Exchange traded funds continue to grow in popularity and that’s making life difficult for Canada’s mutual fund industry.
ETFs outsold mutual funds in Canada last year for the first time in a decade and the trend looks set to continue.
In the first five months of 2019, ETFs had net inflows of $10.4 billion compared to $4.9 billion for mutual funds, according to Strategic Insight data reported in the Globe and Mail. In 2018, ETFs had net inflows of $19.8 billion compared with net outflows of $2.7 billion for mutual funds.
What’s behind the trend? ETFs, which trade on exchanges like stocks, charge very low management fees compared to mutual funds. Passively managed ETFs in Canada had an average management expense ratio of just .24% in 2018, according to PWL’s Passive Vs. Active Fund Monitor, authored by PWL Research Director Raymond Kerzérho. That compares to .74% for passively managed mutual funds and 1.73% for actively managed mutual funds.
As you may know, Canadian mutual funds charge some of the highest management fees in the world, despite the fact that most actively managed funds fail to beat the index in any given year. It’s clear from the surging sales of ETFs that investors are finally getting savvy about fees and the wealth destroying impact they can have over the long term.
To give you an idea of that impact, Raymond calculated that a 1% MER difference that brings your returns on a $100,000 investment from 5% to 4% would cost you a whopping $72,000 in lost wealth over 25 years.
However, despite the rapid growth in ETF sales, mutual funds still dominate the investment scene in Canada. The $178.6 billion invested in ETFs is dwarfed by $1.5 trillion in mutual funds. In the U.S., ETFs have made more ground against mutual funds with $3.4 trillion in assets compared to $18.7 trillion in mutual funds at the end of 2018, according to data reported in the Wall Street Journal.
It’s a similar story when you look at the broad categories of actively versus passively managed funds, whether they be ETFs or mutual funds. PWL’s fund monitor shows that passive funds in Canada had a 10.5% market share in 2018, a far cry from their 37% market share in the U.S.
It’s not hard to find the reason for the discrepancies between the two countries. In Canada, the sale of investment products is dominated by the big banks. The banks push inhouse actively managed mutual funds that generate higher profit margins.
Indeed, many mutual fund salespeople in banks and other firms can’t trade ETFs even if they wanted to because their IT platform doesn’t support them, the Globe reports.
At PWL, we understand how important low management fees are to long-term investment returns and wealth creation. That’s why we build portfolios using passively managed funds that are mostly ETFs.
When it comes to investment products, it’s good to know we’re ahead of the parade.