Me and My Money

Index mutual funds are cheap and accessible.

Posted November 25, 2011
Originally Published June 20, 2011

Are you sick of mutual funds? Are you weary of the confusion, wretched statements and lack of transparency about fees and returns? If so you might be ready for mutual fund divorce. On the other hand, you might not be ready to give up the convenience mutual funds offer.

The argument for investing in mutual funds has always been that they provide you with professional money management and advice and allow you to invest relatively small amounts easily and cheaply.

The easy part is true. The cheaply part, not so much. In fact, fees for Canadian mutual funds are among the highest in the world. And those fees, both management fees (MERs) and sales commissions (front end loads and deferred sales charges) create a huge drag on return.

Depending on which research study or analyst you quote, anywhere from 65 to 80 percent of mutual funds fail to meet or beat their benchmark index. And this is directly attributable to those fees I mentioned.

As concerns mount about the performance of their mutual funds, investors are increasingly turning to ultra low fee exchange traded funds (ETFs). However, they aren’t for everyone.

If you have a small amount of money to contribute to an RRSP or other investment account, buying a basket of ETFs monthly or even quarterly can run up a hefty trading fee bill. Even those who qualify for new, lower trading fees ($6.95 to $9.95 at most discount brokerages when you have $50,000 to $100,000 of combined business and deposits with the bank) will still pay too much in transaction costs to make regular, small ETF purchases worthwhile.

Fortunately, there is an ETF-like alternative -- index mutual funds. Fifteen years ago, passive or index investing hadn’t caught on with mutual funds, by and large. But today there are a number of funds that are strictly passive and do no more than replicate the performance of a given index.

These are great products for those investing small amounts monthly or who don’t have an advisor. Index mutual funds are also good choices for investors who understand themselves well enough to know they will never want to be bothered by the slightly more work and slightly more math involved in managing an ETF portfolio.

Index mutual funds are also convenient – that siren call of mutual funds. You can set up a monthly investment program, arrange the transfer of funds from your chequing account and the work is finished. Interest income and dividends are automatically re-invested for you so you don’t even have that bit of housekeeping to worry about.

“Index mutual funds are good for those who are looking for something that is very accessible and doesn’t cost a lot,” notes Dan Hallett director of asset management services with HighView Financial Group in Oakville, Ontario. “I also like them because you’re not going to be susceptible to all the slicing and dicing that happens in the ETF world.”

Hallett’s last point refers to the ballooning world of ETFs that allow you to bet on the price of natural gas, the direction of currencies or very narrow segments of the market.

Index mutual funds aren’t as cheap as ETFs. Management expense fees (MERs) range from a low of .32 per cent to over 1 per cent. ETF fees, in comparison, start as low as .15 per cent with a large variety available for less than .60 per cent. On the other hand, the average MER for mutual funds is between 2.25 and 2.5 per cent.

I ran a screen to select Canadian equity index mutual funds filtering out any with MERs in excess of 1 per cent, load funds and those that required monthly investments (after an initial purchase) of more than $100 monthly. I also specified that the funds had to have a rating of three stars or better from morningstar.ca.

Only five funds fit the bill (see the table for results.) “There isn’t as much variety with index mutual funds but, trust me, that’s a blessing,” says Hallett. “You really only need one fund for Canada, one for the US, one for overseas, one for bonds and boom, you’re done.”

Having fewer products means getting to that “boom you’re done” point is a whole lot easier.

Index Mutual Fund Index Tracked MER Initial/Subsequent Investment
TD Canadian Index-e S&P/TSX Composite 0.32 percent $100/$100
Altamira Canadian Index S&P/TSX 60 0.64 percent $500/$25
RBC Canadian Index S&P/TSX Composite 0.70 percent $1000/$25
TD Canadian Index S&P/TSX Composite 0.86 percent $100/$100
Scotia Canadian Index S&P/TSX Composite 0.99 percent $1000/$50


The hands down winner in the Canadian index mutual funds category is TD Canadian Index-e. This fund tracks the S&PTSX Composite index and has a skinny MER of .32 per cent. The catch is you must have an investment account at TD Canada Trust. However, there is a higher MER version, (.86 per cent) which can be purchased through any brokerage.

Altamira Canadian Index and RBC Canadian Index are next best alternatives to the TD e-series funds, the downside being a higher initial investment. But both are appealing for the very low subsequent investment amount of $25, which is helpful to those just starting out.

Next week I’ll give you the results of my U.S., global and bond index mutual fund search.

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