Thursday, December 17, 2009

MER Drag on Returns in Pictures

This blog has featured many attempts to explain the damage that investing fees, primarily MERs on mutual funds and ETFs, can have on your savings. This latest effort uses a picture.

This picture makes use of Robert Schiller’s monthly historical data on the US S&P 500 index. Although, I’d prefer to use Canadian stock market figures, US figures are easier to get, and the results would look much the same for Canadian stocks. I traced the path of a $10,000 investment 50 years ago under three different conditions:

1. The money follows the S&P 500 with dividends. We track real returns, meaning that the effect of inflation is factored out.

2. The money follows the S&P 500 with dividends less MER fees of 0.17% per year. This is the MER level of the widely-popular iShares large capitalization index of Canadian stocks (XIU).

3. The money follows the S&P 500 with dividends less MER fees of 2.5% per year. This is the MER level of a typical Canadian stock mutual fund.

Here are the results:

As the chart shows, a 0.17% MER ETF tracks its index fairly closely, even over 50 years. However, the 2.5% MER has decimated returns. The final portfolio value is less than one-third of the value for the lower MER.

Although a percentage like 2.5% sounds like a small figure, it gets deducted from the same portfolio year are year and eventually adds up. Like the flow of water slowly carving a groove in rock, MER costs slowly carve away a big chunk of your savings.

UpdateThicken My Wallet asked what the chart would look like if the MER were set at 1%, which is the fee level set by many newly-issued ETFs.  Ask and ye shall receive:

As we can see, the 1% MER took quite a bite.  The final portfolio value is more than 1/3 less than in the 0.17% MER case.  Even fractions of a percentage point matter over an investing lifetime.


  1. Michael, I just don't see a future for you in mutual fund marketing. That chart is scary.

  2. Gene: Maybe mutual funds could pay me to not talk to their customers :-)

  3. I would like to see that chart at 1.0% which is what some of the newly issued ETFs are charging.

  4. Thicken: Good question. I updated the post with the answer.

  5. Thanks. I don't think Invesco Trimark will be sending you a holiday card this year!

    Best for the season!

  6. Exactly... many investors can create their own diversified portfolio and save the fees.

  7. Great post Michael!

    What is a 'small' 2% fees after all? Every serious investor should be able to answer the following question: how much does it cost to manage my money and how will that affect my returns?

  8. Anonymous: I'd like to see MER fees reported as fees charged per decade or even better, 25 years. The percentages would look bigger and would better reflect the real cost to long-term investors.

  9. 2 per cent cost vs. seventy-five per cent cost. This should be above the fold on every fee-for-service advisor's site. Thanks for this.