Archive | September, 2010

A Would-Be Couch Potato Responds

Last week I posted an e-mail from Shannon, a reader who related her difficulties in opening a TD e-Series Funds account. That post (and an earlier one about her experiences with TD) generated a huge number of comments. Many were supportive; others were rather condescending.

Shannon sent along another follow-up, which I’ve posted below. (Note that you may have to refer back to the comments section of the earlier to post to follow the discussion.)

I’ve spent so much space covering Shannon’s story because I’ve come to appreciate just how much resistance many investors face from financial firms when they try to simplify their investments and lower their costs. Shannon and her husband were screwed by their first investment advisor. When she went looking for help elsewhere, she didn’t get it.

As she notes, many of us who are experienced DIY investors know what to expect, and we know how to push back against the sales pitches. But many people don’t have that knowledge or confidence. I hope by sharing these stories, this blog and its readers can be a supportive community for investors who want to take back control of their own finances.

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Under the Hood: TD Balanced Index Fund

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds. The fund: TD Balanced Index (TDB965) The index: This index mutual fund tracks a blended benchmark made up of 48% DEX Universe Bond Index (Canadian bonds), 32% S&P/TSX Composite (Canadian equities), 9% S&P 500 (US equities), 9% MSCI EAFE (European/Pacific stocks), 2% DEX 91 Day T-Bill Index. The cost: The fund’s MER is 0.83%; as of July 2010, the HST makes the total cost of the fund 0.94%. The details: The TD Balanced Index fund is an all-in-one portfolio that holds several other TD index funds. It holds half of its assets in fixed income and half in equities. Here’s the breakdown as of August 31:

TD Canadian Bond Index
48.6%

TD Canadian Index
32.2%

TD International Index
8.8%

TD U.S. Index
8.7%

TD Canadian Money Market
2.0%

Both the US and international funds are hedged to Canadian dollars to remove currency risk. The fund has a minimum investment of just $100, and subsequent contributions must also be at least $100.

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Is Indexing Less Risky?

Tom Bradley of Steadyhand Investment Funds wrote an insightful blog post yesterday about a television commercial for ING Direct’s Streetwise Funds. The woman in the ad dismisses active management as “educated guesses” and then asks, “Why take the risk? That’s not you. With the ING Streetwise Funds you don’t guess. You invest in the whole market, which reduces risk because you’re diversified.” Here’s how Bradley responded:

There are lots of issues around active versus index investing, but there’s no issue that actively managed funds are diversified. The reality is, “educated guessers’” portfolios are generally less volatile than indexed ones and have no more risk of long-term capital loss (which is minimal in both cases). To leave the impression that the Streetwise funds are safer than other portfolios is a dangerous and misleading message.

Bradley is absolutely right. There are many reasons why index investing has proven to be a winning strategy, but less risk is not one of them. Some do-it-yourselfers may build poorly diversified portfolios, but retail mutual funds generally don’t make concentrated bets. The long list of poorly performing equity funds in Canada aren’t lousy investments because they’re undiversified or overly risky.

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More Fun With the TD e-Series Funds

Last month, I shared the story of Shannon, an investor in western Canada who tried to open an account with TD to buy their low-cost e-Series index funds. As their name suggests, the e-Series funds are intended for online clients, and investors like Shannon who try to access them through their local TD Canada Trust branch have had frustrating experiences. Many bank staff seem to have no idea what an e-Series fund is, and those who do dare not speak the name aloud.

Shannon recently contacted me with an entertaining update on her ongoing adventure:

“I thought I’d let you know how it went with TD in setting up the account so I could purchase the e-Series funds.  We’ve been in the midst of untangling our mess with [our former advisor] and put the TD stuff on the back burner, but I went in today to open the account.

“I know I could have applied online, but I really wanted to see what the experience would be like. I’m at that age when my curiosity has overtaken my natural shyness and ego. In other words, I am no longer afraid to look like an idiot.

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BMO’s Wolves in Sheep’s Clothing

Since Bank of Montreal entered the ETF business in May 2009, it has managed to grab only a tiny market share. Last week, however, BMO made a move designed to attract new investors to its ETFs. Ironically, it did so by packaging and selling them as mutual funds.

Following a unitholder meeting on September 13, BMO announced that it would make changes to its existing family of index mutual funds. These will now be known as the BMO Canadian Equity ETF Fund, the BMO U.S. Equity ETF Fund and the BMO International Equity ETF Fund. Instead of holding the individual stocks in their respective indexes as before, the three mutual funds will now simply hold one or more BMO ETFs in the same asset classes.

For example, instead of tracking the S&P/TSX Composite, the Canadian equity fund will now simply hold shares in the BMO Dow Jones Canada Titans 60 Index ETF. For now at least, it appears that the new mutual funds will also hold derivatives that promise the same return as the respective ETFs.

Many advisors can’t sell ETFs

What’s the point of wrapping up an ETF inside a mutual fund?

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Taking ETFs to the Next Dimension

This month I began writing what I hope will be a regular series of articles in Canadian MoneySaver. For those who aren’t familiar with the magazine,  MoneySaver features articles on personal finance and investing, primarily written by industry professionals and knowledgeable do-it-yourselfers. Contributing editors include value hunter Norm Rothery, fixed-income specialist Hank Cunningham, preferred share guru James Hymas, and Canada’s self-proclaimed youngest retiree. The magazine contains no advertising and is entirely supported by its membership.

My first article, An ETF Portfolio With Added Dimension (PDF format), explains how do-it-yourselfers can follow the investment strategies of Dimensional Fund Advisors. DFA is based in the US, though it has operated a Canadian subsidiary, DFA Canada, since 2003. It’s a unique firm whose passively managed equity funds are designed to capture the returns of entire asset classes. However, Dimensional funds do not track any index. Instead, they weight companies according to a formula that gives more prominence to small-cap and value stocks, which have historically provided higher returns than the broad market. The screens are purely rules-based—that is,

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Dollar-Cost Averaging With ETFs: Part 2

In yesterday’s post, I introduced a reader’s idea for overcoming the main drawback of exchange-traded funds. Donald plans to contribute $2,000 a month to his RRSP (currently $65,000), and to minimize the trading commissions associated with ETFs, he’s created a “mirror portfolio” with index funds. This will allow him to set up pre-authorized payment plans and take advantage of dollar-cost averaging. Donald plans to move the money from the mutual funds into the lower-fee ETFs once a year.

Let’s look closer at his plan. To get started, Donald will have to purchase index mutual funds in the same asset classes as his ETFs. Because he uses TD Waterhouse, he has access to TD’s e-Series funds, and these are the best option in all cases except emerging markets. (The only no-load emerging markets index fund in Canada is CIBC’s.) Here’s how his ETFs and mutual funds compare in terms of annual management fees:

Exchange-traded fund
Ticker
MER

Canadian equity
XIU
0.18%

US equity
VTI
0.07%

International equity
VEA
0.14%

Emerging markets equity
VWO
0.27%

Canadian bonds
XBB
0.33%

Corresponding index fund
Code
MER

TD Canadian Index – e
TDB900
0.31%

TD US Index – e
TDB902
0.33%

TD International Index – e
TDB911
0.48%

CIBC Emerging Markets Index
CIB519
1.37%

TD Canadian Bond index – e
TDB909
0.48%

To make his monthly contributions,

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Dollar-Cost Averaging With ETFs: Part 1

One of the most common questions I hear from budding Couch Potatoes is, “Should I use index mutual funds or ETFs?” While index funds generally have higher annual costs (MERs), they do allow investors to add and withdraw money with no fees. ETFs have the opposite problem: they can have much lower management fees, but they incur commissions (typically $10 to $29) every time you buy or sell shares. That usually makes them unsuitable for people who contribute to their accounts every month. As a result, dollar-cost averaging with ETFs can be impractical.

There’s no perfect solution to this problem, but a reader in Regina explained that he’s come up with a compromise, and I think other ETF investors might consider adapting it to their own situation.

Donald has $65,000 in his RRSP, and he’s using iShares and Vanguard ETFs to achieve the following asset allocation:

Asset class
ETF
Allocation
Amount

Canadian equity
XIU
30%
$19,500

US equity
VTI
20%
$13,000

International equity
VEA
20%
$13,000

Emerging markets equity
VWO
10%
$6,500

Canadian bonds
XBB
20%
$13,000

$65,000

Donald and his wife recently paid off their mortgage and he’s now planning to supercharge his savings by contributing $2,000 a month to his RRSP.

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Mackenzie’s Fund Report Misses the Point

Ah, the good people at Mackenzie Financial. Last year, they brought us I Thought I Wanted an ETF, a marketing brochure full of red herrings and half-truths about exchange-traded funds, clearly designed to discourage their clients from getting out of Mackenzie’s high-priced dreck and into low-cost investments. You can read discussions of this little gem on Larry MacDonald’s and Jon Chevreau’s blogs.

Now the consumer advocates at Mackenzie have released a new report called Canadian Mutual Fund Ownership Costs: Competitive Relative to the U.S. It looks to bust the popular idea that US investors pay dramatically lower fund fees than Canadians. You can download either the six-page research summary or the complete 14-page report. If you have a pronounced gag reflex, I suggest the briefer version.

Fees are calculated differently

I’ll concede that several points highlighted in the report are true, and that they’re often misunderstood by investors and the media, who tend to focus on Canada’s undeniably higher MERs. “The calculation of mutual fund expenses is different between the two countries,” the report rightly argues,

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