The Longterm Cost of Higher Management Expense Ratios (MER’s)
You’ve all heard it before from books, personal finance blogs and newspapers to keep your investment expenses low. But does it really matter if your portfolio management expense ratio is 2% instead of 0.30%? Lets take a look.
Lets assume that the ETF portfolio is a typical global index portfolio using iShares ETFs of equal weight. I realize that the portfolio can be cheaper if we used some Vanguard ETF products, but lets keep it simple for now.
- XIU 0.17% (Canadian Large Cap Index)
- XSP 0.24% (US S&P 500 Index)
- XIN 0.49% (International MSCI EAFE Index)
- XBB 0.30% (Canadian Bond Index)
- Avg: 0.30%
Lets also assume that we can put together a diversified actively managed mutual fund portfolio for a MER of 2%.
Even though we know that greater than 75% of all mutual fund managers do not beat the index, lets assume that the index ETF and the mutual fund portfolio’s have the exact same performance before fees.
Lets also go with both portfolios returning 8% before fees over 20, 25 and 30 years with $10k invested initially.
|Active Mutual Fund Portfolio||2%||8%||$32,071||$42.919||$57,435|
This just goes to show, a seemingly small MER difference can make a HUGE impact on your retirement funds over the long term. Over 30 years, reducing your annual fees by 1.7% can result in a portfolio that is 61% larger. Even if the MER difference was only 1%, over 30 years, it would result in a 21.6% disparity.
Certainly puts the management expense ratios in perspective now doesn’t it?