ETFs are an example of capitalism at its finest.
Intense competition between a growing number of companies has been driving fees lower for years. Now, there’s an emerging trend of funds with zero fees, or that actually pay shareholders a nominal amount.
ETFs without fees may sound great, but they’re actually a distraction designed to divert investor attention away from a few key facts:
- Many ETFs are already darn close to free: There are Canadian equity ETFs with management expense ratios as low as 0.06 per cent. That’s $6 per $10,000 invested, which is negligible. No one falls short of investing success because they paid a fee of 0.06 per cent. Bond ETFs are also cheap - some have MERs as low as 0.08 per cent. Check out the ETF portfolio-building strategy I call Freedom 0.11 because the weighted average MER is just 0.11 per cent.
- ETFs with no fees may track new, unproven indexes or follow unproven strategies: ETF investing at its finest means buying into a widely followed, well diversified, highly liquid stock or bond index. As it happens, ETFs tracking core indexes tend to be the largest funds and thus are able to charge low fees.
- Zero-fee ETFs may have fine print: Watch out for performance fees, which snap up a portion of returns that exceed a certain threshold. Also, watch out for fees that are waived only for a set period of time.
Though they’ve been around for decades, ETFs are still an upstart investment category attracting new players all the time. This explains the zero fee trend -- it’s a way to grab attention in a marketplace where most of the marketshare is accounted for by giants like Blackrock, BMO and Vanguard.
Fees are crucially important in selecting funds, but so are a variety of details that you’ll find covered in the Globe and Mail’s annual ETF Buyer’s Guide. The guide focuses on ETFs that have been around for five years or more, which means they have established themselves in up and down markets and built a track record. None of those funds have zero fees.