Canadians love their banks so much that they are prepared to subsidize them.

US health care consumes 17% of GDP compared with the Canadian healthcare system that consumes only 11% of GDP, yet Americans have a worse life expectancy than most developed countries1. Strange then, that the US is a leader in stripping out unnecessary costs for investors, leaving Canada in the dust.

The latest data from Morningstar Inc, an investment research firm, lists the top 25 US best selling funds (mutual funds & ETFs) in the 12 months ending Feb 2015:

  • Of the top 25 funds, not one uses an active manager to pick US stocks.
  • Out of every dollar invested in the top 25 funds, 73 cents went to passive or index linked investments funds.
  • Vanguard Group Inc., founded on the principles of passive investing, has now become the US’s largest fund company.

According to data from Vanguard, Canadian total assets invested in index strategies account for only 17% of equity funds, compared with 35% in the US. Funds with active managers have fallen out of favour in the US for a simple reason that their high costs are not justified by their performance. The Vanguard report comes to the same conclusion for Canadian funds as other researchers when it states:

“… a majority of actively managed funds underperformed the average low-cost index fund across investment categories and time periods”

A study published in 2014 estimated the total annual fee paid by the average Canadian investor using an advisor to be 2.7% of assets. Allowing 1% for an advisor fee and 0.35% for ETF/index fund fees suggests a saving of 1.35% annually for investors moving away from active management. This looks like a small number but consider that the size of the Canadian retail sector is $876 billion and that 80% of these assets reside in advisor directed accounts. What then if Canadian investors woke up tomorrow, followed their US cousins and directed their advisors to put 35% of their assets into passive investments? The savings would be $1.70 billion per year and their investment performance would improve.

Unfortunately Canada’s sleep walking seems likely to continue: 90% of all retail investments in Canada are made through Canadian banks. These same banks also own a large chunk of the Canadian active fund industry and, based on 2013 data, 57% of all investments Canadians made through their banks went into bank owned funds. Thus it seems reasonable to assume that at least 57% of the $1.70 billion in savings would be at the expense of Canadian banks (a subsidy of $969 million) with the other $731 million in savings at the expense of other Canadian active fund managers.

If these numbers make you feel queasy, then remember cost effective health care is available to all Canadians.

 

1 See article