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You don't pay anything out of pocket (besides the buying commission). The MER is taken right off the returns. However, if you want to know how much in returns you're giving up, simply multiply the MER by the amount invested. So if the MER is 0.5%, then $1000 invested will cost $5 per year.
 

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Thanks for that straight forward response.
Unfortunately, it's not correct.

For mutual funds, the MER is calculated daily, based on the daily average amount of the assets.

ie A $100,000 of a fund with an annual MER of 2% will be charge 2%/365*100,000 = $5.47.

If the next day ,the value goes up to $105,000, then the charge will be $5.75.

I assume ETFs do something similar, but since the ETF price will move around during the day, they must use some sort of average price to do the calculation.
 

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Unfortunately, it's not correct.
It's not that far off to say it's completely wrong. FT wrote...

You don't pay anything out of pocket (besides the buying commission). The MER is taken right off the returns.
Pretty close...comes out of assets...a nuance corrected in the later example.

However, if you want to know how much in returns you're giving up, simply multiply the MER by the amount invested. So if the MER is 0.5%, then $1000 invested will cost $5 per year.
Not much to quibble with here other than it's not detailed but I thought it more straightforward and understandable (for a novice) than your more detailed explanation. And I highlight this for the original poster's benefit, not to nit-pick or play critic.
 

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You cannot calculate in advance how much you will pay to hold a (volatile) ETF over time.

As FP has said, you will pay x bps x NAV per share, calculated daily. You can "guesstimate" what you will actually pay over the course of a year, and you can calculate what you DID actually pay over the course of a year which has passed, but the total dollar value of the MER will fluctuate with the asset value of your shares/units.
 

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X-post with you, OntFA.

I do think this an important issue and it's worth getting right - not because I think that understanding why total MER paid wasn't $50 on $1000 invested but actually came out as (say) $47.29 - but because I think understanding how investments work, including volatility, is really, really important. And that people should get this at the level of intuition.

So, like you; I don't intend to "correct" or nit-pick or split hairs. :)
 

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i think something should be added about how the official MER doesn't include the brokerage commissions to buy and sell the fund's securities. This is often misunderstood. These are not the commissions retail brokers charge to retail investors to buy and sell a specific fund. They are the commissions paid by the funds themselves to broker/dealers for the large amount of stocks, bonds, index proxies or other instruments that each fund's portfolio holds & trades, sometimes on a daily basis.

these commissions are hidden in the sense that they are added to cost of securities bought and subtracted from proceeds of disposition from securities sold. These figures in turn affect the amount of cash on hand at the fund each night, and thus they also affect the NAV calculation each night.

it is still fairly common to find fund salesmen who represent to investors that the MER includes all expenses of a fund, including the aforementioned institutional brokerage commissions. Alas it does not.

a weighted etf can have higher brokerage commissions of the type mentioned above, as the product managers are required to buy and sell securities at intervals in order to stabilize the weightings. On the other hand, a non-weighted pure index fund such as plain-vanilla XIU will passively follow the relevant index and feature fewer adjustment-related trade commissions.
 

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i think something should be added about how the official MER doesn't include the brokerage commissions to buy and sell the fund's securities. This is often misunderstood. These are not the commissions retail brokers charge to retail investors to buy and sell a specific fund. They are the commissions paid by the funds themselves to broker/dealers for the large amount of stocks, bonds, index proxies or other instruments that each fund's portfolio holds & trades, sometimes on a daily basis.
Good point. I forgot about the trading expenses.

Here's an article by Rob Carrick on the topic.

https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20070414/STMAIN14
 

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if one looks at the financial statements of a fund, one can see how the fund managers collect their daily increment fees, first by tapping the fund's income to the fullest extent, and after that by moving on to graze on the capital itself, vacuuming up the balance of any payments due to themselves from cash balances. This is why most stock funds, and certainly aggressive-growth smallcap stock funds, pay out either very low dividend & interest distributions or else none at all.

to use a trust analogy, i've always pictured fund managers as income beneficiaries, having first and preferential entitlement to income from a body of investments. Thus the retail investors themselves, who are the ultimate beneficial owners, are relegated to being merely the capital beneficiaries. In down markets, of course, there are no capital gains to distribute. This partly explains why investors can hold funds in band-trading markets, sometimes for years & years, yet be no better off in the end.

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i think something should be added about how the official MER doesn't include the brokerage commissions to buy and sell the fund's securities. This is often misunderstood. These are not the commissions retail brokers charge to retail investors to buy and sell a specific fund. They are the commissions paid by the funds themselves to broker/dealers for the large amount of stocks, bonds, index proxies or other instruments that each fund's portfolio holds & trades, sometimes on a daily basis.
This is true for mutual funds and closed end funds.

these commissions are hidden in the sense that they are added to cost of securities bought and subtracted from proceeds of disposition from securities sold. These figures in turn affect the amount of cash on hand at the fund each night, and thus they also affect the NAV calculation each night.
Let's be clear, this is not an issue of wanting to hide anything. This is an accounting issue. Expenses that are on account of capital are capitalized into the cost of capital assets. Trading costs are capital costs, which is why they are added to the cost of securities bought and deducted from the proceeds of securities sold. They are a real cost that certainly impacts NAV and returns but it's the accounting rules that dictates the capital treatment.

it is still fairly common to find fund salesmen who represent to investors that the MER includes all expenses of a fund, including the aforementioned institutional brokerage commissions. Alas it does not.
This hasn't been my experience. What I would agree with is that TER is not often discussed in my experience. But the funds I use tend to have TERs around 0.1% so it's not a significant cost. There are lots of other details I consider more important so TER is not atop my list of discussion items.

a weighted etf can have higher brokerage commissions of the type mentioned above, as the product managers are required to buy and sell securities at intervals in order to stabilize the weightings. On the other hand, a non-weighted pure index fund such as plain-vanilla XIU will passively follow the relevant index and feature fewer adjustment-related trade commissions.
Many here took shots at me for my restricted MFDA license (i.e. I can't sell ETFs) but I'm about to prove that you don't have to be licensed to know about the products. An ETF tracking a market-cap-weighted index incurs ZERO trading commissions thanks to the market makers and the creation unit structure (which closed end and mutual funds do not have).

ETFs that track indices that are not market-cap-weighted - fundamental index ETFs - that incur trading expenses. And they might be in the 3-5 basis point range, not a lot less than the active funds I use.
 

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OntFA - if only the licensing requirements *did* actually demonstrate or confer knowledge!

But. I'm curious. Why do you not have the CSC certification? If you felt like answering, I'd be interested in the response.
 

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OntFA - if only the licensing requirements *did* actually demonstrate or confer knowledge!
I agree that I wish the industry were structured differently but it's not. And since a whole new registration rule came in force last year I don't think we'll see advice licenses (instead of sales licenses) any time soon. So, I operate as best I can within the existing framework.

But. I'm curious. Why do you not have the CSC certification? If you felt like answering, I'd be interested in the response.
Oh, I took and flew through the CSC. That's a piece of cake and not worth holding out as any real standard. And let's be clear on this: the CSC is not a certification, it's a licensing course you take by correspondence. I chuckle to myself when I see advisors put those three letters behind their name. I didn't even think that was allowed.

But most of the IIROC platforms I've found interesting do not really fit with me. I like to operate with a lot of independence. And the tenure I have with my dealer has earned me a certain amount of respect and autonomy. I know all of the head office people and can call in favours for clients. I have more pricing flexibility for client portfolios than I'd have at other firms I've checked out. I will use a Leith Wheeler or a Mawer when it makes economic sense to do so. Invesco Power Shares has a very well priced bond fund. I have more options than you realize and I can access funds that are relatively unique.

And I have helped our dealer sign on some pooled funds that offer really unique exposures for clients. This process isn't easy as there is a bit of due diligence to do before the dealer will sign them on. But I do my homework, make my case for the dealer and they really listen to my requests regarding products, services, back office, etc. I'm a bit of a control freek, yes, so I probably enjoy the influence and attention I get. But ultimately my clients benefit and I enjoy the environment and culture so I prefer it to the typical IIROC platform.

Speaking of which, most IIROC firms have separately managed account platforms. While this has been the big trend at IIROC firms, it's as much a status symbol than anything - i.e. "I have direct stocks and bonds, not piddly mutual funds". But what you never hear is that overseas stock mandates in SMAs are restricted to ADRs while a pool or a fund can buy the stocks directly on local exchanges, which is a huge advantage since the manager is not restricting the opportunities to the relatively short list of ADRs.

I've probably rambled too much but you asked. ;)
 

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Right - as I was typing that about "CSC certification" a very small lightbulb was going off in my head about how that wasn't the right word, but I didn't heed it.

We are in agreement, I suspect, about much of how the FA business works.
 

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Right - as I was typing that about "CSC certification" a very small lightbulb was going off in my head about how that wasn't the right word, but I didn't heed it.

We are in agreement, I suspect, about much of how the FA business works.
I appreciate your response MoneyGal. I have been surprised by how many in this forum have quickly jumped to conclusions about me based solely on two facts: i) I am MFDA licensed and ii) I disagree with them because I argue in favour of mutual funds. And yet these bloaks know nothing about me or how I conduct myself with clients.
 

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Can someone explain the math here?

Assume a $50,000 principal, getting 8% for 20 years, no annual additions, with a 2% MER.

First, if I use an online compound interest calculator, here's what I get:

50000 compounded x 20 @ 8%= 233,047.86
50000 compounded x 20 @ 6% (subtracting 2% for MER) =160,356.77
Difference of $72,691.09 (so this should be the fees...)

But then on this website, here is their MER calculator
http://www.getsmarteraboutmoney.ca/tools-and-calculators/mutual-funds/default.aspx

Plugging in the value of $50,000, past performance of 8%, and MER of 2%, the stated MER over 20 years is $48,096.76

What am I doing wrong in my compound calculator method?

BTW- I hold nothing with a 2% MER (not anymore...). I was simply playing around trying to shock myself at the fees I used to pay.
 

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If you look at the bottom of the MER calculator, you can see the assumptions - and they provide the formula as well. You won't get the same results if you don't use the same formula and assumptions (i.e., frequency of compounding).
 

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In your first calculations, using 8%, you compounded everything.
So the difference, including the 2% mer was compounded. That's why there's more missing than the actual mer that was taken out.

You can get the $160,356.77 result by plugging in past performance of 6% with a 2% mer.
This gives you the mer plus the opportunity cost when you hover over the pie chart with your mouse pointer.
 

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In your first calculations, using 8%, you compounded everything.
So the difference, including the 2% mer was compounded. That's why there's more missing than the actual mer that was taken out.

You can get the $160,356.77 result by plugging in past performance of 6% with a 2% mer.
This gives you the mer plus the opportunity cost when you hover over the pie chart with your mouse pointer.
OK, so the difference is due to the fact that 2% is taken out of earnings every year and not allowed to compound. My error was compounding the totals and then subtracting.
 
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