After this blogpost on my site, you can retire comfortably with less than $1 million in the bank, a few readers seemed a bit shocked by the money management fees charged by monthly income funds referenced in Gary’s article:
“Interesting “wake-up” point about fees. In the example of investing the principal of $500K in a monthly income fund, and paying $7.500 per year in fees, that’s $625 per month!!!! It would nice if that sum went into my pocket, rather than my advisor’s/the bank’s pocket. But, what is the alternative?”
Another investor rightly pointed out “most income funds don’t have any particularly special investments” so while “they do take care of some of the work for you, but there are funds that hold similar investments with much lower fees. And you can also buy many of those securities directly.”
Absolutely. Let’s take a look at some of the big bank monthly income funds and see if you see a trend.
Fund # 1 – BMO Monthly Income Fund
Fund # 2 – CIBC Monthly Income Fund
Fund # 3 – RBC Monthly Income Fund
Fund # 4 – Scotia Diversified Monthly Income Fund
Fund # 5 – TD Monthly Income Fund
What are your first impressions when you see these funds?
What holdings are the same?
What mix of stocks and bonds do you see?
Here are my quick observations:
- The Management Expense Ratios (MERs) are all over 1%. Using the RBC product as an example, this means a retiree with $100,000 initially invested in this product will pay about $1,200 in fees every year. Not so bad. However if you hold this product during retirement for 15 years you’ll pay over $31,000 in money management fees.
- Most of these monthly income funds might yield between 3%-4% per year.
- Most of these monthly income funds are made up of Canadian equities and Canadian bonds, roughly in the ratio of 40-60% equities and 30-50% bonds.
For the fees charged I think you can do better!!
- Canadian equities can be bought in the form of lower-cost, broad-market Exchange Traded Funds (ETFs) like: XIC, ZCN and VCN to name a few options. The cost is <0.20% in fees per ETF I listed. These Canadian equity ETFs and others yield between 2-3% per year. So, $100,000 invested will yield about $2,000 – $3,000 per year.
- Canadian bonds, with a mix of corporate bonds and government bonds can be bought in the form of lower-cost ETFs like: XSB, ZAG and VAB to name a few options. The cost is <0.25% in fees. Many Canadian bond ETFs yield around 2-3% but the yield to maturity is lower than that at the time of this post.
So, you could buy a mix of ZCN and ZAG for example, or go with something like an “all in one” ETF for simplicity and more diversification.
Therefore, consider ZMI.
In my opinion this ETF is outstanding for low-cost and income. The yield is consistently over 4%! It also offers a great mix of bonds and equities all-in-one without any rebalancing.
Using a couple of ETFs you can “unbundle” your expensive monthly income mutual fund.
This is especially true if you’re already holding a number of blue-chip dividend paying stocks for the long-run like I intend to OR you hold other broad-market equity products in your portfolio.
Most diversified portfolios can be built with just a few ETFs. There are other income options for retirees (annuities) but that’s another post for another day.
I think the time to ditch your pricey mutual funds is now. Lower-cost ETFs like ZMI are going to keep far more money in your pocket.
What are your thoughts on monthly income mutual funds? Do you use them? Do you use ETFs instead?