Let’s understand how much MER (Management Expense Ratio) fees can affect your portfolio value.
Scenario 1
MER of 0.24%. This is a reasonable starting point for DIY investors. I love the Vanguard Canada All-in-One Index ETFs like VBAL, VGRO, and VEQT, which are all 0.24% MER.
Scenario 2
MER of 2.23%. I selected the average MER fee in Canada. Unfortunately, most mutual funds MER costs range from 2%-3%
MER Calculator
| Scenario 1 | Scenario 2 | |
|---|---|---|
| MER (%) | ||
| Initial Investment (pv) | ||
| Regular Contribution (pmt) | ||
| Frequency | ||
| Investment Return (%) | ||
| Time Period (Years) | ||
| Future Value (No Fees) | ||
| Total MER Fees | ||
| Total Payments | ||
| Investment Growth | ||
| Investment Value |
Fees saved:
Hi! Great Calculator btw.
In the calculations, I noticed that for “Total Payments” the calculator is not adding the “Initial Investment (pv)”, is this intentional? if so why?
Also would be great to add more than 2 Scenarios as it would be handy to compare a few usecases on the UI.
Hi John,
Thanks for the heads up. I’ll take a look at the calculation for the initial investment.
What sort of use cases did you have in mind? Do you have an example you’re interested in that you could share?
THE MER CALCULATOR is not working when I hit calculate.
Thank you for letting me know. It’s fixed now!
Cheers,
-Sterling
THE MER CALCULATOR is not working
I am assuming the returns over time are based on compounding interest not simple correct. If so would that be misleading because money invested in the market is not based on compound returns. Also are the mer’s also based on a compound factor rather simple.
Hi Tony,
Investment returns compound over time (MER as well). Money invested in the market do receive compound returns. For example, if I invest $100 today and have it invested for a year and it receive 6%. I now have $106. If I then invest another $100 and have it invested for a year the result is:
– First $100 compounding for one year = $106.00
– Then $106 compounding for one year = $112.36
– The second $100 compounding for one year = $106.00
=====
$218.36.
I hope that helps.
But my arguement is that money in the market does not compound. The returns are based on averages. The only investment that compounds is a gic. So if you get 7% locked in for 5yrs then that is the true definition of compounding compared to averaging 7% in the market. That also holds true for mer charges due to flucuating markets. At best the mer charges are based on simple interest due to flucuations.
That’s not accurate but fortunately for us, the markets do compound. If they didn’t, in the example I gave – that would mean that the $6 I earned in year one wouldn’t also earn interest in year two. And that’s not the case. These calculations are based on a “Future Value” calculation if you are looking for more information.
Another way to look at MER is that it is negative compounding. As in, it costs you more the longer the investment horizon. Every extra dollar I spend in MER I lose it as an investment, but also the return on my returns. I hope that helps.
I understand you saying that if you earn $6 in year one. But what happens if I lose $12 in year two due to markets fluctuating. Then I would be in the negative. So in hindsight the mer applied would be the same percentage but the dollar factor would be lower based on fund value. So that is why I said that investing in the market is not the true definition of compounding. From my perspective the proper definition would be averaging because from year to year returns are different not locked in. They can go up and they can go down.
Gains on gains is ‘compounding’.
I respectfully disagree. What do you refer to capital losses as? Like I indicated the only investment that truly compounds are gic’s when they are truly locked in at a fixed interest rate. When markets fluctuate up and down that is not compounding that is averaging.
Hey Tony, I can see where you’re coming from but I think you’re being too strict in your definition of compounding in that it HAS to go up, like for GICs. Averaging is at play as well when looking at time-frames, but that doesn’t take away the fact that the markets compound. The key point is they compound “returns”. MER’s would be less actual dollars during a downturn b/c there is less capital, but over time their impact on your portfolio has a compounding effect.
I appreciate your questions and engagement. Let me know if you have any more questions. Cheers!
-Sterling
You’re too deep in the trees to see the forest. But at least we tried.
I’m struggling with how to calculate the impact of MER on dividend focused ETFs, such as HYLD, HDIV, etc.
Can the calculator be used for those funds as well, (forgetting growth) if you substitute the annual growth with the fund’s annual dividend yield?
Sorry, I’m not sure if I’m wording this as clearly as possible.
Hi Arie, great question. I’m not quite sure what you mean by “forgetting growth”. The calculator is based on “investment return”; Capital appreciation + dividends = Investment return. This assumes that dividends are reinvested (included as part of total return). The dividend yield is one part of the funds return. MER is calculated on the total invested assets, not the dividend yield.
This is a great calculator, thank you!
How is MER calculated? I saw you deducted it from returns in your calculation in one of the previous comments, but MER is payable on entire balance of fund, which could perhaps make the calculation be off a bit (I could be wrong though)
For example a portfolio value of 1M MER @2% would be 20k in fees for that year.
Year 1: $1,000,000 – $20,0000 = $980k
Year 2: [980,000 + return (7%)]
= $1,048,600 – 2% MER = $1,027,628
However, if I were to take the returns Instead and minus them from one another the #s are different
(7% return – 2% MER = 5%)
Year one = $1,050,000
Year 2: = $1,102,500
Not sure which of the methods you’ve used to calculate the MER.
Hi Rea,
Thank you for reaching out! The calculator uses a future value formula. The fees are subtracted from the gross return, then applied to the portfolio value (net return). That’s the same as saying the gross return is applied to the portfolio value, and separately the fees are applied to the portfolio value and then those two results are subtracted. You’re correct that the fees are on the entire balance, so is the return.
In your first example: a portfolio value of 1M MER @2% would be 20k in fees for that year.
Calc1: Gross Return and Fees Calculated Separately
Year 1: $1,000,000 x 7% = $70,000 – gross return
Year 1: $1,000,000 x 2% = $20,000 – fees
Year 1: Net Return $1,000,000 + $70,000 – $20,000 = $1,050,000 (which is the same as your 2nd example)
Calc2: Net Return
Year 1: Net Return: $1,000,000 x 5% (7%-2%) = $1,050,000
Doing it the calc2 way, just changes where the subtraction occurs.
Thank you for the clarification!
The calculator is great.
Could you please include a third scenario for typical robo-advisor fees. Not everyone is comfortable using a brokerage account to buy ETFs but if they switch to a robo-advisor they could lower the management costs without increased complexity.
It would also be handy if you could list a couple of webpages someone could check out to determine what to enter into the “investment returns” field. Past returns isn’t really a good metric and I don’t know of any Canadian webpages that regularly update projected returns. For 2023 I have been using table 4 on https://www.pwlcapital.com/expected-returns-2023-update/
Hi Dan,
Thanks for the feedback. I will check into the 3rd option. The link for returns is a good call-out.
In the mean-time you could use one of the scenarios to key in a Robo-advisor MER and that would produce the results your looking for.
-Sterling
It looks like the calculator works correctly only for whole number Investment Returns. When I tried with decimal Investment Returns the results is the same as for the whole number smaller than the amount I entered. For example, if you enter a return between 7.01 to 7.99 the result will be same as for 7. If you enter return between 8.01 and 8.99 the result will be the same as for 8. These are just examples but it is the same for all the decimal returns that I entered. You may want to look into the glitch in the calculator.
Hi Jare,
Thank you for the feedback and sorry for the late response. I’ve updated the calculator to work with decimal rates. Let me know if you see anything else. Thanks! – Sterling
Its a helpful calculator. How did you compute the Future value. I tried using FV formula in excel but it doesn’t match the future value by this calculator, can you please help on this?
Hi Amit,
If you key this into Excel you get the same results. I used the scenario 1 information.
=FV(rate, nper, pmt, pv)
=FV(.07/12,12*25,-1000,-10000)
How do you calculate the Total MER Fees?
Hi Henry, the total MER fee is the difference of the Investment Return % and Investment Return % minus MER %. In scenario 1 above, that’s 7% and 6.76% (7% minus 0.24% MER). Do a future value calculation using each rate then subtract.
Using the results listed:
$867,325.88 – $833,910.07 = $33,415.81
(FV @ 7%) – (FV @ 6.76%) = (Total MER Fees)
Helpful calculator! Made the change from an index mutual fund to etfs, gonna love saving the fees long term
This helped me finally get out of Mutual funds and invest in ETFs. The money we’ll be saving is huge.
That’s amazing! Congrats on the move. I’m happy to hear this helped. 🙂
This is a very useful tool. It has given me a huge insight on investments and fees. Thank you
Hi Chidalu, great to hear from you. I’m happy to hear you gained valuable insight from it.
Thank you for building this. I used it to compare an all-in-one ETF against my multi-ETF portfolio. Now I know the cost (to some extent) of simplifying my portfolio: $75K over 25 years.
Hi Bob,
Thanks for stopping by. I’m glad you found it useful!