ShareOwner: A Better Way to Buy ETFs? Part 2

May 27, 2010

Last week’s post was an overview of Canadian ShareOwner Investments, a service that allows clients to buy stocks and ETFs using an innovative trading platform. Investors can place an order to purchase multiple securities for a single $40 commission, and the trades are implemented according to a fixed monthly schedule. Uniquely, ShareOwner also allows investors to hold fractional shares and automatically reinvests all distributions.

Now let’s consider whether ShareOwner offers good value for Couch Potato investors with all-ETF portfolios. My thanks to reader Steve, who recently opened account with ShareOwner and gave me his impressions of its strengths and weaknesses, and to those who shared their own experiences in the comments section of the previous post.

The Advantages

  • ShareOwner lets investors assemble and maintain a diversified ETF portfolio with much lower trading costs than big-bank discount brokers that charge $29 per trade. First, the service allows you to make individual ETF purchases for $9.95, the same as low-cost brokerages like Questrade and QTrade. Where you can potentially save much more is by buying multiple ETFs for a single $40 commission. (As one commenter pointed out, however, you still need to pay attention to your overall trading costs. A $1,000 order spread across eight ETFs works out to a commission of $5 per fund, which sounds cheap. But a $40 commission on a $1,000 purchase is 4%, which is not a cost-efficient trade at all.)
  • The ability to hold fractional shares allows investors to buy in smaller, rounder amounts, making asset allocation easy and dividend reinvestment more efficient. ShareOwner will reinvest whatever dividend amount you receive, even if it’s enough to buy only a tiny fraction of one share (up to four decimal places).This is especially useful for ETFs that have high share prices and low yields. For example, the SPDR S&P 500 ETF (SPY) trades at over $100 and yields less than 2%, so you’d need more than $20,000 to receive a quarterly dividend large enough to pay for one full share.
  • The strict monthly trading schedule forces investors to stick to a disciplined strategy, which is crucial for Couch Potatoes. As Steve explained: “It seems to me that one is less likely to make spontaneous purchases. It’s like ING Direct, which I use for short-term savings: for some reason, the fact that the money is a day or two away makes me less likely to go to it. Similarly, ShareOwner is forced discipline, because you cannot time the market.”

The Disadvantages

  • ShareOwner has high annual fees for RRSPs ($79) and TFSAs ($50), regardless of account size. Only unregistered accounts have no annual fee. Most discount brokers waive their account fees once you hit a certain threshold: QTrade, for example, charges an RRSP fee only if accounts are under $15,000, while Questrade charges no account fees at all fees.
  • The cost of selling ETFs is higher than buying them — $9.95 per security, with no co-op discounts — and withdrawals cost $12 to $48, depending on the type of account. For long-term investors who don’t trade often, this isn’t a huge disadvantage. However, when rebalancing your portfolio with ShareOwner it would be much more cost-effective to add new money, rather than selling off the top performing funds. See the full schedule of fees here.

The Verdict

ShareOwner is an innovative service that can offer a lot of value to buy-and-hold investors. But I think it’s better suited to stock pickers than to Couch Potatoes for several reasons:

  • For RRSP investors, the $79 annual fee may wash out any cost advantage over low-cost discount brokers. And it makes little sense to pay $50 annually for a TFSA, especially since the contribution limit is just $5,000 a year. If you’re investing in a taxable account, however, you can make a much better case for using ShareOwner.
  • Couch Potatoes with less than $30,000 are often better off staying away from ETFs altogether. Index mutual funds already let you buy fixed-dollar amounts and reinvest distributions, plus you can add or withdraw money with no fees. My first Index Investor column in the current issue of MoneySense discusses this idea in detail.
  • ShareOwner’s DRIP feature is of limited value for Couch Potatoes. Most discount brokers already offer DRIPs on Canadian exchange-traded funds, albeit for full shares only. In any case, there’s an argument to made for taking distributions in cash and using that new money when you rebalance.
  • The real savings from ShareOwner’s co-op trades only come if you’re making a lot of purchases in each order. A stock picker, for example, might have a portfolio have 30 to 40 dividend-paying stocks, which would be very expensive to buy individually. But a Couch Potato portfolio typically includes only four to eight ETFs. In theory, the platform would work well for something like my Über-Tuber portfolio, which includes ten ETFs. But ShareOwner doesn’t offer a wide enough selection of products to build this kind of sophisticated ETF portfolio.

If any readers are using ShareOwner to maintain an all-ETF portfolio, please post a comment and let us know your thoughts.

{ 4 comments… read them below or add one }

Bob Gibb May 27, 2010 at 10:50 pm

Thank you very much for the nod about my comment re: $40 is still 4% on a $1000 purchase whether you buy 4 or 40 companies. Too many people considering ShareOwner fail to realize that focusing on the number of companies instead.

As one further comment, I would like to point out that most of the bank discount brokerages drop their commissions to $9.95 once you have combined accounts of $100,000: for example trading accounts + RRSPs + TFSA’s for both husband and wife, etc. For some this might seem far off but with time easily achievable.

I really enjoyed Part II BTW.

Steve in Oakville May 27, 2010 at 11:53 pm

Very interesting thoughts Dan – I generally agree with you. The withdrawal fees you refer to could be a concern for people who are using the TFSA like a short term savings vehicle, not so much in my case because I’m using the TFSA for a long-term investment vehicle for my kids.

Regarding the annual fees, I think they are a problem with the TFSA given that it takes a while to build up a big account if you’re limited to $5K per year. However, in an RRSP, I’m not sure it makes much difference. Bob Gibb is correct in pointing out that the annual fee at many discount brokerages (I use Waterhouse) gets waived after a certain point – such as 100K in household assets – but really, when you have 100K in assets, the annual fee is a so small I would argue it’s not worth considering. If my math is correct, $79 on a $100,000 account is about .079%, or less than 1/10th of 1%. It’s not nothing, but it’s close. So, my view is that the annual fees on the TFSA are significant and worth considering, but they are with Waterhouse as well. I don’t have accounts at the deep discount brokerages so I can’t speak to their fees.

As Dan alluded to, CSA might not be ideal for an ETF portfolio given the lack of selection and I agree there. To me, there are some obvious and automatic Canadian ETFs that are absent and I don’t understand why that is. I think you could still put together a pretty reasonable portfolio via ETFs with the CSA, but you won’t get the selection that you would in other discount brokerages.

Personally, while I definitely would opt for a couch potato portfolio when compared with actively run mutuals, my personal preference is through dividend growth stocks, and CSA is very effective for that type of portfolio. If one is building a portfolio of dividends, having them automatically re-invested, even in partial shares, is a clear advantage over what I can do with Waterhouse.

If I were to put an ETF-only portfolio together in CSA, I’d probably contribute monthly cash positions (say $500), and then make a block purchase twice a year for $3000, making sure I rebalance each time. I can do the same thing at Waterhouse, but I’d obviously have to do it through index funds because buying the individual ETFs would be prohibitive.

One final point, and one that Dan mentioned: I might be different from the readers of this forum, but I seem to lack patience and discipline. I have my TFSA account at CSA and my RRSP account at Waterhouse. My Waterhouse account is so darn easy to access with fancy research reports telling me to “buy” this or “sell” that. With a few clicks, boom, transaction executed. Not so, at least so far, with CSA. It’s sort of ‘out-of-sight, out-of-mind’. I can’t time the market with CSA so I don’t even care – In a sense, I’m forced to stick with my strategy. I’m almost embarrassed to admit all this, but it’s true, and from what I’ve read recently, I think the problem I face is actually pretty common. I can’t tell you what a big advantage this gives CSA in my partcular case.

Anyway, it seems that under certain circumstances, CSA might be a good avenue, and under other circumstances, it might not. For me, it meets my conditions and protects me from my weaknesses, which is why I’m going to be moving my RRSP over in the near future. But, I don’t think it’s for everyone, especially active traders or those with small monthly contributions.

Looking forward to hearing the comments of others – and a big thanks Dan for opening up this topic to Couch Potatoes!

Paul O'Toole July 11, 2010 at 8:09 am

Read both articles on the shareowner association and this may be sutiable for me. With my house paid off I am looking to take that money and start stocking up my investments for retirement down the road at least 20 years from know. The non-RRSP account with no withdrawals until retirement would work for me, and there actual stock list isn’t to bad for a bit of disverification. I could just open a non-rrsp account with another firm but and keen on the drip idea. Thanks for the very informative post, this adds more info for me ot think about for sure.

Paul
Kingston, Ont

Canadian Couch Potato July 12, 2010 at 12:07 am

@Paul: Glad it was helpful. I agree that Shareowner can be a great deal for people buying individual stocks in non-registered accounts. Not sure it works so well for ETF investors saving inside an RRSP: they’re likely much better off with Questrade or another low-cost broker.

Leave a Comment

{ 1 trackback }

Previous post:

Next post: