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

sale discount best price
Investing

These Stocks Simply Look Too Cheap to Ignore Any Longer

CN Rail (TSX:CNR) and another Canadian value stock are still worth picking up as the TSX soars.

Read more »

data analyze research
Dividend Stocks

Buy the Dip on the Return of These Recession Stocks?

These companies keep humming along, no matter what the economy is doing.

Read more »

data analyze research
Bank Stocks

This Canadian Financial Stock Down 16% Pays an Iron-Clad Dividend

This bank stock took a big hit last year but is rallying in 2025.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

2 Canadian Dividend Stocks to Buy and Hold for the Next 20 Years

These high-yield Canadian stocks have sustainable payouts and could continue to grow their dividends in the coming years.

Read more »

man touches brain to show a good idea
Dividend Stocks

Investors: How to Maximize Returns and Minimize Risk in Today’s Market

Forget about getting rich quick. Take less risk in the stock market by investing in diversified ETFs and loading up…

Read more »

investment research
Bank Stocks

Is This Canadian Bank Down 8.5% Too Good to Pass Up?

This Canadian bank now offers a 6% dividend yield.

Read more »

bulb idea thinking
Dividend Stocks

I’d Consider These 5 Stocks for a $10,000 Canadian Dividend Portfolio

Here are the five top Canadian dividend stocks I think should be in every long-term investor's portfolio in this period…

Read more »

Start line on the highway
Metals and Mining Stocks

The Smartest Canadian Stock to Buy With Only $300 Right Now

This copper Canadian stock is due for even more growth, making now a great time to pick it up.

Read more »