Expensive, Eh?

August 28, 2006

Think we’ve got it bad? Investors across the northern border pay nearly twice as much in fees as investors in the U.S.

Mutual fund fees are entirely too high here in the United States.  The average fund expense ratio hovers well above one percent, and 12-1b fees and loads steal untold millions in capital from investors each year.  But we can be thankful for one thing: At least we're not Canadian.

According to a new research study entitled "Mutual Fund Fees Around The World," the United States is among the lowest cost countries in which to invest, while our neighbors to the chilly north pay some of the highest fees in the world. The study was published in February, and reported recently in Investment News.

The study, written by Ajay Khorana, Henri Servaes and Peter Tufano, three professors from Georgia Tech, the London Business School and the Harvard Business School, respectively, found that U.S. investors pay an average of 1.15 percentage points for fixed-income exposure, which Canucks pay an astonishing 2.08 percent.  For equities, U.S. investors pay a total expense ratio of 1.71 percent, while Canadian investors cough up 2.87 percent. 

On that basis, a U.S. investor who puts $10,000 to work for 30 years will end up with $96,502, while a Canadian investor will end up with just $65,835 - a difference of over $30,000! The difference for the bond funds is even larger.  That's a lot of loonies.

All those figures are before loads, too: After loads, Canadian equity investors pay nearly 5 percent.

The study says that the high concentration of banking assets in Canada - where the top 5 banks control 84 percent of all assets - helps keep Canadian fund fees high. Investment News says that a number of low-fee fund companies have failed over the years in Canada, as well, suggesting the need for greater investor education … or something … in the great North.

You would think that the entry of exchange-traded funds (ETFs) onto the market would tip the scales, but in truth, the jury's still out.  Barclays Global Investors (BGI) manages $11 billion in ETF assets under the Canadian iShares program, charging fees between 17 and 55 basis points. But still, with fees nearing 3 percent for the average Canadian equities fund, you have to that investors would be rushing money into the ETF space. 

From a global perspective, Canada's expense ratios were simply out of line with established norms. The closest competitor was Luxembourg, where the average equity fund charged 2.09 percent.  Wake up, Canadian investors! Look at the Dutch: They pay just 0.79 percent in fees.

The global ranking for equity expenses, before loads, were:

Country

Expense

Canada

2.87%

Luxembourg

2.09%

Spain

1.99%

Ireland

1.96%

Italy

1.96%

Offshore

1.93%

Norway

1.80%

United States

1.71%

Australia

1.70%

Austria

1.65%

Japan

1.53%

Switzerland

1.48%

France

1.45%

Finland

1.45%

Germany

1.41%

United Kingdom

1.39%

Sweden

1.37%

Denmark

1.27%

Belgium

1.20%

The Netherlands

0.79%

 

For bonds, the numbers look similar:

 

Country

Expense

Canada

2.25%

Luxembourg

1.94%

Offshore

1.35%

Ireland

1.32%

Spain

1.29%

Australia

1.25%

Italy

1.23%

United States

1.15%

Finland

1.01%

Denmark

0.85%

Germany

0.82%

United Kingdom

0.80%

Switzerland

0.77 %

Japan

0.76%

France

0.75%

Austria

0.73%

The Netherlands

0.72%

Belgium

0.59%

Sweden

0.57%

Norway

0.55%

 

You can read the full study here.

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