Exchange-traded funds (ETFs) have fundamentally changed retail investing. A Canadian investor today can hold a globally diversified portfolio of thousands of companies — rebalanced automatically — for less than 0.25% per year.
Understanding MER: The Silent Return Killer
The Management Expense Ratio (MER) is the annual fee charged by a fund. It is deducted automatically — you never write a cheque — which makes it psychologically invisible but financially enormous.
| Fund Type | Typical MER | Annual Fee on $500K |
|---|---|---|
| Canadian bank mutual fund | 1.8% – 2.5% | $9,000 – $12,500 |
| Actively managed ETF | 0.5% – 0.9% | $2,500 – $4,500 |
| Asset allocation ETF (XEQT) | 0.18% – 0.25% | $900 – $1,250 |
The One-Fund Solution: Asset Allocation ETFs
These "asset allocation ETFs" hold thousands of stocks and bonds from around the world, automatically rebalance, and cost approximately 0.20% per year.
| ETF | Provider | Stock/Bond Split | MER |
|---|---|---|---|
| XEQT | iShares | 100% stocks | 0.20% |
| XGRO | iShares | 80% stocks / 20% bonds | 0.20% |
| XBAL | iShares | 60% stocks / 40% bonds | 0.20% |
| VGRO | Vanguard | 80% stocks / 20% bonds | 0.24% |
| VCNS | Vanguard | 40% stocks / 60% bonds | 0.24% |
Both are excellent. The MER difference (0.20% vs 0.24%) is negligible over most timelines. Choose based on your risk tolerance: XEQT is 100% equities (higher expected return, higher volatility), VGRO is 80/20. Consistency of investing matters far more than which one you pick.
Account Priority: Where to Hold ETFs
- TFSA first — All growth and withdrawals 100% tax-free
- RRSP second — US-listed ETFs are tax-efficient here due to the Canada-US tax treaty
- Non-registered last — Capital gains taxed, least efficient for active rebalancing
Frequently Asked Questions
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