Choosing funds: isn't net returns track record more important than MER?

[winnythefoo]

Hi all, first time poster, reader for a year or so.

I live in Canada and have been reading Mr. Frugal Toque's post on Canadian investing. For those not yet comfortable with open markets and ETFs, he recommends TD e-series funds, which AFAIK are the lowest-MER index funds available without a broker account.

Here's my question though. His entire post works on the assumption that, as long as you have broad market exposure, MER should be your number of primary concern. Lower MER = earlier FI. But if a fund has a 10 year or longer track record (especially having gone through 2008), shouldn't you just look at the average annual compounded return (which seems to always be given after deducting expenses) and ignore the MER?

For instance, TD's e-series US index fund (pdf), which tracks the S&P 500, states: "As of May 31, 2017, the annual compounded return of e-Series securities of the fund was 6.3% over the past 10 years. If you had invested $1,000 in e-Series securities of the fund 10 years ago, your investment would now be worth $1,834."

RBC's US index fund (pdf) also tracks the S&P 500, and states: "A person who invested $1,000 in the fund ten years ago would have $2,220 as at May 31, 2017. This works out to an annual compound return of 8.3%."

Both documents state, in the same section: "Returns are after expenses have been deducted. These expenses reduce the fund's returns."

This would mean those percentages in bold are after subtracting MER, right? So then it doesn't actually matter that the TD fund charges 0.35% MER and the RBC fund 0.72% -- in fact, the RBC fund's higher returns are worth it.

Is this correct or am I missing something?

Also, sub-question... if both funds just track the S&P 500, how can their 10-year performance be so different?

Thanks for your thoughts. Hopefully this hasn't been asked before; it was a hard thing to search for!

[alexpkeaton]

Two things:

• How a fund performed in the past is not a predictor of future performance. The fact that one of these two funds did significantly better than the other during the past ten years doesn't tell you which will do better in the next ten.
• You're right that it is strange that two funds tracking the same index should have such different performance. And even stranger that the one with higher fees performed better. Seems like some serious tracking error in at least one of the funds.

[alexpkeaton]

It looks like the RBC US index fund doesn't track the S&P 500 Index but instead the FTSE USA Index. That might account for the discrepancy.

[winnythefoo]

Thanks for your reply. Yes, I see the doc for the RBC fund does seem to say it switched to track FTSE in September. I still don't understand how they were so different before that though.

But yes, I think I take your larger point -- whatever accounts for the difference in past performance, choosing funds based on that is a similar trap to picking stocks. Objectively, the most reliable strategy when choosing among options with equivalent market exposure is still to go with the lower-cost option. Is this what you mean?

[alexpkeaton]

Objectively, the most reliable strategy when choosing among options with equivalent market exposure is still to go with the lower-cost option. Is this what you mean?

Yes.

Though I'd still like a better answer to explain the difference between these two funds.

[GreatLaker]

The performance results for the RBC fund are in CAD. The performance results for the TD fund are in USD. Note the fine print near the bottom of p.2 the TD fund facts.

This fund's base currency is the U.S. dollar. All fund and performance data is expressed in U.S. dollars. This series of the fund can be purchased in either Canadian dollars or U.S. dollars.

It took me a while to see it, but looking at the year by year returns for the two funds, they are just too different.

The following link shows returns for the TD fund in CAD
https://www.tdassetmanagement.com/fundDetails.form?fundId=3270&lang=en

Also you can see the return for the S&P500 index in CAD near the bottom of the page at the following link. Results are for the index itself, i.e. without any MER or other investing costs. If you want to see it in USD you can switch currencies under Options.
http://bit.ly/2zPT8LX

[Heckler]

What a sneaky way to make the TD fund look better!  Performance must always be compared using the same currency. 

My work plan (5% match) is to a $C Sunlife SP500 index that charges 0.39 and shows this charge on my statement, and I now watch $6 per month be removed each month.   Thankfully I can pull out for free annually and  move it to $U VTI, which charges 0.04, a huge reduction in cost.

I don't compare returns, as the two funds are very different indices (500 vs 3626 companies) and one is $U, the other $C, but I know that the fx rate is set daily, so the only thing I can control is which MER I select.  I do have to pay $30 to buy VTI, so do it in at least $20k blocks annually - a 0.15 MER, again a cost I can control.

[GreatLaker]

Canadian Couch Potato published an article explaining funds priced in CAD, USD and currency neutral (hedged) and compares them to the actual S&P500 return in USD. It's from 2010, but the explanation is still valid.

http://canadiancouchpotato.com/2010/08/11/will-the-real-sp-500-please-stand-up/