Over the years while helping readers, friends, and co-workers with investing, I’ve come to the conclusion that convenience is of the highest priority, even if it means paying higher fees. Most people simply want to stick with their current banking institution and have no interest in opening a discount brokerage of their own.
Having said that, if they “must” stay loyal to their bank and their mutual funds, I usually recommend that they pick their bank’s index funds as they will likely have the lowest fees of the mutual funds offered.
A new graduate at work recently asked me about investing and told me about the mutual funds that he is invested in. While it’s great that he is investing at a young age, he is currently invested in mutual funds that average 2.5% MER. My calculations show that a 1.7% reduction in MER results in a 60% portfolio size after 30 years…. 60%! I believe in corporate profits as much as the next capitalist, but excessive MERs simply do not add value to investors.
So what do we do about my young friend with expensive mutual funds? The path of least resistance is to switch to the bank’s index funds which would drop the portfolio MER from 2.5% to approximately 1%.
To help clarify which funds they should pick, here are the index funds offered by each of the big banks and their associated fees. What I am aiming for is a portfolio that includes:
- Canadian equity index;
- US equity index (non-hedged);
- International equity index; and,
- Canadian bond index.
- CIBC Canadian Index Fund (MER 1.14%);
- CIBC US Index Fund (MER 1.18%);
- CIBC International Index Fund (MER 1.24%); and,
- CIBC Canadian Bond Index Fund (MER 1.17%).
Royal Bank of Canada
- RBC Canadian Index Fund (MER 0.72%);
- RBC US Index Fund (MER 0.72%);
- RBC International Index Fund (MER 0.71%); and,
- RBC Canadian Government Bond Index Fund (MER 0.67%).
Toronto Dominion Bank
- TD Canadian Index Fund-I (MER 0.88%);
- TD US Index Fund-I (MER 0.55%);
- TD International Index Fund-I (MER 1.00%); and,
- TD Canadian Bond Index Fund-I (MER 0.83%).
TD also offers an e-series of mutual funds with extremely low MERs. Among my favorite mutual funds out there and I use them for our family RESP.
- TD Canadian Index Fund-e (MER 0.33%);
- TD US Index Fund-e (MER 0.35%);
- TD International Index Fund-e (MER 0.51%); and,
- TD Canadian Bond Index Fund-e (MER 0.50%).
- Scotia Canadian Index Fund (MER 0.98%);
- Scotia US Index Fund (MER 1.02%);
- Scotia International Index Fund (MER 1.14%); and,
- Scotia Canadian Bond Index Fund (MER 0.86%).
Bank of Montreal
- BMO Canadian Index Fund (MER 1.05%);
- BMO US Index Fund (MER 1.17%);
- BMO International Index Fund (MER 1.15%); and,
- BMO Core Bond Fund (MER 0.95%).
While the majority offer index funds in the 1% range, the RBC and TD e-series funds stand out from the pack. However, as previously mentioned, switching from your bank’s expensive under-performing active mutual funds to your bank’s index mutual funds will likely result in a much bigger retirement nest egg for you.
Alternatives with Smaller Banks
EQ Bank’s Saving Account Offers Close to 2% Annually. It is Canada’s best saving account.
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