Several weeks ago, a reader named Steve wrote to me about using Canadian ShareOwner Investments to build a Couch Potato portfolio with exchange-traded funds. I had no experience with this service, so I asked Steve to report back after he did his research, and he kindly followed up. In today’s post I’ll describe how ShareOwner works, and early next week I’ll pass along Steve’s assessment of its pros and cons.
ShareOwner Investments (formerly the Canadian Shareowner’s Association) is a dealer that allows investors to trade stocks and ETFs in both registered and taxable accounts. But unlike a discount brokerage, ShareOwner uses a dollar-based trading platform that enables you to buy and sell small amounts, and to own fractional shares. For example, you can place an order for $500 worth of a stock or an ETF, and if it’s trading at $27.36, you’d receive 18.2749 shares. ShareOwner also reinvests all dividends including partial shares, something traditional DRIPs don’t allow.
The other important feature of ShareOwner’s platform is that you can place a single order covering as many securities as you want. If you have $1,000 to invest, you can order $50 worth of 20 different stocks or ETFs, all for a single trading commission of $40.
ShareOwner can do this because it makes large “co-op purchases” of the stocks and ETFs in its inventory at specified times. (The schedule is not based on market timing: orders for ABC Company might be executed every Thursday, for example, while orders for XYZ Company might take place on the fourth Wednesday of every month.) Once a month, each client receives his or her allotment of these bulk purchases, including fractional shares down to four decimal points. In this sense, ShareOwner makes buying stocks more like buying mutual funds.
The platform was designed as a cheap and easy way to build a diversified stock portfolio, but it’s also ideal for ETF investors. One drawback of ETFs has always been that it is cost-prohibitive to trade small amounts. Commissions make monthly contributions — and even annual rebalancing — too expensive for many investors. Imagine that you’ve decided to set up a Couch Potato portfolio with the following asset allocation:
20% Canadian equities
20% US equities
20% International equities
5% Emerging markets equities
5% Real estate
20% Short-term bonds
10% Real-return bonds
Building an ETF portfolio like this through a big-bank discount brokerage would incur seven trading commissions totaling more than $200. I use the rule of thumb that a trading commission should not exceed 1% of the purchase or sale. So if you’re paying $29 commissions, your trades should be at least $3,000 or so. The cost of adding money and rebalancing, even once a year, is so high that you’d likely be better off using index mutual funds unless your account is at least $60,000. (If you’re paying $9.95 per trade you could pull it off with less, but it would still be unwieldy.)
Now consider the same portfolio in a ShareOwner account. You’d build it by placing one $40 order that includes all seven ETFs. Using my 1% rule, you’d need only $4,000 to make this cost-effective. After subtracting the $40 fee you’d have $3,960, which you’d allocate like this:
|Dollar amount||Current price||Number of shares|
|iShares S&P/TSX Composite (XIC)||20%||$792||17.96||44.0980|
|SPDR S&P 500 (SPY)||20%||$792||107.55||7.3640|
|Vanguard Europe Pacific (VEA)||20%||$792||29.03||27.2821|
|Vanguard Emerging Markets (VWO)||5%||$198||36.38||5.4426|
|iShares S&P/TSX Capped REIT (XRE)||5%||$198||11.56||17.1280|
|iShares DEX Short-Term Bond (XSB)||20%||$792||28.97||27.3386|
|iShares DEX Real-Return Bond (XRB)||10%||$396||20.79||19.0476|
Once or twice a year (or as often as you want) you can add a few thousand dollars and rebalance the whole portfolio in one fell swoop. In the meantime, all of your distributions get automatically reinvested rather than lying around in cash.
ShareOwner is a unique service that promises to make buying ETFs even easier and cheaper for small investors. In my next post, we’ll look at its strengths and weaknesses so you can decide whether it would be the right vehicle for your Couch Potato portfolio. Until then, If you’ve used ShareOwner, please let us know your thoughts in the comment section.