So last week I treated y’all with a post about a real-life portfolio I’m going to be building for some people. I asked for your help deciding on investments and, for the most part, everyone delivered. I got some really good ideas from the peanut gallery. Yeah, that’s right. Peanut gallery. It’s not an insult. I like peanuts.

Some people suggested I go the ETF route, which I’m not going to do for a number of reasons. I’m confident in my ability to pick good stocks. It’s an intellectual exercise for me to try and beat the market. Besides, I have problems with the way many Canadian ETFs are set up and I’m not the biggest fan of U.S. stocks right now.

Still, some of y’all suggested it, even though I outlined why in the actual post.

One commenter even went as far as suggesting various ETFs I should buy. One choice was XBAL, an ishares product that uses ETFs to create its own balanced fund.

Now I really have nothing against XBAL or any other ETF for passive investors, folks who have no interest in learning about the ins and outs of investing. It comes with a very reasonable 0.18% management fee, which is a hell of a lot less than what an equivalent mutual fund charges.

But it’s also a hell of a lot more expensive than setting up a buy, hold, and forget portfolio. How much more? Let’s take a closer look.

ETF costs can add up

(Edit: I originally got the math wrong on this. The numbers have been corrected)

Let’s run the numbers based on a $250,000 portfolio, a $500,000 portfolio, and a $1 million portfolio.

We’ll start with $250k. That much cash invested in XBAL would cost an investor $45 $450 in fees each year.

$500,000 would mean double the fees, at $90 $900 per year. And $1 million would double the fees again, to $180 $1,800 per year.

Now let’s look at a portfolio with 25 names in it. Qtrade charges $6.95 per trade, meaning it would cost $173.75 to get the portfolio in place. Then we’d have to reinvest dividends, say 4 times a year. That’s an additonal $27.80 in fees, which puts us at $201.55 in fees for year one.

We’ve already crushed the ETF route at fees even at only $250,000 invested.

But what about year two? The buy and hold portfolio would only have $27.80 in fees while the $500,000 portfolio in ETFs would charge an additional $900. You’re looking at about $230 in fees over two years for the buy-and-hold portfolio versus $1,800 for XBAL.

Even at $250,000 invested you’ve beaten ETF fees by the end of year one, and that’s not even counting the cost needed to buy these ETFs in the first place. Some online brokerages don’t charge for ETFs. Others charge for specific ETFs. It’s all very confusing, just like my gender.

The point is this. Say in 10 years your ETF portfolio doubles in size from $500,000 to $1 million. You’re looking at well over $1,000 $10,000 in fees versus a buy and hold investor who just reinvests dividends four times a year, who would pay about $400.

Okay Nelson this doesn’t actually matter, does it?

Look, I’m the first to admit none of this really matters. $900/year for a balanced portfolio of $500,000 is a damn reasonable fee.

But a simple buy-and-hold portfolio with minimal turnover will always beat an ETF on fees, especially over a few decades. The secret is not fucking it up by making constant adjustments. This will be tricky for me, since I sometimes uncover great companies in my research. And I do want to add a U.S. component to the portfolio in a few years.

I also, foolishly perhaps, think my portfolio might be able to beat the underlying indexes. Especially the TSX Composite, which has a big mining and energy weighting.

What I’m saying is I think a portfolio of ETFs is a pretty good choice. And when it comes to investing, doing pretty good can still get you rich. I’m going to try and do a little better, and hopefully I can do more than save a few fees in the process.

Tell everyone, yo!