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Why this investor should stick with his mutual fund over ETFs

The past year on the stock market has left some people wondering if they need a new investment approach.

The 21.1-per-cent surge by the Toronto Stock Exchange can be disorienting because a properly diversified portfolio would have made far less. In a recent column, I estimated 5.3 per cent, after fees, for 2016. One reader took a look at the return from his balanced fund last year and saw he made a fair bit less than that. He's wondering whether he should chuck that fund and replace it with a quartet of exchange-traded funds.

Here are the ETFs he proposes:

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-BMO Aggregate Bond Index ETF (ZAG): The management expense ratio is 0.23 per cent and the one-year return to Dec. 31 was 1.54 per cent.

-Vanguard FTSE Canada All Cap Index ETF (VCN): The MER is 0.06 per cent and one-year return was 23.9 per cent.

- iShares Core S&P 500 Index ETF CAD- Hedged (XSP): MER of 0.11 per cent and a one-year return of 11.2 per cent

- iShares MSCI EAFE Index ETF CAD-Hedged (XIN): MER of 0.5 per cent and a one-year return of 5.6 per cent.

If we were to mix these funds in roughly the same proportion as the balanced fund owned by this reader, we'd end up with a portfolio of 36 per cent ZAG, 18 per cent VCN, 21 per cent XSP and 25 per cent XIN. The weighted average MER would be 0.24 per cent, much lower than any balanced fund out there, even the low-cost ones.

Now, let's compare returns. This reader's mutual fund made 3.2 per cent last year, which would compare to 8.6 per cent for our comparable portfolio of ETFs. The fund's three-year returns are much better – an average annual 8.5 per cent, which compare to 5.8 per cent for our ETF portfolio. It would be better to compare this reader's balanced funds over a longer period of time, but the ETFs he chose haven't been around long enough.

To sum up, ETFs won in a short term comparison and this reader's balanced fund triumphed in the medium term. Now, consider the conveniences offered by his mutual fund – automatic rebalancing, automatic redistribution of dividends and income distributions and no brokerage commissions on purchases. ETFs are a rock solid portfolio-building tool, but they don't seem to offer an advantage over this reader's balanced fund beyond the past year.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998.Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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