Q: I have about $20,000 and I’m interested in investing in a U.S. index mutual fund. I just want to grow the money and don’t plan to touch it for years. Where would I be able to find such a fund with an MER of less than 1%, and do they differ much from each other?
— Maggie N.
A: Index investing has been skyrocketing in popularity, but in Canada, virtually all that growth has been in ETFs: the humble index mutual fund has been pushed to the back of the bus. The options haven’t changed in years, and the management fees are mostly unattractive—at least compared to ETFs.
Maggie, your cheapest option is still the e-Series version of the TD U.S. Index Fund (TDB902). The e-Series mutual funds have long been the cost leader in Canada: the MER on this fund is just 0.35%. The downside is that the e-Series funds are available only to TD clients. To access them, you need to open a TD Mutual Funds account at your local branch or use TD Direct Investing, the bank’s online brokerage arm.
If you already have your investments at another brokerage, then the next best option is the RBC U.S. Index Fund (RBF557), which has an MER of 0.69%. The other big banks all offer U.S. equity index funds, but the fees are considerably higher—over 1% in most cases.
There are some differences to be aware of when shopping around. The TD and RBC funds mentioned above both track the S&P 500, the standard benchmark for U.S. stocks. This index includes 500 large-cap companies in all sectors, making it very well diversified. Other U.S. equity funds track narrower indexes and should be avoided. The NBI U.S. Index Fund from National Bank, for example, is pegged to the Dow Jones Industrial Average, which includes just 30 stocks and is a poor proxy for the U.S. market, despite its popularity in the media. TD also offers an e-Series fund that tracks the NASDAQ-100, a tech-heavy index that has done well recently but is also poorly diversified compared with the S&P 500.
Finally, be aware that U.S. equity index funds are also available in versions that use currency hedging. This is a strategy designed to remove the effect of the exchange rate between the U.S. and Canadian dollars. It will boost your returns during any period when the U.S. dollar weakens compared with the loonie, but over the long run, it is usually better to use funds without currency hedging.
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