What are we looking for?
Canadian-listed ETFs with rock-bottom fees for broad market exposure.
The screen
Over the past 10 years, Canadian investors have benefitted from a fall in fees across investment fund products. This is echoed in Morningstar’s Annual Canadian Balanced Landscape report, which paints a picture of how much fees have fallen across both balanced mutual funds and ETFs. Today, motivated Canadian investors have access to a wide swath of balanced ETFs with an average management expense ratio of just 0.52 per cent, a far cry from a decade ago when single-ticket, diversified multi-asset portfolios were largely accessed through the mutual fund structure at a far greater cost.
Today, we go one step further to find rock-bottom fees among Canadian exchange-listed ETFs. To give readers an idea of the landscape, across 1,400 Canadian-listed ETFs, 594 of them have management expense ratios south of 50 basis points (or 0.5 per cent a year). Of these ETFs, 340 of them invest only in stocks, 187 of them invest only in bonds, 35 of them invest in a mix of both (also known as allocation or balanced ETFs), and the remainder are money market ETFs.
To highlight a few reasonable considerations within this low-fee space, I further screened the list on two criteria: (1) ETFs that have received a four-or five-star Morningstar Rating for Funds, indicating that the fund has historically outperformed respective category peers after fees, on a risk-adjusted basis and (2) ETFs that have received a Morningstar Medalist Rating of gold or silver, highlighting funds that Morningstar believes will produce excess after-fee returns in the future, based on our analysis of people (quality of the management team), parent (stewardship of the fund company) and process (robustness of investment decision making).
This final list was still quite large with 110 funds, which is not a surprise given that Morningstar’s ratings put a great degree of emphasis on fees. From here I hand-picked a subset of fund categories (looking specifically for those that might commonly fit into investors’ asset allocations) to display a top-three list within five categories, ranked by MERs.
What we found
The ETFs that qualified in the screen are listed in the table accompanying this article, alongside categories, MERs, trailing performance, inception dates and ratings. It is worthwhile noting that all the stock and bond ETFs that appear on this list are passively managed, while the three balanced ETFs are actively managed (in that the fund manager makes decisions around the mix between stocks and bonds, but invests in other low-cost index products). Investors are urged to first look at the category to which each fund belongs, given that Morningstar’s ratings are meant to measure performance against category peers. Note that some funds may have been renamed since their inception.
This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the funds or ETFs mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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