Index Funds from PC Financial? No, Thanks

October 8, 2010

President’s Choice Financial has long been a favourite of frugal Canadians looking for no-fee banking. But until a reader pointed it out to me recently (hat tip to Greg S), I wasn’t aware that the online bank also offers low-cost index funds through its partnership with CIBC. True to its nature as a discount bank, PC Financial even offers investors a rebate of 10 basis points off the funds’ annual management fees.

Here’s how it works: banking customers can open an RRSP or non-registered account and invest in any of CIBC’s family of index funds. CIBC has the second-largest selection of index funds of any bank, behind only TD. Investors have a lot of choice here, including some index funds that are unique in Canada: the CIBC US Broad Market Index Fund — which tracks the Wilshire 5000 rather than the S&P 500, like most of its competitors — the CIBC Emerging Markets Index Fund, and the CIBC Canadian Short-Term Bond Index Fund. This means you can build a very well diversified index portfolio with asset classes that would otherwise be available only through ETFs.

Another attractive feature of the program is the Index Portfolio Rebalancing Service, which automatically adjusts your portfolio twice a year according to your chosen asset allocation. This is a service that many novice investors will find helpful, especially if their portfolio includes more than three or four funds.

Nice funds, shame about the price

Now the bad news. The MERs of the CIBC funds range from 1.03% to 1.37%, which makes them the most costly index funds in Canada. The 0.10% rebate brings them in line with their counterparts from Scotiabank and BMO, but they are still much more costly than the index funds offered by RBC and Altamira, and about double that of the TD e-Series funds.

If we assume that a balanced portfolio of CIBC index funds would cost about 1% after the rebate, the annual cost is very close to the ING Direct Streetwise Funds, offered by PC Financial’s main competition in the online banking world. However, unlike the Streetwise Funds, which carry absolutely no fees other than their 1% MER, PC Financial levies several other charges in their mutual fund accounts:

  • an annual RRSP administration fee of $12 plus tax
  • withdrawal fees of $10 plus tax
  • an account closing fee of $40 plus tax
  • a $10 fee if your account balance drops below the (unspecified) minimum
  • an early redemption fee of 2% if you sell or switch units within 90 days

I have often recommended the ING Direct Streetwise Funds for new Couch Potato investors with accounts under $10,000. I initially thought this offer from PC Financial would be even better, since it allows investors the ability to customize a portfolio, and has a much greater choice of asset classes. But this laundry list of additional fees is a deal breaker for me. Even if you never incur any of the other charges, the $12 administration fee alone wipes out the MER rebate on any account under $12,000.

Index investing only works when costs are kept low, and while PC Financial may be stingy with bank fees, its investing costs are simply too high.

{ 19 comments… read them below or add one }

Evan October 8, 2010 at 10:26 am

You’re absolutely right. My wife and I looked into these when we were setting up our couch potato portfolio since we do most of our banking at PC.
Not only are the rates high, there also seemed to just be a lot of barriers to access. Too much paperwork and hurdles, and if I remember correctly no online access to your account.
We ended up going with mostly TD e-series funds and once we actually figured out how to set them up we’ve been thrilled with them.

Canadian Couch Potato October 8, 2010 at 10:33 am

@Evan: Many thanks for sharing your experience. As I’ve written about in the past, TD has a number of hurdles in the way of its e-Series funds, too, but once you get over them I think you’re much better off.

Evan October 8, 2010 at 11:02 am

Yeah, I’ve read a few articles about people trying to sign up for those and they matched my experience pretty closely too (with less frustration and anger on my end). I think the most important thing is understanding what the e-series funds are designed for and that they purposefully make it difficult so you’ll just give in and get the regular ones. Kind of like a bait and switch I guess.

But I love the easy online access, quick updates, and general ease of use of them.

Canadian Capitalist October 8, 2010 at 12:17 pm

CIBC index funds might be interesting for those investors who qualify for the MER rebate (IIRC, those with $150,000 or more). For everyone else, I agree with you that these index funds are expensive.

larry macdonald October 8, 2010 at 12:50 pm

Oh well, another case of a Canadian bank being a Canadian bank. It’s too bad the fees are so high — it would have been nice to have the wider choice, especially the broad-based CIBC US Broad Market Index Fund, with its lower index-turnover costs etc. compared to the S&P 500-based index funds.

Greg October 8, 2010 at 2:44 pm

The three index funds in your article are all ones that I was very interested in when looking to build out my wife’s RRSP portfolio but the high MERs we difficult to overcome. In the end, I built her portfolio with RBC index funds, with the CIBC Emerging Index Fund to round it out. Even with the high MER, that fund has performed well and is the only option for those who want to invest in mutual funds over ETFs.

I wish CIBC would lower the minimum from 150,000 for its more generous rebate.

Canadian Couch Potato October 8, 2010 at 3:04 pm

@Greg: Good point about the CIBC Emerging Markets Index Fund: it’s not entirely fair to compare an index mutual fund to an ETF. It’s certainly much cheaper than most actively managed emerging market funds, so if you want to add that asset class to your portfolio it’s not a bad way to do it.

Financial Cents October 8, 2010 at 7:45 pm

Agreed – banks will always be banks :)

I won’t take the bait for the PCF index funds, but I will certainly keep banking with them as long as they don’t charge me any fees.

Credit Cards Canada October 10, 2010 at 1:15 pm

It is pretty surprising that PC Financial is not as “stingy”, as you put it, on index funds as they are on banking fees. On the other hand, not every company excels in everything. This illustrates the same principle that applies when different people with different situations should choose different insurance companies. In this case, choose a different financial institution for different financial services.

Brian October 12, 2010 at 3:39 pm

I’m using CIBC Emerging markets to get exposure to that asset class. The 10bp rebate is nice, but the annual fee is what made me choose to go directly with CIBC.

On a side note, I noticed that there is a $6.30 administration fee every 6 months on the CIBC fund as well. I think its time to look at VWO.

Albert October 16, 2010 at 1:40 pm

Is the ING streetwise funds a “good” fund……must sites (fundlibrary, globefunds, etc.) don’t rate it well….but not sure why.

Also, any idea if they will be creating a more aggresive streetwise fund? I would like to see a streetwise fund with max 15% in fixed (bonds, cash)…currently the balanced growth has 26% bonds….

Greg October 18, 2010 at 12:58 pm

@Albert: Once you are looking for something more aggressive, the presumption is you have the knowledge and sophistication to set up your own portfolio with the right asset allocation. Just use the funds listed in options 2, 3, or 4 from the Global Couch Potato model portfolio listed in the Model portfolio section of the website and allocate them to meet your target allocation.

Albert October 18, 2010 at 4:48 pm

@Greg. Thanks. I do have access via my employer (via SunLife) to many TDAM index funds with very small MERs and I already built a more aggressive index portfolio using these indexes (35% Cdn equity, 20% US equity, 20% international equity and 35% bonds)……….BUT…………….. I wonder if the TD funds available in my plan are the same ones being discussed here…..for example the Canadian Index one is called “TDAM Cdn Equity Index Segregated Fund” and it mentions the underlying fund is “Emerald Canadian Equity Index Fund ” and the MER is at 0.16%….same ones?

Greg October 19, 2010 at 12:17 am

@Albert – Funds provided via an employer are often pooled funds only available as part of group retirement plans. A quick search of google shows the fund you mention as one designed to track the TSX Composite Total Return Index. With the ultra low MER you list, that seems like a good option to me.

Albert October 19, 2010 at 8:15 am

@Greg, thanks again….just read on pooled funds. The funds MER in my plan are low and I just compared my portofolio with the others in the models section….I prefer a little more Canadian exposure at this time and more aggressive. This is what I have (only available index funds in the plan and all based on underlying Emerald TD Index funds):

TDAM Canadian Equity Index 40.00% 0.16%
TDAM Canadian Bond Index 20.00% 0.17%
TDAM International Equity Index 20.00% 0.27%
TDAM US Market Index 20.00% 0.21%
Total: 0.195%
Thanks again, this blog is very informative,

Albert

Wesley September 3, 2013 at 2:54 pm

I’m new to this, but have read great things re index funds (a la Millionaire Teachr). In Canada, TD e-series *seem* to be the most cost-effective way to go [Vanguard is now in Canada, but their index funds are subject to the trading fee charged by the discount brokerage (e.g., $9.95/transaction for TD Waterhouse)]. What are your thoughts re buying an index fund/ETF that is CAD-hedged vs. not? I’m not sure which way to swing on this…

Canadian Couch Potato September 3, 2013 at 3:11 pm

@Wesley: TD e-Series funds are generally a better choice for beginning investors and those with small portfolios. This post will help:
http://canadiancouchpotato.com/2012/07/30/comparing-the-costs-of-index-funds-and-etfs/

As for the hedging question, all of my model portfolios use unhedged funds. While hedging might be appropriate in specific circumstances, it is a long-term drag on returns. There is also evidence that currency diversification actually lowers a portfolio’s volatility.
http://canadiancouchpotato.com/2010/10/29/to-hedge-or-not-to-hedge/

Connor February 3, 2014 at 7:31 am

I’m a Cibc Customer and I have a Gic that’s maturing at the end of the month. Its just over $10,000 and I want to invest in some index funds. Should I transfer the money to a bank such as TD for better Mer?

CyberPablo March 14, 2014 at 10:18 am

Lets just hope ING maintains competitive rates as I believe they are now part of the Scotiabank family.
Also, does anyone have strong recommendations on an index type energy fund and a ‘water supply’ fund that I believe may show future promise?

Thanks. C.P.

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