ETF price war is good for cost-conscious investors

The ETF price war has been escalating to the point where some management fees are going as low as single-digit basis points. Two companies upped the stakes once more in August by launching ETFs with 0% direct management fees.

In Canada, Horizons launched its Conservative TRI ETF Portfolio and Balanced TRI ETF Portfolio, with no top-line management fees or operating costs.1 Both funds invest primarily in Horizons’ Total Return Index ETFs.  

In the US, Fidelity Investments launched its Zero Total Market Index Fund and Zero International Index Fund, both with 0% expense ratios. In their first month alone, these two funds attracted almost $1 billion in investment.2

However, are these zero-fee ETFs too good to be true? And are they right for your portfolio?

Low fees are good—if the shoe fits

There is no doubt that low fees are a good thing for investors. They allow you to keep more of your investment and grow your money faster.

However, when comparing ETFs, you should first consider whether they fit your investment strategy, in terms of asset allocation and risk profile. If you’re choosing between similar funds that meet your criteria, it usually makes sense to choose the lowest-cost option. In case you missed it, check out “How do you choose between similar-looking ETFs?

The fees to look out for: MER and trading fees

An ETF’s MER (management expense ratio) consists of its management fee and operating expenses. Check out the ETF’s factsheet which will show the MER as a percentage, in addition to information about the fund’s benchmark, assets, volatility, and objective.

ETFs are traded on stock exchanges and are therefore subject to trading fees. The good news is, though, that these fees are generally low with online brokerages.  

Qtrade Investor, for example, offers a list of 100 commission-free Canadian and US ETFs. The list includes a wide range of asset classes, countries, industry sectors, and capitalization sizes. These ETFs can help investors build a well-diversified portfolio to meet their objectives.

Remember to read the fine print

There is a catch to these “no-fee” ETFs. The Horizons ETFs are funds of funds. That is, each fund invests in several different index-tracking ETFs and, as such, is subject to the management fees of those underlying ETFs. In this case it’s a maximum of 0.18%. These funds use a total return swap,4 as they don’t own any securities directly, so they also have a maximum trading expense ratio of 0.2%.

And while Fidelity’s funds do both have 0% expense ratios, they’re only available to people who use Fidelity’s brokerage firm (so Canadians can’t buy them). Not to worry: there are still plenty of quality ETFs out there that charge nominal fees.

Are low or no-fee ETFs right for you?

When it comes to choosing ETFs, your first priority should be to determine the ones that fulfill your asset allocation strategy.

In any given asset category, there are likely to be great options at very low prices. Find the funds that complement your portfolio and then go with the cheapest option.

You can take a look at Qtrade’s wide range of commission-free ETFs here.

 

1 James Burton, “Horizons: No need to charge management fee.” Wealth Professional Canada, August 3, 2018. https://www.wealthprofessional.ca/news/etfs/horizons-no-need-to-charge-management-fee-246090.aspx (Accessed September 10, 2018).

2 Charles Stein, “Fidelity zero-fee funds lure about $1 billion in first month.” Bloomberg, September 4, 2018. https://www.bloomberg.com/news/articles/2018-09-04/fidelity-zero-fee-funds-attract-almost-1-billion-in-first-month (Accessed September 10, 2018).

3 “100 commission-free ETFs.” Qtrade Investor. https://www.qtrade.ca/en/investor/pricing/free-etfs.html

4 Bryan Borzykowski, “Are no-fee ETFs really free?” Money Sense, September 4, 2018. https://www.moneysense.ca/save/are-no-fee-etfs-really-free/ (Accessed September 10, 2018).