It is no news that Canadian investors have been being screwed by their investment industry: average MER for a mutual fund in Canada is 2.5% and don’t even get me started on the $29.99 brokerage fees. Somehow Canadians are quite content and even a little suspicious of some of the fees we see south of the border. One of the extreme examples would be Vanguard family of mutual funds with most funds charging under 0.1%. If my math is correct that would be 25 times less.
Luckily, in today’s world of global finance Canadians too have access to these low-cost beauties by the means of ETFs. There had been a lot of discussion out there about ETFs, so we’ll limit ourselves to stating that these are mostly index mutual funds that are traded on the exchanges. Do you want to invest in total US market? Just buy Vanguard’s VTI fund (which carries 0.07%) through any Canadian brokerage (beware of the exorbitant brokerage fees we mentioned)!
Unfortunately, the story does not end here. If you have a Canadian source of funds and intend to eventually use the proceeds of your investment in Canada, you would have to exchange the funds twice from CAD to USD prior to purchase and from USD to CAD upon liquidation. Each of those transactions will chip off at least 1.5-2% of the total amount. On the other hand, compared with an average Canadian mutual fund, the investor will break even just after two years of paying lower MERs.
There are some Existing Alternatives to this situation. iShares has a number of Canadian denominated ETFs, which are traded on TSX. What they do is buy units of the same iShares US-based funds and sell them in Canada. For example, IVV tracks S&P 500 in USD and is replicated by XSP in CAD. Beyond simply buying the units, iShares offers a currency hedge against the fluctuations in the exchange rates. That could be very useful for the short term investors. For the longer term kind (exchange rate fluctuations usually cancel each other out), it does eliminate the need to pay the piper twice. This feature comes at a price though: IVV’s MER is only 0.09%, whereas XSP 0.24% (I know, almost 3X). But the benefit of trading in home currency remains for over 25 years.
Check this math:
- Assume constant exchange rate of 1:1
- Initial investment in IVV right away will be at 2% disadvantage
- This disadvantage will diminish every year as XSP MER will chip away bigger pieces
- Better performance, in this case, will benefit XSP, as it will have more funds invested to begin with
- At the point of redemption IVV will be further reduced by an extra 2% exchange fee
Keep in mind that for some funds this type of “couple pricing” may carry greater spread and, at some point, the balance will tip toward the US-based fund.
At the same time, not all funds are present in Canada, in case of iShares, only very few funds are actually replicated.
Canadian markets are significantly shallower in terms of liquidity, which could partially explain higher fees in general, and may carry some pricing premium. Also, they are more regulated, in terms of transaction types, etc. rendering some trading schemes impossible.
As always, do your own math and keep an eye out for existing alternatives!
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