What are we looking for
Canadian-listed ETFs that have higher-than-average fees, but have outperformed in spite of them.
The screen
Morningstar has long touted that mutual fund and ETF investors should pay close attention to fees. Costs compound over time, and the evidence is clear that lower-fee funds tilt the odds toward better long-term outcomes. But that doesn’t mean every higher-fee fund or ETF should be written off. Morningstar’s latest Canadian Fund Fee Study shows that fees continue to drift lower – particularly among passively managed products – as Canadian investors vote with their wallets for cost-efficient choices. Still, the reasonable question for any fund is not simply “Is this the cheapest?” but rather “Is this fee competitive relative to the right peers?”
Morningstar’s Fee Level Methodology helps answer this by evaluating a fund’s expenses within its proper context – first by investment category, and then by how it is sold (with a bundled advice fee, advice fee charged separately, or without advice fees altogether in the case of ETFs). The methodology offers a genuinely apples-to-apples view of cost competitiveness.
Once funds are placed into the appropriate peer groups, they are divided into five fee quintiles, ranging from “low” to “high.” Importantly, a “high” fee level doesn’t automatically signal poor value – it simply raises the bar for what the fund must deliver in terms of performance and discipline.
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Today, we put that idea to the test by identifying Canadian-listed ETFs that carry “high” fees but have still outperformed their categories after costs. Using Morningstar Direct, we screened the full Canadian ETF universe – now an impressive 1,856 funds – for those flagged with a high fee level and that also hold a five-star Morningstar Rating. As a reminder, the star rating is an objective, performance-based measure that adjusts for both risk and fees over the trailing 10 years if available, with heavier weight placed on recent performance. A five-star rating reflects meaningful outperformance versus peers, after accounting for fees.
Our research also shows that while the rating is backward-looking, performance tends to persist. On average, funds that earn five stars outperform those with four stars, which in turn outperform those with three stars, etc., in periods after receiving the rating. The star rating is not a buy or sell signal, but it remains a strong starting point for deeper analysis.
What we found
The table accompanying this article shows the ETFs that met the above criteria alongside their tickers, categories, trailing returns, whether they are actively or passively managed, inception dates and management expense ratios (MERs). The results clearly skew toward actively managed funds, reflecting the increased costs in managing the portfolio. Investors are urged to first look at the category to which each ETF belongs as the ratings (and the fee level methodology) are largely based on these groups.
This article is provided for informational purposes only and does not constitute financial advice. Investors should conduct their own independent research before buying or selling any of the investments listed.
Ian Tam, CFA, is director of investment research for Morningstar Canada.