# Regular contribution threshold for ETF vs Index Mutual Fund?

I've seen enough info out there comparing lump-sum investments into ETFs vs mutual funds with respect to broker commissions in the case of ETFs, and the discrepancy between MERs between the two. In that case, it's quite easy to figure out the threshold lump-sum to make a case for investing in an ETF instead of an equivalent mutual fund (typically a few \$1000s).

What I'm trying to figure out now is given that I'm making monthly contributions to an index mutual fund with the MER of 1.00%, how would my overall expenses change if I switch to the equivalent ETF XIU with a MER 0.17%. My analysis compares a monthly contribution to the index fund with an equivalent purchase of ETF units. The analysis also includes broker commissions, which I'm taking to be \$5/trade at Questrade.

For example, say I contribute \$1000/mo to my index fund. For ETFs, this purchase frequency would likely be too costly so I'd likely purchase new units every 6 months and contribute \$6000 each time, or every 12 months for \$12000.

I've started a spreadsheet, but no matter what my monthly contribution is, the mutual fund always seems to win. I'm likely calculating something wrong.

Ignoring the attached spreadsheet, is there either a quick and dirty ballpark method or a proper calculated method that I can use to determine (1) my purchase frequency and (2) the threshold investment amount?

(I posted this question at the Financial Webring forum as well.)

EDIT
I was calculating a few things wrong so I updated the spreadsheet. Now the ETF wins.

I ran your assumptions through a similar spreadsheet I put together. Here's a chart:

The assumptions I used were:

• Fund 1, a mutual fund, having 1.00% MER and no commission to buy.
• Fund 2, an ETF, having 0.17% MER and \$5.00 flat commission to buy.
• 12 purchases per year, each of \$1000 gross (i.e. \$995 net purchase in the ETF case.)
• A gross rate of return of 7.00% per year. Returns net of fees were therefore 6.00% for the mutual fund and 6.83% for the ETF.
• Ignoring taxes; i.e. assuming both are in sheltered accounts.

After 30 years, the mutual fund balance was \$977,159 and the ETF balance was \$1,131,304. i.e. +15.8% in favor of the ETF. However, I really wanted to stress the ETF results, so I also ran a few alternate scenarios to see how it would hold up if the purchase frequency were increased, or commissions increased:

• Increase to 120 purchases @ \$100, and the ETF still wins: \$1,080,140 vs. \$977,159. +10.5%
• Increase commission to \$30.00, and the ETF still wins: \$1,102,879 vs. \$977,159. +12.9%
• Increasing commission to \$120.00 (anybody use a full service broker?), and the ETF still wins: \$1,000,550 vs. \$977,159. +2.4%. Note: The mutual fund had the lead until year 26, at which point the ETF moved ahead.

If I had to conclude anything from the above, I'd say it's very hard for a mutual fund to beat an ETF, even with a relatively high purchase frequency or a relatively high commission on the ETF. Rather, fund expenses eat substantially into returns. Minimizing the purchase frequency or purchase commission isn't necessary to make a good case for ETFs over mutual funds.

There's also a case to be made against minimizing the purchase frequency too much: You're losing out on some dollar-cost-averaging benefits. Consider that monthly purchases average you in at more prices throughout the year (12) than semi-annual purchases (2).

UPDATE: My sample Excel 2007 spreadsheet is here: ComparingTwoFundFees.xlsx

• I added a link to the spreadsheet as requested. Let me know if you have any questions about how it works. Feb 11, 2010 at 1:20
• I fixed the spreadsheet link; it's somewhere else now. Dec 3, 2012 at 19:53
• +1 for a convenient spreadsheet, Chris. I wanted to run a similar calculation to compare an ETF/mutual fund and it actually came out fairly close, but that's likely because the ETF has a MER of 0.48%, so it still loses some return despite the mutual fund's MER of 0.83%. May 15, 2013 at 14:19

Just an idea: Average in to a low cost mutual fund to take advantage of the \$0 commission. Then, periodically move those holdings into the lower expense ETF, perhaps once a year.

I wonder what the optimal move-to-ETF frequency would be. This idea makes more sense for tax sheltered accounts.