Whatever investments you own, it’s natural to wonder if you can do better.
With bank mutual funds, you often can. How do you tell?
A reader raised this question after I wrote about the negativity shown toward bank mutual funds by many in the personal finance and investing world. The conclusion was that there are cheaper, better alternatives to bank mutual funds, but they do have a few benefits and can be adequate for some investors.
The reader who got in touch has a bank fund with a management expense ratio of 2.02 per cent and a three-year return of 5.2 per cent. Let’s assume this is an annualized three-year return because that’s how fund companies generally present their returns.
The category of mutual fund wasn’t mentioned by this reader, but both the MER and return suggest it’s a bank balanced fund with a mix of 60 per cent stocks and 40 per cent bonds. Evaluating the performance of this fund requires finding the right benchmarks.
Let’s go with a selection of exchange-traded funds that work similarly to 60-40 balanced mutual funds in providing a fully diversified portfolio in a convenient package:
-The BMO Balanced ETF (ZBAL-T): Produced a three-year annualized return of 5.1 per cent to Dec. 31; the MER is 0.2 per cent.
-The Fidelity All-in-One Balanced ETF (FBAL-NE): Produced a three-year annualized return of 7.2 per cent to Dec. 31; the MER is 0.4 per cent.
-The iShares Core Balanced ETF Portfolio (XBAL-T): Three-year return of 5.2 per cent; the MER is 0.2 per cent.
-The Vanguard Balanced ETF Portfolio (VBAL-T): Return of 4.9 per cent; MER of 0.24 per cent.
As for the reader with the bank mutual fund, the answer to his question is: Yes, there are better alternatives in the ETF universe. But making a change is a judgment call in this case and not a slam dunk.
A reason to stick with his bank fund beyond the competitive past results is zero cost to buy or sell. ETFs can cost as much as $9.99 per trade, depending on the broker. A reason to dump his bank fund and switch to an ETF is lower MERs. Basic fund math: A fund’s gross return minus the MER = the net return reported to investors. Low fees obviously don’t guarantee strong performance, but they’re a big help over the long term.