Welcome Team Black (is the new red)!

ETFs What The Heck


There are only three fundamental concepts required for fabulous success in investing. And anyone—I mean anyone—can learn these basics:

  • Time value of money
  • Diversification
  • Low fees

Let’s go through them one-by-one. 

First, understanding time value of money. This has to do with compound interest, but essentially means, the earlier you start investing, the longer and harder your money can work for you. Which is to say the best time to start investing was 10 years ago, and the second best time is today.  And yes, that is really all you need to know on the time-value of money.

Second, picking the right stocks at the right time is the key to long term wealth, right?  Wrong. That is why it is not on the list!  Diversification (together with time value of money/low fees), and not stock selection, is the primary driver of successful long term investing.  And so you might ask, “what exactly is diversification?” Diversification is the idea of not putting all of your eggs in one basket, or in the case of investing, the following examples:

  1. 1000 stocks instead of one stock
  2. 10 countries instead of one country
  3. bonds and stocks instead of just stocks
  4. stocks and bonds instead of just bonds
  5. micro/small/medium/large company stocks, instead of just big companies


Er, if we only have $1000 to invest, how do we buy 1000 stocks, 10 countries, bonds and stocks and the stocks of virtually every size of company?!

Well, there are two ways to do this:

  • mutual funds
  • exchange traded funds (ETFs)

Let’s spend some time talking about the similarities between them.  First, both mutual funds and ETFs offer a great way to achieve diversification in your investment portfolio. OK wait, that is actually all the time I need to explain the similarities between the two—it pretty much stops at diversification.

So let’s discuss the key differences between mutual funds and ETFs:


In a single phrase: This is what all the fuss is about.

Why?  To answer this, I have to back up a bit to a time many years ago when I was alive, but still at James Bay Elementary (yes, that James Bay Elementary, on Oswego), someone, let’s call him a Portfolio Manager (why? Because well, that is what they are called, and back then, they were all men) actually had to choose the 1000 stocks that went into a mutual fund that held 1000 stocks.

And surrounding the Portfolio Manager—then and now—are all sorts of people required to help the Portfolio Manager and the firm he works for (aka the, “mutual fund company”) make sure the mutual fund is a success.

Here, I drew you a  picture. (click for larger image)

Screen Shot 2016-07-09 at 12.39.58 PM

And guess what? All these people have to get paid. A lot. (except maybe the receptionist)  And who pays everybody? You. 

Now, when the smart people in the room were putting together the payment structure for mutual funds, the really smart guy said “You know, if our customers start figuring out how much they actually pay us each year, it might scare the crap out of them and in all likelihood they will start to look for alternatives.” And everyone in the room had a really good long laugh because obviously (if you want diversification) there were no alternatives.

[I mean, it’s not at that exact moment a young Bill Gates was working on creating a machine capable of complex calculations…]

But still, just to be safe, the men dedicated the entire meeting to finding interesting and creative ways to hide their bloated, excessive and exorbitant fee structure.


Nothing has changed. The average (hidden) equity mutual fund fee (it’s called an MER for Management Expense Ratio) in Canada is 2.25%.  Advisors still receive kick backs trailer fees and hundreds of thousands of dollars in DSC mutual funds (which benefit the Advisor and not the investor) are still sold every day.  Any attempts to ban, or even curtail, hidden trailer and DCS fees (as done in Australia and the U.K) have been vehemently opposed by the mutual fund industry.

Not sure whether or not to believe me? Read this: Canada earns “F” grade and dubious distinction of having highest mutual funds fees in the developed world. Source: Morningstar Investment Research 

And so, yep, you still pay. 


First I want to talk about ETFs. As most of us know (surprise!) Bill Gates did invent a thinking machine and that machine has gone on to create a revolution that has disrupted every industry imaginable. Yes, even the investment industry. It turns out that not only can computers pick stocks, but 80% of the time (closer to 98% of the time over 20+ years) they are a lot better at stock and bond picking than Portfolio Managers. And what do you know, they can do it for a fraction of the cost.

And I mean fraction. 

The average MER for an ETF in Canada is .2%. Yes, that decimal is in the right place. On average, ETFs cost less then a tenth of mutual funds, without sacrificing returns. Passive management beats active management, it just does.


I don’t know your situation, so let’s talk about me. At the age of 35, my husband and I had $250,000 combined, in our RRSPs, and give or take, depending on variables, we contribute $1000.00 per month to our RRSPs.


  • 30 years passes (so we are both 65)
  • Average rate of return over the 30-year period was 6.5%
  • we continued to contribute $1000/month until age 65

Are you ready? 

  • Combined value of RRSPs if held in mutual funds: $1,255,578
  • Combined value of RRSPs if held in ETFs: $2,178,750

Choosing to invest in mutual funds at age 35 has cost us $923,172*.

Continuing on (yes, it gets worse), if we live to age 100, the following calculations can be made:

  • Annual income (combined, before taxes) derived from RRSP accounts invested in mutual funds (age 60 – 100): $65,973. 
  • Annual income (combined, before taxes) derived from RRSP accounts invested in ETFs (age 60 – 100): $114,481.17 

Bottom line: Making a choice to invest in mutual funds over ETFs at age 35, has cost us almost 50% of our annual income from age 60 to 100**. That is 40 years. And my question to you is, do you think a a drop of over 40%, from $114,481.17 to $65,973 would affect your quality of life in retirement? Would it affect what you eat, where you live. what you drive, where you travel (if you travel?!). And most importantly, whether you have enough to enjoy your retirement or whether you risk outliving your funds and relying on your children for financial support.

These are important questions which I don’t think enough of us are asking ourselves today. 


To be clear, I am not opposed to financial advice. I love financial advice! If I could, I would roll around naked in financial advice. I am opposed to hidden fees. Seek out financial advice, now and often. Just make sure the fees you are paying are transparent, and whenever possible, outside of your registered accounts.

Are all mutual funds bad? No. And not all ETFs are good. You want strong diversification with ultra-low fees. Today, may ETFs are what fit that requirement.

For those that are interested, ETFs are comparable to index fund investing (again, what you are looking for, regardless of the name on the package, is diversification and low fees). What is an index? You know how when Global TV says, “78% of Canadians think Justin Trudeau is doing a good job,”  We know that the polling company did not call every Canadian. We accept that they called a segment or cross section of Canadians, and that this cross-section of Canadians can be considered a proxy for most Canadians. And so it is the same with stocks (or bonds).  An index is a certain number of stocks or bonds that serve as a proxy for the entire market you want to invest in.


*proprietary calculator (I had it custom built to compare opportunity costs of MERs over a 30-year period. Email me if you would like a copy—and please specify if you would like Numbers or Excel version)

** Visit Get Smarter About Money, retirement income calculator found at http://www.getsmarteraboutmoney.ca/tools-and-calculators/rrsp-savings-calculator/rrsp-savings-calculator.aspx#.V4Ez7pMrJBw (I used 4% as rate-of-return after retirement)