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:
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!