Dale Jackson: Is your mutual fund really an overpriced ETF?
BNN Bloomberg
Data over several time periods shows the average equity mutual fund slightly underperforms its benchmark once fees are added. As if that isn’t curious enough, the holdings and weightings in many funds are strikingly similar to their benchmarks, writes Dale Jackson for BNNBloomberg.ca.
It suggests an under-the-radar practice called “closet indexing” -- when mutual fund managers claim to be actively managing the individual holdings in their portfolios but are merely duplicating the underlying index.
It allows them to post returns comparable to the index, while reaping big fees. Annual fees on equity mutual funds, expressed as the management expense ratio (MER), often exceed two per cent of the total amount invested. In comparison, annual fees on market weighted exchange traded funds (ETFs), which track their indices directly, are often well below half of a per cent.
Most Canadians save for retirement through mutual funds because they are the only way for average investors to access a diversified, professionally managed portfolio. But mutual fund fees can add up to thousands of uninvested dollars, which could have compounded into hundreds of thousands of dollars over time.
