Personal Investor: Bond fund fees outstrip returns
The irony could ruin your retirement. Most investors looking for safe income through bond funds are actually losing money because fees are bigger than returns.
Over the past year the average Canadian fixed income fund declined in value by 0.3 per cent. Over the past three years, the average annual gain for fixed income funds were a paltry 0.9 per cent – far below inflation.
Most investment experts recommend a significant portion of any retirement portfolio hold fixed income to offset risk from the equity portion. Rock-bottom interest rates over the past decade have produced rock bottom yields, but the primary objective of fixed income is stability. Safe bonds or guaranteed investment certificates (GICs) have managed to squeak out annual gains of about two per cent.
Bond funds have had similar returns, but once fees are stripped out it ends up costing the investor to invest. Annual fees on Canadian fixed income funds can be as high as 2.74 per cent.
So, why would anyone put their hard-earned retirement savings in a bond fund? Most Canadians invest for retirement through mutual funds. Many advisors are merely mutual fund vendors and don’t invest directly in bonds. Even those with direct access to the fixed income market choose to put their clients in bond funds because the mutual fund company compensates them through the annual fee.
Most retail investors don’t have direct access to the bond market but one alternative is the iShares Core Canadian Universe exchange-traded fund (XBB). Since it is passively managed the annual fee is under 0.1 per cent. That low fee has helped the fund produce an average annual return of 1.74 per cent over the past three years.
A cheaper alternative is short-term GICs laddered over frequent maturities to ensure more opportunities to get the best yields as interest rates head up.