although this fund will likely face lower volatility than the balanced and growth fund, safety comes at a price of lower overall long term returns (theoretically). The asset mix is 30.9% equities, 66.5% bonds, and 2.6% cash with a 80% concentration in Canada, 10.9% U.S and 9.6% other.
- Balanced Growth Fund – This fund will typically appeal to the investor with a long time horizon and higher risk appetite. The volatility will be the highest with this fund, but also the highest potential for greater returns. The asset mix is 74.7% equities, 24.3% bonds, and 1.0% cash with a 50.1% concentration in Canada, 25.8% U.S and 24.1% other.
What I Like
While the MER is similar to other index mutual funds out there, the real advantage with these funds is that they re-balanced automatically. All the investor needs to do is buy more units and the fund will take care of the rest. Compared to ETFs, these fund portfolios are great for smaller accounts as it eliminates trading commissions.
Compared to other index solutions, like the TD e-Series, although the Streetwise products are more convenient, they are more expensive. More on this in the next section.
As well, for investors with larger accounts (>$25k), these funds may not be the best choice. For an index ETF portfolio using iShares similar to the Balanced Growth Fund, the MER would average 0.30% vs 1%. The larger the account, the less the drag of low frequency trading commissions from a discount broker.
How does it Compare to TD e-Series?
Some of you may be comparing this group of funds with the popular TD e-Series. We are using the TD e-Series for our family RESP and have our portfolio setup very similarly to the Balanced Growth Fund. While the ING Balanced funds are easier to manage with no re-balancing, TD e-Series remains king with their low fees. A portfolio similar to the Balanced Growth Fund with TD e-Series has a MER of 0.42% compared to the ING product of 1.0%.
For beginner investors who have no interest in watching the market, or even re-balancing, then I have no problems with the ING fund products as they are convenient with relatively low fees, especially for small accounts. If the investor is willing to do a bit of annual re-balancing, then the TD e-Series is more cost effective. However, once a portfolio gets large enough, index ETFs are the lowest cost solution of them all.
What are your thoughts on the ING Streetwise funds?