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.
Update: Thicken 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.