Mutual funds and ETFs have much in common and they offer easy, instant diversified access to the stock and bond markets, but their biggest difference between them is fees. Fees will have a huge impact on your overall return in long run. Most mutual managers usually claim their skills, professional approach and active maintain help them to outperform a comparable index. But, when you calculate the actual return after the management fees is usually similar or far worse than the index.
The fee range for a mutual fund that holding larger U.S or Canadian companies is between 1.9 to 2.7 per cent and some funds charge other fees too, such as trading fees, front loads, back loads and trailers fees. In contrast, ETFs such as iShare ETFs charge between 0.7 and 0.55 per cent.
Let’s do some calculation and see how much you will pay as management fees with both mutual funds and ETFs at a return of 6% over 10 years.
Let’s say you have $20 000 in your tax efficient account and you are investing in $10 000 in mutual fund with MER 2% and another $10 000 in ETFs with MER 0.25%.
Mutual funds and ETFs fees comparison
Mutual total return after 10 years
| Year | Initial ($) | 6% return ($) | Management fees ($) | Net return ($) |
| 1 | 10000.00 | 10600.00 | 212.00 | 10388.00 |
| 2 | 10388.00 | 11011.28 | 220.22 | 10791.05 |
| 3 | 10791.05 | 11438.52 | 228.77 | 11209.75 |
| 4 | 11209.75 | 11882.33 | 237.64 | 11644.69 |
| 5 | 11644.69 | 12343.37 | 246.87 | 12096.50 |
| 6 | 12096.50 | 12822.29 | 256.45 | 12565.84 |
| 7 | 12565.84 | 13319.79 | 266.40 | 13053.40 |
| 8 | 13053.40 | 13836.60 | 276.73 | 13559.87 |
| 9 | 13559.87 | 14373.46 | 287.47 | 14085.99 |
| 10 | 14085.99 | 14931.15 | 298.62 | 14632.53 |
ETFs total return after 10 years
| Year | Initial ($) | 6% return ($) | Management fees ($) | Net return ($) |
| 1 | 10000.00 | 10600.00 | 26.50 | 10573.50 |
| 2 | 10573.50 | 11207.91 | 28.019 | 11179.89 |
| 3 | 11179.89 | 11850.68 | 29.63 | 11821.06 |
| 4 | 11821.06 | 12530.32 | 31.33 | 12498.99 |
| 5 | 12498.99 | 13248.93 | 33.12 | 13215.81 |
| 6 | 13215.81 | 14008.76 | 35.02 | 13973.74 |
| 7 | 13973.74 | 14812.16 | 37.03 | 14775.13 |
| 8 | 14775.13 | 15661.64 | 39.15 | 15622.49 |
| 9 | 15622.49 | 16559.84 | 41.40 | 16518.44 |
| 10 | 16518.44 | 17509.54 | 43.78 | 17465.77 |
At the return of 6% over 10 years with no new contributions, you will have $14632.53 after paying $2531.18 in fees for mutual funds. In Contrast, the total ETFs total return is $17465.77 after paying $344.97 as fees.
Some people may say that you have to pay the broker’s commission to trade or rebalance an ETF, which can range from $10 to $30, but that is not true now because many stock brokerages offer a feature called commission free ETFs. For example, in U.S you can buy more than 100 different ETFs using TD Ameritrade without paying commission fees, and in Canada you can buy any ETFs in Questrade Stock broker without paying trading commission.
Also, some investors believe that mutual funds are somehow safer than ETFs. But both are actually basket of stocks which mean a mutual fund holding stocks will be as risky or safe as an ETF holding stocks.
ETF fees are already low, and some competitors are keep chopping fees which means more money in the pockets of ETFs investors.