Should You Ever Buy a Bond Mutual Fund?

Should you pay up for expertise? Or just buy an ETF?

| More on:
The Motley Fool

There has been much discussion in recent years about the fees in equity mutual funds, and for good reason. With management expense ratios (MERs) over 2%, it has become very difficult for these funds to beat their respective benchmarks, and most of them don’t.

Fixed income funds have lower fees, typically 1.0-1.5%. But with bond returns so low, the fees can be even more onerous than they are for equity funds. A comparison of bond funds provides an illustration.

A comparison

The following table shows the flagship Canadian bond fund for each of the big 5 banks.

Bank Fund Annual Fee 10-Year Annual Return
RBC RBC Bond Fund 1.22% 4.4%
TD TD Canadian Bond Fund 1.11% 4.52%
Bank of Nova Scotia Scotia Canadian Income Fund 1.46% 4.01%
BMO BMO Bond Fund 1.60% 3.63%
CIBC CIBC Canadian Bond Fund 1.51% 4.4%
Average 1.38% 4.19%

Instead of buying one of these funds, an investor could have bought the iShares Canadian Universe Bond Index ETF (TSX: XBB), which currently charges 0.33% per year. Over 10 years, that investment would have returned 4.85% per year, beating every one of the bond funds in the table above. Why is this the case?

Tough to get an edge in bonds

When investing in stocks, there are always opportunities to gain an edge – prices can fluctuate wildly, creating opportunities for astute investors. So there tends to be a wide gap between the best stock pickers and everyone else.

But bonds are trickier. They require making economic predictions such as the movement of interest rates, and the reward for being right is relatively small (certainly compared to the reward for being right on a stock). The funds above are largely invested in safe assets like government of Canada debt, making it all the more difficult to outperform. And with interest rates so low, it’s now even tougher to achieve high returns.

The fees are magnified

One can make a couple of interesting observations from the table above. One is that before factoring in fees, the bond funds made 5.57% per year over the past decade. This was actually higher than the bond ETF. So the fees were enough to turn outperformers into underperformers.

Secondly, the best-performing bond fund, which came from TD, also had the lowest fee. Meanwhile, the worst-performing fund, which came from Bank of Montreal, had the highest fee. Does anyone think this is just a coincidence?

Foolish bottom line

At the end of the day, when investing in safe assets like government of Canada bonds, you don’t need to pay up for expertise. No matter who you are or what your goals are, you’re better off in a bond ETF than a bond mutual fund.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Payday ringed on a calendar
Dividend Stocks

3 Top TSX Passive-Income Stocks That Pay Out Every Month

Here are some of the best TSX stocks for passive monthly income. Investors should explore to see if they're a…

Read more »

edit Sale sign, value, discount
Dividend Stocks

3 Remarkably Cheap TSX Stocks to Buy Right Now

These three cheap TSX stocks are some of the best buys on the TSX, and yet their share price is…

Read more »

think thought consider
Dividend Stocks

This Dividend Stock Could Create $1,353 in Passive Income in 2024

This dividend stock can create massive passive income from two sources, so don't miss out before a recovery in 2024!

Read more »

Increasing yield
Dividend Stocks

TFSA Investors: Buy This Top Bank Stock for High-Yielding Dividends

Generate a superior passive-income stream by investing in this high-yielding dividend stock from Canada’s Big Six banks.

Read more »

grow money, wealth build
Dividend Stocks

2 of the Best TSX Dividend Stocks I Plan on Holding Forever

High-yield TSX dividend stocks, such as Enbridge, offer you tasty yields and trade at significant discounts to consensus price targets.

Read more »


CNR Stock: Should You Buy Today?

Canadian National Railway has been hit in recent quarters, as economic growth has slowed, with CNR stock declining 10% in…

Read more »

Family relationship with bond and care
Dividend Stocks

TFSA Investors: 3 Cheap Canadian Stocks for Retirees

These three Canadian stocks are super cheap for retirees looking for a great buy that will last the test of…

Read more »

calculate and analyze stock
Dividend Stocks

CPP Disability Benefits: Here’s How Much You Could Get

Not everybody can get CPP disability benefits. If you want some passive income, consider investing in Royal Bank of Canada…

Read more »