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 U.S. S&P 500 index. Although, I’d prefer to use Canadian stock market figures, U.S. 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:  A reader, 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.


  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. 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?

  4. 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.

  5. 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.

  6. I started out with Investors Group years ago. Apparently I had signed a piece of paper acknowledging that the MER was [at the time] 3.2%. I didn't know what an MER was.

    A decade or two later, I read a blog article that declared, "Canadians will lose approx 50% of investment profits, over their lifetime, to MERs.

    What is this MER you might ask ?

    As you have precisely explained, it is not [with an MER of 3%] 3 dollars on every 100 you have is the FIRST 3% of the 6% gross you made;

    6% minus a 3% MER equals 3% OR in effect, 50% of your profits right down the drain to the 'actively managed' RRSP manager !

    This is what I did not understand; I have since made it a point to bring this up with family, friends and acquaintances over the past few years, and with one(1) single exception, all were unaware of this little fact. They all believed a 2% 'Commission (MER) means paying 2 dollars for every 100 you make.


    Actively managed fund MERs are the greatest scam ever perpetrated on mankind, next to Realty industry commissions.

    1. @T Reashore: I wish you the best of luck spreading the message. I'm trying to do the same.