- Trading commissions — When you purchase or sell an ETF, you will often pay a commission to the investing provider. If you plan to make regular purchases or trade frequently, think about how these expenditures will effect your returns.
- Management fees and operating expenses – ETFs pay management fees and operating charges in the same way as mutual funds do. The management expense ratio is what it’s called (or MER). ETFs typically have lower MERs than mutual funds in the same category. They are paid by the fund and are calculated as a percentage of the fund’s total value on a yearly basis. While you are not directly responsible for these costs, they have an impact on you because they diminish the fund’s returns. Over time, this can mount up.
What makes a Mer ETF good?
For an actively managed portfolio, a decent expense ratio from the investor’s perspective is roughly 0.5 percent to 0.75 percent. A high expense ratio is one that exceeds 1.5 percent. Expense ratios for mutual funds are often greater than those for exchange-traded funds (ETFs). 2 This is due to the fact that ETFs are handled in a passive manner.
What is the Mer of the average ETF?
In an ideal world, ETFs would match the performance of their benchmarks exactly, but this is not practical. As a result, investors should track the difference between an ETF’s performance and the performance of the benchmark to see if they are getting value for their money. The resulting Tracking Difference is rarely zero, and it almost always lags behind the benchmark. ETFs are obliged to file a Management Report of Fund Performance (MRFP) twice a year on the SEDAR.ca website, so it’s easy to discover.
Fees, of course, are virtually invariably the source of performance lags and the single strongest predictor of future Tracking Difference. That is why ETF issuers continue to strive for the lowest costs possible. Other factors, such as trading and rebalancing costs, which occur when ETFs realign themselves as indices adjust their holdings, sampling issues, which occur when it is impractical to hold every security in the index, and a cash drag between when the ETF receives dividend and interest payments and when it distributes them to shareholders, could all reduce returns.
There are around 425 ETFs in Canada, however the top 100 by assets account for almost 83 percent of all invested assets. As of May 31, 2016, the Top 100 ETFs give an excellent sample of the amount of any performance lag relative to the benchmark. We can assess how much of the underperformance is related to these expenditures by combining the MER and the Tracking Difference (based on three years of data ending in December 2015). The chart above and the table on the left show this analysis for the Top 100 ETFs and their major asset subcategories on a pro-rata weighting basis. Interestingly, despite the fact that the number of individual ETFs per category varies dramatically (2 Money Market ETFs, 33 Bond ETFs, and 65 Equity ETFs), the average MER across the entire 100 ETFs is 0.31 percent (individual MERs ranged from 0.03 percent to 0.91 percent) and this remains very consistent across all asset classes. The other interesting aspect of this data is that, while Money Market and Bonds showed very little additional underperformance not directly attributable to costs, Equities did not. Because equities make up such a substantial part of the Top 100 ETF group, they underperformed their benchmark by 0.73 percent per year on average, which flowed through to the overall sample underperformance (0.61 percent). This cost/weakness is far greater than most investors realize or anticipate.
A Passive ETF’s goal is to track the performance of its benchmark, hence they aren’t designed to outperform.
As a result, one of the most significant ETF data to evaluate is Tracking Difference. Investors who do not comprehend the concept of tracking difference are almost certain to underperform.
What is a mer’s job?
A management expense ratio is a fee that most mutual funds levy on a regular basis (MER). The MER is not paid directly by you. The fund is the one who pays for it.
What exactly does that MER help you with? It covers expenses relating to the fund, such as client statements and financial advice from your investment agent.
It can be divided down into a few different categories. For example, if you put $10,000 into a Canadian balanced fund with a 2.5 percent MER, the charge would be around $250.
What does Mer imply in stocks?
Expense ratio for management. The Management Expense Ratio (MER) is the sum of a fund’s management fee, operational expenditures, and taxes for a given year, represented as a percentage of the fund’s average net assets for the year.
What is the most secure ETF to buy?
“Start with index ETFs,” suggests Alissa Krasner Maizes, a financial adviser and founder of the financial education website Amplify My Wealth. “They have modest expenses and provide rapid diversity.” Some of the ETFs she recommends could be a suitable fit for a wide range of investors:
Taveras also favors ETFs that track the S&P 500, which represents the largest corporations in the United States, such as:
If you’re interested in areas like technology or healthcare, you can also seek for ETFs that follow a specific sector, according to Taveras. She recommends looking into sector index ETFs like:
ETFs that monitor specific sectors, on average, have higher fees and are more volatile than ETFs that track entire markets.
How often do you make payments to Mer?
Are the numbers before – or after – fees and expenses when fund companies advertise their returns?
The management expense ratio (MER), which includes the fund’s management charge, operational expenses, and taxes, is deducted from the performance figures published by mutual funds and exchange-traded funds. That’s only fair, given that these expenses have a direct impact on the investor’s return.
The MER is calculated as a percentage of the fund’s annual average assets. Instead of being deducted all at once every year, the MER is frequently deducted on a daily (prorated) basis and reflected in the fund’s net asset value. After trading costs, which are represented in the trading expense ratio, fund returns are also disclosed (TER).
For example, if a mutual fund’s underlying portfolio earned a total return of 10% during the year and the MER and TER were both 2%, the investor’s net return would be 8%.
Another thing to bear in mind is that performance figures for mutual funds and exchange-traded funds (ETFs) show the total return, which includes both capital appreciation and dividend and interest income. It’s also expected that all payouts were reinvested in more units. It’s critical to pay attention to the exact series when looking at reported results for a certain fund (denoted by a letter such as A, I, D or F after the fund name). Varied series have different MERs, resulting in a wide range of returns.
Fund companies frequently tout the returns of their F-series funds, which are utilized in fee-based adviser accounts and typically have the lowest MERs, according to Dan Hallett, vice president of HighView Financial Group. This, however, is deceptive because “Investors cannot purchase the F-series fund ‘as is,’ as they can with an ETF. The F-series may only be purchased by paying an additional percentage fee to your consultant – typically 1% plus tax for most people “Mr. Hallett expressed his thoughts.
What about the tax situation? Taxes will almost surely reduce your net return if you invest in a non-registered account. Fund returns, on the other hand, are reported on a pretax basis because people’s tax situations differ and many people hold money in a registered account.
Looking over my T3 tax returns for 2016, I observed that the capital gain declared on one of them – the Voya Floating Rate Senior Loan Fund (ISL.UN) – substantially outweighs the cash distribution I received. I’m not sure how I’m supposed to disclose this for tax purposes.
Instead of paying out capital gains to unitholders, investment funds, such as mutual funds, exchange-traded funds, and closed-end funds like ISL.UN, reinvest all or a portion of their earnings internally. Even if you never get these reinvested or “phantom” dividends in cash, you must still pay taxes on them as if you did. Capital gains are simple to report for tax reasons. Box 21 of your T3 contains the sum of a fund’s capital gains, both reinvested and dispersed in cash, which you would report on your tax return.
When a fund makes a reinvested dividend, as ISL.UN did last year, you must do one additional thing: increase your investment’s adjusted cost base (ACB) by the amount of the reinvested distribution. If you don’t, you’ll end up paying more tax than you need to when you sell your units.
Is Mer a taxable item in Canada?
On line 221 as well, management expense ratios (MERs) for mutual funds or exchange-traded funds (ETFs) are not deductible.
“Costs to manage or take care of your investments” or “fees for some investment advice” are the investment fees you can claim for your non-registered accounts, Patti.
To be more explicit, the fees must be “paid for advise on the taxpayer’s purchase or sale of a specific share or security, or for the administration or management of the taxpayer’s shares or securities.” The payments must be given to someone whose main business is advising others on whether to buy or sell certain shares, or whose main business is administering or managing shares or securities.”
As a result, Patti, fees paid by an investor on a fee-based investing account are normally tax deductible.
Fees paid to a fee-only, advice-only, fee-for-service financial planner such as myself are usually not tax deductible. “Fees paid for other sorts of guidance, such as general financial advising or planning, are not within the rules,” according to the Canada Revenue Agency.
If such expenses are paid for an employee by a company, they may qualify as “retirement counselling,” which is tax deductible for the company and considered a tax-free benefit for the employee.
Most financial counseling services for an individual are not tax deductible, though a portion of them may be if they are related to a sole proprietorship or a rental property.
Surprisingly, if a fee-based investment counsellor’s costs include both investment management and financial, tax, and estate planning advice, the full amount may not be tax deductible. But I’ve never seen a tax receipt or summary for an investment management fee make a distinction, whether it’s from a tiny, private portfolio manager or one of the big banks.
What is Canada’s average MER?
This statistic is the most important because it includes the management fee as well as other expenditures related to the fund’s operations, such as legal, accounting, and marketing. All funds in Canada have an average MER of 2.53 percent. It’s worth noting that all return rates are presented net of fees. For example, if the fund reports a 10% return on paper, it actually earned 12.25 percent because the MER has already been subtracted. This cost is never visible because it is deducted from the fund on a monthly basis.
