Total Cost Reporting Guide

Overview:

• New total cost reporting (TCR) rules from the CSA start in January 2026, requiring clearer annual fee disclosures.
• ETFs usually have lower costs than mutual funds; TCR may highlight this advantage.
• TCR requires reporting both total dollar expenses and fund expense ratios for each fund.
• Fees vary with passive fixed income ETFs as cheapest, while some products (e.g., private funds, U.S.-listed ETFs) are excluded from TCR.
• Greater transparency may make ETFs more attractive to cost-focused investors

Beginning January 1, 2026, new total cost reporting (TCR) requirements from the Canadian Securities Administrators (CSA) take effect. Securities registrants and insurers must provide annual reports with TCR enhancements for the year ending December 31, 2026, clarifying recurring embedded fees like management and trading expense ratios.

Investment expenses significantly affect outcomes. Exchange-traded funds (ETFs) generally have lower costs, averaging a fund expense ratio of 0.77% (median 0.60%). Expenses for ETFs vary by asset class and strategy, from 0.2% for passive fixed income to 2.47% for alternative or leveraged products. Actively managed ETFs usually have higher fees; for example, the median Fund Expense Ratio (FER) is about 0.35% higher for active fixed income and 0.50% greater for active equity ETFs compared to their passive counterparts.

Median FER of ETFs Across Different Assets and Strategies

Although specific trading expense data is often lacking, mutual funds generally have average expense ratios that are 0.20% higher than ETFs based on management expense ratios (MERs). The TCR requirements may therefore benefit ETFs. However, the new reporting requirements may impact different investment products differently. Certain investment vehicles, such as structured products, offering memorandum (OM), private funds and U.S.-listed ETFs/ mutual funds are not currently in scope. This could impact the relative competitiveness of those products subject to the new regulations.

The Basics of Total Cost Reporting

TCR mandates that dealers and portfolio management firms revise the current Annual Report on Charges and Compensation (ARCC) to incorporate the aggregate dollar amount of fund expenses incurred by clients during the reporting period, as well as the fund expense ratios (FER) applicable to each fund held by the client throughout the year.

The ARCC should be updated to include the following elements:

• Fund Expenses: Disclose the aggregate dollar amount of fund expenses, encompassing management fees, fund trading costs and operating expenses associated with all relevant investment funds held by the client for at least one day within the reporting period.
• Fund Expense Ratios: Report the fund expense ratio corresponding to each class or series of every investment fund owned by the client for at least one day during the reporting period.

Most ETF investors know about management fees and management expense ratios (MERs). Management fees are a percentage of assets under management charged by portfolio managers or advisers. MERs include these fees as well as performance fees, funding costs and other operating expenses like legal and accounting costs.

Trading costs are part of total ETF expenses but are often overlooked. Included in the trading expense ratio (TER), they cover buying and selling within the fund and can reach 2%-3% for some alternative strategy or leveraged/inverse ETFs. The fund expense ratio (FER) for Client Relationship Model Phase 3 (CRM3) combines all costs, including MER and TER, offering a full picture of what investors pay.

TCR for ETFs

ETFs are expected to benefit from TCR, making them even more cost-efficient and transparent. However, total expenses differ by asset class and strategy.

Lower Fees Compared to Mutual Funds

• Management Expense Ratio (MER): Reports show an average MER of 0.97% for fee-based mutual funds versus 0.67% for ETFs. Active ETF investors pay about 0.86%, which is still below the 0.97% for mutual funds (f-class).
• Trading Expense Ratio (TER): ETF trades mostly occur in the secondary market via market makers, unlike mutual funds, which require direct company interaction. For significant supply-demand changes, authorized participants adjust ETF shares using securities rather than cash, shifting trading costs away from long-term investors.

Fees differ across Asset Classes and Strategies

On average, ETFs show a MER of 0.67%, TER of 0.10%, and FER of 0.77%. Median fees are lower due to outliers. Most ETF assets are in low-cost products, resulting in even lower asset-weighted average fees.

Fees for ETFs can differ widely depending on asset class and investment strategy. The table below shows the median and maximum management fee, MER, TER, and FER for various ETF types. Medians are used to better reflect typical costs.

• Passive fixed income ETFs have the lowest fees: These ETFs offer the lowest median management fees and expense ratios with a median TER of 0% due to no explicit trading commissions—costs are reflected in bond spreads instead. In contrast, equity and active ETFs have higher TERs from more frequent trading and operational mechanisms.
• Active ETFs are more expensive: Active ETFs generally charge higher fees. Passive equity ETFs have a median FER of 0.39% annually versus 0.89% for active equity ETFs; passive fixed income FER is 0.20%, compared to 0.55% for active fixed income.
• Leveraged and alternative ETFs how higher MERs: Lightly leveraged ETFs have a median MER of 1.99%, mainly due to funding costs, while alternative ETFs can report even higher MERs because of performance fees. Management fees and MER distinctions are important for investors.
• Highest TERs in leveraged/inverse ETFs: Swap-based and daily rebalancing leveraged/inverse ETFs incur greater trading-related expenses, leading to the highest TERs.
• Highest FERs in alternative and leveraged/inverse ETFs: Median FER for both categories is 2.47%, with alternative strategy ETFs reaching up to 7.30%, impacting fund performance.

The Impact of Total Cost Reporting

The upcoming TCR enhancement is intended to increase transparency without adding extra costs. This change aims to clarify cost information, which may influence investor decisions regarding products with more explicit disclosures. The exclusion of certain products from these requirements may result in differences across the market.

• Transparency exercise: The main goal of this exercise is to improve transparency. Although it does not introduce new costs, it requires more comprehensive disclosure of fund expenses to support informed decision-making.
• Time for ETFs to shine: As noted earlier, ETFs generally have lower costs. Total cost reporting provides investors with clearer information about the expenses for each investment, which could lead investors to compare options based on potential cost savings.
• CRM3 coverage: Some investment products—such as structured notes, prospectus-exempt funds (like private funds or pooled funds), and labour-sponsored investment funds—do not fall under CRM3 requirements. Differences in TCR reporting may affect issuers' product launch strategies. Uneven coverage means increased transparency may raise cost awareness for some products, while others remain unaffected. For products outside the scope, lack of cost disclosure may influence investor or advisor decisions.
• Greater transparency with CAD-listed ETFs: Canadian ETF issuers are subject to total cost reporting requirements, while U.S. ETF issuers are not. For U.S.-listed products, net expense ratios may be used as an approximate measure of TCR, introducing additional considerations for investors when selecting investment vehicles. Canadian-listed ETFs are expected to offer more detailed cost transparency moving forward.

Looking Forward

To achieve TCR, fund issuers provide expense data to broker dealers, who, with data vendors, calculate daily expenses based on client holdings and aggregate totals for the year. This information is then shared with investors.

Client Relationship Model Phase 4 (CRM4) may be introduced to address TCR requirements for products not covered by CRM3, like structured products, private funds and U.S.-listed ETFs or mutual funds. It aims to resolve any CRM3 challenges and improve operational efficiency.

Enhanced cost reporting could make ETFs more appealing to cost-focused investors by highlighting fee differences. Passive fixed income ETFs tend to have the lowest fees, while alternative and leveraged/inverse ETFs face the highest. Active ETFs typically incur higher expenses than passive ones. Products such as structured products, private funds and U.S.-listed ETFs/mutual funds remain outside CRM3's scope, potentially affecting competitive dynamics under the new rules.