Management fees, part of the expense ratio of funds, have always been considered one of the primarily nuisances for investors when deciding between a fund and individual stocks. Don’t confuse management fees with commissions fees when buying into funds. They are two different animals. These days ETFs are free when buying through a discount broker like Questrade.
However, for the past few years a pattern has emerged where popular ETFs have begun lowering their management fees across all banks and other wealth management houses. Take BMO for example. BMO Aggregate Bond Index ETF (ZAG) has dropped 0.01% to 0.08%. This is their first time lowering any of their funds since June 2016. Granted this drop isn’t that exciting, but this lowering has been happening consistently everywhere.
Although American funds have been more aggressive at lowering their expense ratios compared to Canadian ETF, Canada has also caught the bug and fee dropping has occurred for years now as well.
Fidelity announced they are launching six dividend ETFs in Canada this fall. With that announcement alone you can expect fees to drop even more. This trend is so consistent that it’s very likely that in the near future ETFs will not cost investors anything to own.
Imagine that. A world with no-fees for investors. With few expenses it means you can work your money better by investing more. These costs will no long be a factor when making your ETF decisions. Right now, because ETFs are so similar it just makes sense that people will choose the one with the lowest fee. This is not dissimilar to say going to a hardware store and looking to buy a dust pan. Some come in different colors, but for the most part your decision will be based on which pan is cheapest. With fees approaching zero it forces ETFs to get more creative to grab your attention — possibly being more active to keep the fund from getting stale, or having a wider market coverage reach than the next guy — to improve its diversification level.
When fees do become zero, with all things being equal, it’s very likely investors will just pick ETFs based on their personal experiences with a brand. In other words, investors will need to do more due diligence to decide which is best for them; be it what the funds hold, how often holdings are adjusted, where it invests, and other factors. Whatever the case may be, paying nothing will always be better than the alternative.
Times are changing @Bahkir. Mutual funds aren’t as popular as they use to be. Also robo-advisors are taking their place. People still want managed investing but with less fees. ETFs fill the void of self-directed funds but there is still a sizeable, and meaningful, market for those households who want an actual human touch on the other end.
What confuses me is what is the point of mutual funds when ETFs exist? We are paying exhorbatant front and back-end fees for what studies have shown is no better than a room of monkey’s tossing darts at the latest prices.
I could be wrong but i think Questrade, a Canadian-bron brokerage, was the first to introduce free etf trades. Not sure if it applies for buying or selling or both; i don’t have an account.
It’s about time. Fees are the biggest factor that has always detered my desire to expand my interest in the markets. So the lower the better. Thanks for the interesting post.
I noticed this interesting trend as well. I guess with so many avenues for people to invest it only seems natural for investment places to need to be competitive to stay relevant.
Personally i don't think the fees have come down enough. I just can't understand what these managers are doing behind the scenes that justify their expense ratio.
Historically, you see that Index funds outperform most other funds because the are directly linked to major indices. And yet, even they too have expenses. Why? Surely, it can be fully automated and cost nothing.
In short, it's about time things are starting to change.
It's not just centralized just on ETFs. It is also happening with Mutual Funds, and regular stocks too.
Questrade has very good selection of funds (ETF and Mutual Funds) with very low expense ratios.
In fact, i have a second account that uses their managed Questwealth Portfolios which although it has a ratio for them to manage it on top of the funds underlying expense ratio, when you combine the two its still way lower than anyone else and i have made a handsome profit for the past few years.
Yea, but will it last? Just like gasoline prices I have to conclude this is just a temporary trend to keep people from mass exodus to alternatives.
My TFSA and RRSP investment accounts are completely made up of iShare and Vanguard holdings. I picked them because of a balance of low fees and very good returns. Granted i do wish the returns were higher but over the next many years i expect it to continue to climb. So i'm happy with my decision.