Indexes Don't Charge Trailers

Quickie tonight: a lot of comparisons between active funds and their benchmarks are clouded by the inclusion of trailer fees (fees paid to the advisor) with actively managed mutual funds. The index performance obviously doesn’t include this. A more apples to apples comparison would be to compare the cap-weighted ETF performance that tracks a specific index versus the investment fund without trailer fees.

Does this change the basic premise? No. Let’s look at some data and then do some simple mental math:

5 Year Annualized Numbers (to end of 2008, Equal Weighted Fund Returns)

S&P/TSX outperformed the average Canadian Equity fund by 3.29%

S&P 500 (CAD) outperformed the average US Equity Fund by 2.79%

Source, 2008 Q4 SPIVA Scorecard Canada

Subtract a 1% trailer fee from those numbers, and then subtract the MERs of the corresponding ETF for those indexes (in the 0.10 to 0.30bps range). If the numbers are still greater than 0.00% then the basic argument still holds.

You may want to budget for tracking error for the ETFs as well, but tracking error can work both ways (negative or positive). I used the equal weighted fund returns, but will replace them with asset-weighted returns when I dig up the info…

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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