Tuesday, June 3, 2008

ETF Does Not Always Mean Low Cost

Many sensible investors like index Exchange-Traded Funds (ETFs) because of the low fees charged. However, just because an investment is ETF-based doesn’t automatically mean that it is low cost.

The Wealthy Boomer posted about some new AIM Trimark ETF-based funds (the web page with this article has disappeared since the time of writing) that underscore this point. These new funds have MERs of around 2% (the management and advisory fees are 1.8%, but I wasn’t able to find out the cost of the other expenses included in MER).

The marketing for these new ETFs include “GlidePath”, “PowerShares”, “Retirement Payout Portfolios”, and other impressive-sounding phrases. But, do you really want to pay $5000 per year in fees when your portfolio gets to $250,000?

Any time a financial product becomes popular, you can count on fund companies to jump on the bandwagon. You can have products with any name you like as long as the fees are high. Just because a financial product’s description talks about indexes or ETFs doesn’t necessarily mean that its fees are low.

In my view, “low MER” means under 0.25%, and anything over 0.5% is a “high MER”. I realize that this puts almost all products into the high MER category, but that’s just the way it is. There may be good reasons for choosing to pay high MERs in some cases, but this doesn’t change the fact that the fees are high.

1 comment:

  1. I saw that article today as well and almost fell off my chair! This may be great for MFDA licensed advisors (as I think Jonathan mentioned) so they can play the "me too" card if a client asks about ETFs.

    Unfortunately those clients may not be informed enough to separate the wheat from the chaff on their own...