I’ve learned about a mutual fund that, in my mind, is specifically designed to extract money from naive and uninformed investors. It made me very mad. There have always been snake oil salesmen, and that’s unfortunate.
Writing this post is my way of helping you to avoid being a victim of such tomfoolery. I want you to be smarter about the financial products you buy, by knowing a little bit about how they’re priced. Learning never stops. It’s up to you to continue reading about money and ensuring that you do better once your know better. If you can commit to learning about personal finance, then you can take steps to avoid ever being fleeced by buying this kind of product. And if you still choose to buy this product, then atleast you’ll be aware that you’re paying more than necessary.
The product I’m referring to is a mutual fund that holds 10 exchange-traded funds (ETFs). For ease of reference, I will call this product “RIPOFF” because it boldly rips off investors under the guise of offering something valuable. RIPOFF charges you way more in fees than you need to pay. No one has provided any indication that RIPOFF generates better returns than the ETFS that it holds. In short, investors would be better off just buying the ETFs instead of buying RIPOFF. As far as I’m concerned, RIPOFF is simply a trap for the unwary. You need not count yourself among the unwary after reading this post.
First things first. ETFs have lower management expense ratios (MERs) than mutual funds. The MER is the fee that you pay to the financial institution for owning the investment product. It is a percentage of every dollar invested. Never forget this!
As an investor, you want to hold securities that have lower MERs because you will keep more money in your pocket. Over time, a higher MER permits the financial institutions to siphon more money out of your portfolio. In other words, less money stays with you because more money is going to them. Check out this MER calculator and play with the numbers. Change the expense ratio number and see for yourself how a higher MER over a long period of time means a lower portfolio balance for you. A higher MER can mean that over $100,000 is paid out in fees for no good reason.
RIPOFF charges an MER of 1.72%. This is a very high MER. Ideally, you will never pay more than 0.50% for your ETFs. (Some people say never pay an MER that’s higher than 0.10%, but I think that applies more to the US market.)
In doing my research, which consisted of a simple Google search, I learned that RIPOFF holds 10 ETFs. After another 10 minutes of research, I learned that none of those ETFs charges an MER as high as 1.72%. One of the 10 ETFs held within RIPOFF charges an MER of as low as 0.06% while he highest MER charged is 0.55%. You’ve no doubt noted that the individual MERs are far, far smaller than the 1.72% charged simply for bundling them together under the name RIPOFF.
Instead of buying RIPOFF and paying 1.72%, you should simply buy the underlying ETFs. Doing so means far less money paid out in fees. Even if you invested your money into the most expensive ETF at the MER of 0.55%, you’d be saving 1.17% on every dollar invested. That’s a difference that should not be ignored.
Assuming that your portfolio is $100,000, RIPOFF would charge you an MER of $1,720 every year! For those not good with math, you simply multiply the balance of your portfolio by the amount of the MER, i.e. $100,00 x 1.72% = $1,720. If you owned $100,000 of the most expensive ETF within RIPOFF, then you would only pay an MER of $550 (= $100,000 x 0.55%). In other words, owning the “expensive” ETF would cost you less than 1/3 of the cost of RIPOFF.
Now, look what happens if you owned $100,000 of the least expensive ETF contained within RIPOFF. You would only have to pay an MER of $60 every year, because $100,000 x 0.06% = $60. Buying RIPOFF is 28 times more expensive than the least expensive ETF!!!
Do yourself a favor. Go back to the calculator and calculate the difference in your future portfolio’s balance between paying an MER of 1.72% and paying an MER of 0.06% over a long period of time. The amount is staggering, and I’m quite certain that you would rather keep that amount in your pocket.
Again, I’m not telling you not to buy the more expensive product. Instead, I hope that I’m educating you. I want you to be aware of what you’re buying and how much it’s going to cost you. Maybe you have your own reasons for paying 28 times more than you have to in order to achieve your financial goals. I simply want you to be aware that you’re doing so. It’s your money to spend as you see fit. That said, you should always know when you’re paying more than necessary.
As you’ve no doubt surmised, my position is that no one should be investing in RIPOFF. There is no evidence that RIPOFF will earn you a return on investment that is 28x better – or even 3x better! – than buying the underlying ETFs. This is another reason why you should just buy the ETFs themselves. Make wise decisions with your hard-earned money. Invest in the ETF instead of the mutual fund. Future You will be very glad you did.
