For decades, mutual funds have been a hugely popular way for Joe or Jane Canadian to own pieces of companies. For years, I thought this was a great way to invest too.
Many investors still believe in this route and I can understand why:
- Mutual funds can provide instant diversification. Many people don’t have the cash to invest individually in a large number of companies so a mutual fund allows investors to own positions in a bunch of companies. If a few of these companies don’t do well, no problem, the rest in the fund should offset poor performers.
- Mutual funds can provide built-in professional money management services. Many people don’t have the time, energy or desire to research good stocks, when to buy them, where to hold them, etc. so professionally managed money helps people in this regard. Time has always been precious in our busy world.
- Mutual funds can provide liquidity. Many people, probably everyone at some point, invariably find themselves in some financial emergency and need money for something. Shares of mutual funds can be easily sold and you can get access to the cash; especially if you kept your mutual funds outside an RRSP where tax-deferred issues don’t exist.
- Some mutual funds can be rather inexpensive to buy. No-load mutual funds exist. These funds don’t charge any fees to buy or sell units but they do have operating expenses.
There are more positives about mutual funds but there are also negatives – some mutual funds cost you money, lots of it, in the form of huge money management fees.
This is largely why I left the mutual fund industry – the costs and the fees were too much for what I needed. (Luckily there are new requirements in place to help investors make better investing decisions now – changes as part of the Client Relationship Model (CRM). Fees for performance matter.)
The reality was, I was paying FAR too much in money management fees.
I was giving up about 2% of my hard earned money in fees. This is money I would never see again. I also lost my money to the following before the switch occurred from big bank mutual funds to indexed funds: load charges to buy the funds in the first place. Load fees are basically charges to pay to get into the investing game. Crazy I did that when I think about it now…
After getting fed up about not knowing what I needed to know, after reading books, journals, blogs and more, I began to realize that most professionally managed money is at a massive disadvantage to the market’s returns – there is virtually no evidence to suggest there is any consistent stock-picking skill amongst most professional money managers over time.
With this realization I learned there was a better way to invest and I’ve built my own portfolio now:
I own some low-cost ETFs for long-term growth.
I own some dividend paying stocks for passive income.
Over the years, I’ve retained MUCH more of my money previously lost to expensive mutual fund products that could not beat any benchmark index they track.
In building my own ETF and stock portfolio, I’ve been a far wealthier investor because of it. Although my entire portfolio is not comprised of Exchange Traded Funds yet I won’t rule it out long-term.
What was your journey to lower-cost investing? Or are you still paying lots of money striving for market out performance?
Like most people, we started investing in GICs, then graduated to mutual funds at our bank before becoming serious about savings and chosing from the wider world of funds. All of this was by the self taught trial and error method but we somehow managed to end up going in the same direction as you recommend..
We have now gone one step further and put our money into the hands of a professional money manager. He is gradually moving us out of funds and etfs into directly holding a mix of bonds and dividend shares. Yes we are paying a fee for this but it is a lot less than the kind of percentage we would pay on funds or some etfs (but its considerably more than the .2% you mention)..
I don’t think there is anything wrong with professional money management as long as you have determined you are getting value for money; really – that applies for everything in life and not just financial services.
Thanks for your comment Richard.
Despite having read a lot on the subject, despite knowing the stats, I still hold on to my mutual fund portfolio.I fail to sell it off and put it all in ETFs.
Part of that is for the historical performance with relative little drawdowns in 2008 and 2011. Maybe the limited historical paper loss is a what brings peace of mind.I wonder what I will do at the next big sell off. What if the portfolio does a s bad as ETFs? What if the portfolio does as expected and has less draw down… In the latter case, It is likely that I switch then from Mutual fund to ETF and DGI. Time will tell
I think with all things being equal, most indexed ETFs should have lower fees than most indexed mutual funds, based on the cost to administer them. The re-balancing exercise is not very difficult.
This means plain vanilla indexed ETFs will, for the most part over time, outperform most mutual funds (indexed or not).
I don’t own any mutual funds and all my ETFs cost <0.20% so I’m paying next to nothing to own what I do.
Hindsight is the best indicator in finance, isn’t it? 🙂
Cheers Amber Tree,
etf’s are the new mutual funds. The differences are lower fees and you can trade them easier. If one believes diversification and getting market returns is the best way to invest than etf’s are for you.
Like Matt I prefer to pick specific stocks which will provide greater retirement income.
In some ways, yes, although some of them are MUCH CHEAPER than their former selves.
I have no short-term intention of selling 40 stocks that I own.
“For decades, mutual funds have been a hugely popular way for Joe or Jane Canadian to own pieces of companies.”
They still are (for some reason??).
ETFs have ~5% AUM market share vs. mutual funds: $90 billion vs $1.3 trillion.
Yes, the inflow into ETFs has been fast and furious, up 17.5%/yr over the last decade, but it’ll be a long while before the MF goliath is brought to its knees (MF inflows have been up 15%/yr over the last twenty years).
Interesting. I had wondered what the market share between the two were – thanks
Here you go Matt:
Here you go, a recent article about ETF inflows:
What is your reasoning for not changing all of your mutual funds to ETF’s?
Probably that I have capital gains in my non-reg. account to deal with. I also believe the CDN market is small enough to own the biggest dividend payers directly, and pay little to no money management fees other than my transaction costs to buy the stocks in the first place.
So far, my approach is working but you never know for how long:
I won’t rule out owning all ETFs eventually for portfolio simplicity.
Yes, I hold companies directly myself.
My comment was in regards to Mutual Funds vs ETF’s. But, yes, being in the capital gains trap in an unregistered account is a reason to keep holding the mutual funds. In fact, it’s the only one I can think of vs ETF or Index funds or direct stock ownership.
Remember, the capital gains is a one time cost and mutual funds are ongoing, increasing (hopefully) costs. Probably best to bite the bullet sooner rather than later.
“In fact, it’s the only one I can think of vs ETF or Index funds or direct stock ownership.”
Another reason would be performance if you’re fortunate to own Mawer mutual funds. Tough to beat their performance with ETFs.
Bernie, Mawer are great products. I wonder if their track record in the future will be as successful though?
Mawer CDN Equity – Morningstar 5-star rating.
Top stocks in this fund?
Top 25 Holdings
[Cash] – 5.2%, then:
Brookfield Asset Management Inc. Class A
Royal Bank of Canada
CCL Industries Inc. Class B
Bank of Nova Scotia
Canadian National Railway Company
Loblaw Companies Limited
Rogers Communications Inc. Class B
Constellation Software Inc.
First Capital Realty Inc.
Own most of those and likely always will.
” I wonder if their track record in the future will be as successful though?”
Tough to say but most of their funds have been light years ahead of the competition since at least 2000.
Good point. History is all we have to go on. Mawer products have a good history.
The full-passive indexing argument is convincing, especially in big markets. When it comes to Canada, however, there are a significantly larger number of active participants that outperform the market than, say, the U.S.
I agree Jason, this is why I’ve decided to slowly unbundle ETFs like XIU and XDV for my CDN portfolio. The U.S. is much harder to do that.
Sorry Matt….I wasn’t clear. I no longer hold any mutual funds. Those are long gone. I hold individual stocks non-reg., inside TFSA and RRSP. I don’t/won’t sell the non-reg. stock holdings because of capital gains right now.
I will continue to own ETFs for the foreseeable future – only the low-cost kind.
Oh, I see. I thought you were saying you still owned some mutual funds.
Nope. The “switch” began six years ago. Been done (i.e., the switch) for a few years now. No looking back 🙂
Fair point about capital gains but when you’re in a modest tax bracket, I would prefer to avoid selling anything and wait until I’m in a lower bracket to crystallize gains. If I have to – since they are an efficient form of tax.
I agree with Matt on this one. Bite the bullet, pay the tax. Then move on. Including a line “Provision for Future Taxes” when you prepare your balance sheet would mentally prepare you for the inevitable tax. By the way, this should be done for registered accounts as well.
Owning the biggest dividend payers is the best way to invest in the CDN market. I still don’t get the love for ETFs. I know you are going to yell at me “DIVERSIFICATION”, I own 32 stocks (3 large US Internationals, 23 large cap, 4 mid cap, 2 small cap CDN). I know I am not diversified. I forego mining, oil exploration, health and micro caps entirely.
I also believe owning the biggest dividend payers in CDN is the way to go. These companies are oligopolies. Sure, you could invest using XIU or XIC as well, but I’m convinced by and large in Canada – owning the top stocks in XIU or XIC is a good way to earn dividends.
Now, I think doing the same in the US and internationally is much harder, which is why I’m index investing more inside my RRSP.
I also forgo mining stocks. Too cyclical. I do own some O&G stocks and likely always will. I think healthcare stocks are a growing sector, although with healthcare REITS – I want to own more of those.
To clarify, I no longer hold any mutual funds. Only low-cost, vanilla ETFs and stocks now Matt. No bonds either.
What is your reasoning for not changing all of your mutual funds to ETF’s?
The financial products available have evolved a lot since I started investing in the 80’s. ETFs didn’t exist and stock had to be traded through a broker on a telephone. I guess my journey was mostly predicated on what was available. Heck, at one time I used to sign up for CSBs through the payroll deduction system. Haven’t done that in a looong time. Suffice to say, things change.
Lots of changes since the 80s. I haven’t been into investing since about the mid-2000s, although I have been an investor for about 20 years. I recall the touting of CSBs – funny days looking back now based on where bond yields are.