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’s no secret Canadian mutual fund fees are among the highest in the developed world. Not all mutual funds are expensive and in many cases, those hefty fees are justified by strong performance. But 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.
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 , often exceed two per cent of the total amount invested. In comparison, annual fees on market weighted exchange traded funds , which track their indices directly, are often well below half of a per cent.
The asset class ripest for closet indexing are Canadian equity funds - a staple in every retirement portfolio. The top holdings disclosed in just about every fund in the category include the same big Canadian banks, telcos and resource-related companies that make up the S&P/TSX Composite Index.
The trailer fee can vary but is normally about one per cent of the total amount invested. In a $500,000 portfolio of mutual funds the trailer fee would add up to $5,000 each year for the advisor.
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