A seasoned investor, Mr. Henderson, is comparing a mutual fund and an Exchange Traded Fund (ETF) that track the same index. He notes that the mutual fund's Management Expense Ratio (MER) is 0.75%, while the ETF's MER is 0.20%. Mr. Henderson mentions he sometimes buys and sells within the month to rebalance his portfolio. Given this information and assuming identical underlying portfolios and gross returns, what is the most important factor for Mr. Henderson to consider regarding the MERs and his trading behaviour?

Question: A seasoned investor, Mr. Henderson, is comparing a mutual fund and an Exchange Traded Fund (ETF) that track the same index. He notes that the mutual fund's Management Expense Ratio (MER) is 0.75%, while the ETF's MER is 0.20%. Mr. Henderson mentions he sometimes buys and sells within the month to rebalance his portfolio. Given this information and assuming identical underlying portfolios and gross returns, what is the most important factor for Mr. Henderson to consider regarding the MERs and his trading behaviour?

Answer options: ✅ The mutual fund's trading costs are embedded in its higher MER, making it potentially more expensive for frequent trading than the lower-MER ETF that requires separate brokerage commissions for each trade.

• The mutual fund's higher MER suggests it offers more personalized advice, which would offset any trading costs Mr. Henderson incurs.
• The ETF's lower MER means it is inherently less volatile and therefore more suitable for short-term trading.
• The MER is only a factor for buy-and-hold investors; it has no impact on investors who trade frequently.

Correct answer: The mutual fund's trading costs are embedded in its higher MER, making it potentially more expensive for frequent trading than the lower-MER ETF that requires separate brokerage commissions for each trade.

Explanation: While ETFs generally have lower MERs, trading them involves brokerage commissions for each buy/sell transaction, similar to stocks. Mutual funds typically have higher MERs, but transactions (purchases and redemptions directly with the fund) often do not incur separate commissions. For a frequent trader like Mr. Henderson, the cumulative brokerage commissions on an ETF could potentially outweigh its lower MER benefit compared to the mutual fund, making the higher-MER mutual fund cheaper net of all costs, or vice versa, depending on the frequency and size of trades.