Mutual Funds

An ETF investor considers a high-cost mutual fund with strong returns. Plus, the fallout from new variant fears

A big plus of ETF investing is not having to pay attention to who’s managing your money.

The most popular, lowest-cost exchange-traded funds track well-followed stock and bond indexes. These ETFs need portfolio managers to ensure the holdings mirror the underlying index, but there’s no discretionary stock picking going on.

Mutual funds are mostly run by stock pickers who have their ups and downs over the years. Add up the returns, fold in fees and you too often end up with results that fall below what index-tracking ETFs deliver. Many investors have come to this realization and chosen ETFs for their portfolios, including a reader who got in touch with me recently.

Here’s why: He found a mutual fund that looks good. “The fund has an excellent manager and good returns, but the management expense ratio of 2.48 per cent looks high,” he wrote. “Is it worth it?”

The fund is Fidelity Canadian Opportunities Series A. Right off the top, this investor could cut fees a bit by looking at the Series B version, which has an MER of 2.28 per cent. But let’s be real here. Even 2.28 per cent is a hefty fee compared to ETFs tracking Canadian stock market indexes – their fees can be as low as 0.06 per cent.

Comparing fees on investment products is vital, but incomplete. You also want to assess the value you get for the money you pay. On value for fees paid, Fidelity Canadian Opportunities Series B shows well. The fund has outperformed its benchmark, the S&P/TSX Completion Index of small and medium-sized companies, over the 12-month, one-year, three-year, five-year and 10-year periods to Oct. 31. The fund’s 10-year annualized return is 11.6 per cent, compared to 6.8 per cent for the index.

The first rule of assessing past investment returns is that they are backward-looking and no indication of what’s to come. But the people running Fidelity Canadian Opportunities have consistently generated clear value, despite its big fee. There’s some demonstrated skill here.

Investors tend to see passive index investing with ETFs and active management with mutual funds as an either/or proposition. Index investing alone is a proven foundation for long-term investing success. But if you are an ETF investor who is open to mutual funds, Fidelity Canadian Opportunities is one to consider.

— Rob Carrick

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