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A solid return for ETFs - even with adviser fees

What we're looking at

You want a core Canadian equity fund for your portfolio. Could an exchange-traded fund be the right choice?

Our screen

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Let's look at the best performers among Canadian equity funds over the past 10 years to see where ETFs stand in the group. One-year results are also shown here so that you can see how these funds have performed during the challenging markets we've had in recent months. You'll also find quartile rankings, which divide funds in a category into four groups according to their returns. First quartile is best, fourth is worst.

What we found

There are two Canadian equity ETFs with a history going back 10 years or more and they both make the Top 10 on our list. For do-it-yourself investors, this suggests ETFs are a simple, attractive alternative to mutual funds. Remember, traditional ETFs give you the returns of stock indexes minus a small amount for fees. What strategy do competing mutual funds use, and can it be counted on to work as well in the future as it has in the past? You decide.

Investors who are paying for the services of an adviser have a different calculation to make regarding ETFs. Let's use the example of a fee-based account where an adviser layers a fee of 1 per cent of a client's account assets over top of the cost of owning an ETF (measured in our screen through the management expense ratio, or MER).

Now, what if we reduced the returns for the two ETFs in the Top 10 on our list by one percentage point a year to reflect advisory fees? The average annual 10-year return for the iShares S&P/TSX Capped Composite Index Fund falls to 6.56 per cent, while the iShares S&P/TSX 60 Index Fund falls to 6.46 per cent. Those returns would put both ETFs high up in the second quartile of Canadian equity funds over the past 10 years, which is still quite respectable.

Prefer mutual funds? Then cross-check this screen with Tuesday's list of five-year Canadian equity fund leaders (read it here) to find the most consistently good performers.

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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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