Small ETF Fees matter more Near Findependence

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By Callum Melville, WealthRadiant.com

Special to Financial Independence Hub

Most Canadian ETF investors already know that fees matter. The harder question is how much attention they deserve.

Early in the Accumulation years, the honest answer is often less than people think. If someone has a $15,000 portfolio and is still building the habit of investing every month, the difference between a 0.06% ETF and a 0.20% ETF is not the main thing deciding their future. Saving rate, asset allocation, behaviour, and simply staying invested usually matter more.

But the math starts to feel different as a portfolio approaches retirement size.

A 0.14 percentage point fee gap sounds tiny. On $25,000, it is about $35 per year before compounding. On $1,000,000, it is about $1,400 per year before compounding. Over a long retirement or semi-retirement period, that difference can become large enough to be worth a second look.

That does not mean every investor should chase the lowest possible MER. It does mean investors near Financial Independence (Findependence) should translate fee percentages into dollars before deciding that a small-looking fee difference is irrelevant.

Why MERs are easy to ignore early on

Management Expense Ratios are strange because investors rarely pay them as a separate bill. The fee is embedded in the fund’s return. You do not log in and see a line item saying, “ETF fee paid today.”

That makes MERs easy to underweight. A 0.20% fee looks almost invisible beside the normal movement of the market. One ordinary trading day can move an equity ETF by more than the annual MER.

For newer investors, this is not always a bad thing. The biggest investing mistakes at the beginning are often behavioural: waiting too long to start, holding too much cash for no clear reason, changing strategy every few months, or building a portfolio that is too complicated to maintain.

If an All-in-One ETF helps someone invest consistently, rebalance automatically, and avoid tinkering, the slightly higher MER can be a reasonable price for simplicity. A cheap portfolio that someone cannot stick with is not really cheap.

Why fees feel different near retirement

Near Findependence, the same fee percentage applies to a much larger base.

Consider a simple example. A 0.20% MER on a $1,000,000 portfolio is roughly $2,000 per year before compounding. A 0.06% MER on the same portfolio is roughly $600 per year. The gap is about $1,400 in the first year.

That is not life-changing by itself, but it is no longer abstract. It might be a month of groceries, a short trip, part of a property tax bill, or simply money that could stay invested.

The compounding effect is what makes the check worth doing. Using a simplified 25-year projection with a 6% gross annual return, a $1,000,000 portfolio at a 0.06% MER grows to about $4.23 million. The same portfolio at a 0.20% MER grows to about $4.09 million. The difference is roughly $138,000 over 25 years.

That example is deliberately simplified. It ignores taxes, trading costs, changing returns, withdrawals, and Asset Allocation differences. Real life will not move in a smooth 6% line. But it shows why a basis-point difference that looked harmless early on can deserve attention once the portfolio is large.

What a recent Canadian ETF fee snapshot showed

I recently reviewed MERs and historical fee anchors for 30 popular Canadian-listed ETFs across Vanguard, iShares, BMO, and Global X. The goal was not to find the “best” ETF. It was to see where fees have compressed, where they remain higher, and where investors may be paying for convenience or product structure.

The broad pattern was clear:

  • Canadian total-market ETFs in the sample were extremely cheap, with VCN, XIC, and ZCN all at 0.06%.
  • S&P 500 index ETFs were also tightly clustered, with VFV, VSP, XSP, and ZSP all around 0.09%.
  • The all-in-one ETF category was more expensive, with the funds in the sample sitting roughly between 0.17% and 0.24%.
  • More specialized products, such as covered-call or sector ETFs, could be meaningfully more expensive.
  • Fee compression has not been even. Some plain index categories already look highly competitive, while other product types still carry a visible cost.

The average MER across the 30 ETFs was 0.178%, with a median of 0.140%. That is already low compared with many traditional retail mutual fund fee levels, but the spread still matters when applied to large portfolios.

For example, an all-in-one ETF charging around 0.20% may be perfectly reasonable for an investor who values simplicity. But compared with a plain Canadian equity ETF at 0.06% or an S&P 500 ETF at 0.09%, the dollar cost of convenience becomes visible as portfolio size grows.

The All-in-One ETF tradeoff

All-in-one ETFs are a good example because the fee conversation can easily become too rigid.

An investor can often build a lower-MER portfolio by holding separate Canadian, U.S., international, and bond ETFs. But the all-in-one fund handles asset allocation, rebalancing, and ongoing maintenance in one product.

That can be valuable. Retirees and near-retirees may not want more moving parts. Some investors do not want to rebalance manually. Others know that if the portfolio becomes too fiddly, they are more likely to second-guess it.

So the right question is not, “Is this ETF the cheapest?” Continue Reading…

Why Secular Trends beat Market Indicators

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Forget about market indicators–picking up on secular trends is a much better way to spot top stocks

TSInetwork.ca

Investors sometimes ask how I learned about investing and the stock market. The answer is that I started early, read a lot, and learned how to write so that readers understand what I’m saying.

I got started as a teenager, with a part-time job for an investment writer. My job was to gather and organize information on public companies and the economy. This called for a lot of reading, but I was always an avid reader.

Learning how to write easy-to-read material is also a plus. After all, you have to understand information to be able to explain it to others.

During my first full-time decade in the investing business, I learned that many factors influence market trends. Naturally, I tried to learn about or create market indicators that could tell me how these factors could help my investing. Gradually it dawned on me that most market indicators turn out to reflect the fact that random events tend to occur in bunches.

Some of these bunches are big enough and last long enough that you can mistake them for sure signs that the market is headed in a particular direction.

The four-year U.S. Presidential Election indicator is different. It’s the most valuable market indicator I know of because it takes advantage of recurring cycles in the U.S. Presidential Election cycle. It’s still far from perfect. However, you might say that every few years, it gives investors a helpful nudge in the right direction.

The four-year rule is of little interest to many investors, particularly those who are new to the game. They lack the patience for it. Over the years, I’ve talked to many young investors who seem more interested in short-term trading than in our long-term Successful Investor approach.

From their point of view, they don’t need to obsess about risk because they don’t have enough investment capital to worry about losses. They say they’ll switch to our approach when they’ve made a windfall in something that works out as they hoped. When they have more money to risk, they’ll be more careful with it.

The trouble is that since they disregard risk, they may never acquire the gains they hope for. All too often, they get sucked into one bad investment after another. These include short-term trading (particularly in so-called meme stocks), dabbling in stock options or IPOs or SPACs or cryptocurrencies or NFTs. Dabblers fail to see that the big gains in these opportunities go to those who sell them to the investing public.

Secular trends beat market indicators

In the 1980s, I lost interest in market indicators and began to focus on secular trends. These are economic trends that last longer (sometimes much longer) than the typical prosperity/recession cycle.

Back then, for instance, goldbugs were sure that federal deficit spending was responsible for the high inflation of the period. It seemed to me that they were paying too little attention to the economic changes going on, particularly the impact of the baby boomers’ entry into the workforce. When employers hired boomers, it raised costs, since these newcomers needed training (particularly women who were going to work in higher numbers than previously). Continue Reading…

Can Millennials become Financially Independent?

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Image Pixabay/iStock

By Billy and Akaisha Kaderli

Special to Financial Independence Hub

Millennials, those born roughly between 1980 and the year 2000, face a different future than Baby Boomers did at their same age. In terms of Wealth Building and saving for Retirement their challenges are wage stagnation, unemployment, underemployment and a seeming sense of entitlement. Because they came of age during the Great Recession, their faith in brokerage firms, Wall Street and global banks has been bruised.

Being optimists, we believe the financial future of this generation can still be bright, but with loads of student debt and lack of investment understanding they need to get started learning about finances and money management now.

Time is on your side and is your greatest asset

One thing Millennials have today that Boomers don’t is great stretches of time before Retirement. It is their greatest resource and this fact needs to be made clear to them. Time cannot be replaced, and if you are a Millennial, then knowing about the power of compounding will change your financial life. $10,000 – the cost of a used car – invested today in the S&P 500 Index and based on market historical returns from 1950 to March 2023 could grow to US$1,000,000 or more throughout your career, thereby building a solid foundation for your retirement needs. This return is without adding another dollar to your investment.

S&P Market Return Chart

If you do nothing else for your retirement, scrape and scrap to make this investment into SPY (S&P 500 Index ETF) or VTI (Vanguard Total Stock Market ETF) and you will be handsomely rewarded, since you have this time on your side.

Just get Started

A new investor with limited funds can utilize an online, no-frills brokerage account and — depending on which brokerage you pick —  you can open an account with less than $1,000. Not every house requires initial investments of more than $2,500, and as of this writing, Fidelity is offering a no minimum for opening an account. Continue Reading…

BMO ETFs’ third annual ETF Investor Day aimed at DIY investors

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On Tuesday, BMO ETFs conducted its third annual ETF Investor day. Conducted at the Toronto Stock Exchange, Do-it-yourself investors and finfluencers [Financial Influencers] were on hand for the ceremonial opening of the exchange, shown in the photo on the left. The Investor Day will also be held in Montreal on June 18: Details here. 

This marks BMO’s 17th year as a Canadian ETF provider, with $165 billion in Assets under management and 66 tickers  with a 10-year track record.

The first presentation was an economic and investing overview from Fred Demers, Director of Multi Asset Strategy at BMO Global Asset Management. He teased whether the R word refers to a Recession or Resilience when it comes to forecasting the economy. While the world is likely to remain messy, “the good news is the world always carries on.”

Demers is particularly bullish about the long-term prospects of the U.S. economy and the Tech giants that power innovation and in particular the A.I. Capex boom and AI infrastructure buildout. Stock markets are already seeing beyond the drama of the war in Iran, he said, led by a 12% gain YTD 2026 in Emerging Markets, 9% or so for the Nasdaq and almost 8% for the TSX, as shown in the chart below taken from the presentation.

Fixed income is not doing much of anything, which is to be expected when the economy is doing well but would show its value if a Recession got under way accompanied by Job Loss, which he said is not yet where we are. Gold has returned almost 6%, disappointing given the Middle East conflict but “still doing its thing short-term.” Its role is not to diversify equities but to diversify fixed Income.

Obviously the oil shock hurts and is a clear negative for Growth but it remains to be seen how severe it will be. Demers said Trump’s Tariffs amount to basically the equivalent of a 3% GST (a reference to Canada’s Goods & Services Tax).

He said it’s good to diversify globally but investors worried about the impact of Trump should “be careful about exiting the U.S. entirely.” The AI race is primarily between the US and China and AI Capex will keep roaring for years if not for decades. We are “not even half way through the capex cycle.” AI Capex spending has reached a “phenomenal” US $350 billion, and is on track to pass US$750 billion in 2026; the hyperscalers are planning between $1.1 and $1.2 trillion.

By contrast, AI Capex in Canada is not even $50 billion. Just ten giant American companies generate a third of the country’s economic activity. These are the big-tech titans but the U.S. economy has also become an Energy Powerhouse: the biggest oil producer in the world and net exporter of energy. Next is Saudi Arabia and Russia, with Canada in fourth and Iran is ninth. (See chart shown in the Sector section below)

Sector ETFs

The second talk was by Simona Mocuta, managing director and chief economist for State Street Investment Management (shown on the left). BMO recently launched a suite of BMO SPDR Select Sector Index ETFs with State Street and sector investing was the focus of her talk.  She started by saying she agreed with everything Fred said, drawing laughs when she said “it’s nice to see a Canadian that still likes the United States.”

BMO’s vice president of Online Distribution ETFs Zayla Saunders asked Mocuta about a SPDR energy ETF [XLE/TSX] to capitalize on surging oil and gas prices sparked by the Iran conflict. “Go for it,” Mocuta says, “Talk AI all you want but you need Energy to make it happen.” With the Iran war, the U.S. is telling Europe to buy from the U.S., which makes Energy as “compelling buy-and-hold.” The chart below is from Demers’ presentation:

Among other sectors, Technology was by far the best performer in April, Mocuta said, but there have been over the last 12 months strong inflows into Industrials, Materials and Energy.” However, investors should also consider less-loved sectors like Healthcare.

In response to an audience question about the U.S. financial sector, Mocuta said that in the medium term banks are being deregulated, which is a huge positive after the regulatory burdens imposed after the Great Financial Crisis. Continue Reading…

Dalbar’s Measure of Retail Investor Underperformance

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DALBAR/LinkedIn

By Michael J. Wiener

Special to Financial Independence Hub

Lately, I’ve heard a few references to Dalbar’s measure of how much retail investors underperform the investments they hold due to poor behaviour.  I suspect that if the people making these references understood how Dalbar calculates this measure, they’d be embarrassed at having mentioned it.  There can be legitimate academic debate about the best way to measure investor underperformance, but Dalbar’s simple method is just nonsense.

A simple example to illustrate the problem

Ann has invested in ABC fund for the past 5 years.  Her initial investment was $10,000.  Over the first 4 years, she left her investment alone and it grew 50% to $15,000.  Ann then got an inheritance of $20,000, which she put into ABC fund to give her a total of $35,000.  In the final year, ABC went up 6%.  Ann now has $37,100.

By any reasonable method of analyzing Ann’s investment behaviour, she exactly matched the performance of her fund.  She was always fully invested with the money she had available.  She never held back any funds waiting for a better entry point, and she never withdrew any money anticipating a market decline.

But let’s look at what happens when we apply Dalbar’s calculation method.  Over the 5 years, ABC fund produced a 50% total return over the first 4 years, and a 6% return in the last year.  The total return for the 5 years is then

(1 + .50) * (1 + .06) – 1 = 59%.

The compound average annual return for ABC fund is

(1 + .59) ^ (1/5) – 1 = 9.72%.

Ann invested a total of $30,000 over the 5 years.  Her total return is

$7100 / $30,000 = 23.67%

Her compound average annual return is

(1 + .2367) ^ (1/5) – 1 = 4.34%.

Ann’s annual underperformance is then

9.72% – 4.34% = 5.38%.

Apparently, Ann is a terrible investor.  According to Dalbar, Ann’s poor behaviour was in receiving her inheritance late in the 5-year period.  She should have invested the entire $30,000 5 years ago.  This is nonsense, of course, but that’s how Dalbar’s calculations work.

Telling advisors what they want to hear

To my knowledge, Dalbar doesn’t apply their methods to a single investor in this way.  They look at investors collectively across a set of funds.  However, the same problem illustrated above exists.  During any period of net inflows, investors are blamed for the returns these inflows missed at the beginning of the measurement period.  Investors are blamed for “poor timing” because they didn’t invest the money earlier.  The fact that most of them were unable to invest before they had earned the money is not considered a valid excuse. Continue Reading…