An Overview of Commission-Free ETFs

June 28, 2012

Three discount brokerages in Canada now offer a menu of commission-free ETFs. Scotia iTrade pioneered this feature in Canada last September, then Qtrade Investor announced a similar offering about a month later, followed soon after by Virtual Brokers.

While index investors welcomed this development, the lineup of ETFs eligible for commission-free trades at all three brokerages is less than ideal. Narrowly focused funds dominate all three lists, which is fine if you want to invest in copper futures, Indian large caps, or the Australian dollar. But if you’re a long-term Couch Potato investor, you have to look a little harder for appropriate ETFs.

To help with that task, I’ve compiled a checklist of commission-free ETFs available from each of the brokerages, limiting the selection to broadly diversified funds that cover core asset classes. Funds that use currency hedging are marked with an asterisk (*).

Scotia Qtrade Virtual 
Fixed income iTrade Investor Brokers
iShares 1-5 Year Laddered Gov’t Bond CLF x x x
iShares 1-5 Year Laddered Corp Bond CBO x x x
BMO Mid Federal Bond Index ZFM x
BMO Long Federal Bond ZFL x
BMO Long Corporate Bond ZLC x
iShares Advantaged Canadian Bond CAB x x x
iShares DEX Real Return Bond XRB x
BMO Real Return Bond ZRR x
iShares Advantaged High Yield Bond * CHB x x x
Canadian equity
Horizons S&P/TSX 60 HXT x x x
iShares S&P/TSX Completion XMD x x x
iShares S&P/TSX SmallCap XCS x
iShares Dow Jones Canada Select Value XCV x
iShares Canadian Fundamental CRQ x x
iShares S&P/TSX Cdn Dividend Aristocrats CDZ x x
iShares S&P/TSX Cdn Preferred Share CPD x x
US equity
Horizons S&P 500 HXS x x
BMO US Equity * ZUE x
iShares US Fundamental Index * CLU x x
iShares US Fundamental Index CLU.C x x
iShares S&P US Dividend Growers * CUD x
International and global equity
iShares International Fundamental CIE x x x
BMO International Equity * ZDM x
Vanguard MSCI EAFE * VEF x
iShares Global Monthly Adv Dividend CYH x x
iShares Global Real Estate CGR x x x
Emerging markets equity
iShares MSCI Emerging Markets XEM x
iShares Broad Emerging Markets CWO x x
BMO Emerging Markets Equity ZEM x

A breakdown of each asset class

Fixed income. If you’re looking for a broad-based ETF that includes both government and corporate bonds of all maturities, there simply isn’t one. (CAB appears to fit this description, but it is a non-traditional fund that is appropriate only for taxable accounts.) All three brokerages offer CLF and CBO, which are excellent short-term bond ladders, but only Virtual Brokers includes ETFs with longer maturities. Two of the three brokerages offer a real-return bond fund.

Canadian equity. You’re pretty well covered here. While none of the brokerages include the iShares S&P/TSX Capped Composite (XIC), they all offer HXT and XMD, which work well in combination. HXT includes the 60 largest companies in the S&P/TSX Composite Index, while XMD includes the remaining 190 or so. You can hold about 75% in HXT and 25% in XMD to mimic the Composite index, or split them 50-50 to give yourself a small-cap tilt.

US equity. The US equity offerings are limited from all three brokerages. They all have a large-cap option that includes currency hedging, plus Scotia iTrade and Virtual Brokers also offer the iShares US Fundamental Index (CLU.C), which does not use hedging. Note that there are a few US-listed options that I have not included in the table above: Virtual Brokers offers the Vanguard S&P Small Cap 600 ETF (VIOO), while Qtrade has included several Vanguard, iShares and SPDR sector funds.

International equity. Some decent choices here. All three brokerages offer the iShares International Fundamental (CIE) which does not use currency hedging and would be a good choice as a core holding. Scotia iTrade and Virtual Brokers include traditional cap-weighted options from Vanguard and BMO, respectively, both of which are hedged to the Canadian dollar.

Emerging markets equity. All the brokerages offer good choices in emerging markets: Virtual Brokers even offers two options, one fundamental and the other cap-weighted. All Canadian-listed ETFs in this asset class are quite costly, but there is no good mutual fund alternative, so these are as good as you can get without using US-listed ETFs.

{ 23 comments… read them below or add one }

Raj June 28, 2012 at 12:44 pm

i am hoping RBC or TD would atleast match these brokers in the coming months. what are the chances?
though i have seen opinions that no commission means higher ETF fee in the end (hence a wash).
my employer banks with RBC and i with TD. i do not want to open any new accounts!

Canadian Couch Potato June 28, 2012 at 12:58 pm

@Raj: I’m not sure how anxious the banks are to get into this business, but I would not hold my breath. I have always felt the obvious candidate here is BMO, since they have a discount brokerage arm and a large family of ETFs. I am sure they could win a lot of new customers to the brokerage by offering commission free trades on their own ETFs. That would also give them an opportunity to take some market share away from iShares.

If you bank with TD, you have access to the TD e-Series funds, which are actually a better choice than most of the commission free ETFs in the list above, at least for the core asset classes. Their MERs are generally lower, and you can also set up preauthorized contributions.

Raj June 28, 2012 at 1:52 pm

i believe RBC and TD brokerages count on captive customer i.e. one with multiple accounts who would not leave to gain only a bit. not great for customer but seems to be working for these banks.
my RESP is exclusively made up of TD e-series. but for non-registred account I would go with ETFs as they cover more asset classes, more styles (fundamental etc) and can be traded if need be. e-series redemption within 90 days results in a 2% fee.
for long term investor commission is not a big deal anyway. ETF fee is.
though commission can matter if one wants to add an amount say monthly.
i guess i would jump to Scotia or BMO if they gave me an added incentive (like 1-2% cash back) apart from free account transfer!

Jas June 28, 2012 at 3:52 pm

Two more commission-free ETF that might be worth to mention are Ishare balanced ETF-wraps : CDN and CBN.

Park June 29, 2012 at 9:28 am

“Emerging markets equity. All the brokerages offer good choices in emerging markets: Virtual Brokers even offers two options, one fundamental and the other cap-weighted. All Canadian-listed ETFs in this asset class are quite costly, but there is no good mutual fund alternative, so these are as good as you can get without using US-listed ETFs.”

Vanguard Canada’s emerging markets ETF has a management fee of 0.49%. That’s more than the US listed Vanguard emerging markets ETF MER of 0.20%, but there will be additional currency conversions costs with US listed ETFs. iShares US listed emerging markets ETF has an MER of 0.67%; it has assets of $32 billion.

Scott Kwasnecha June 29, 2012 at 10:49 am

I was hoping you could suggest a portfolio of free ETF stocks for say a 30 year old? I’d like to keep about 30-35% in bonds and the rest in equities with plans on rebalancing semi or annually.

Thanks!

Canadian Couch Potato June 29, 2012 at 11:19 am

@Jas: Yes, those CorePortfolios can be useful also. You can even use them to hold small amounts that would otherwise be sitting idly in cash. Because they trade for free and have no minimum holding period, they’re quite flexible. But do watch out for their large bid-ask spreads.

@Park: You’re right that Vanguard’s VEE is actually cheaper than EEM. Overall, if you are willing to pay the commissions and trade in US dollars, Vanguard’s VWO is by far the best choice at just 0.20%.

@Scott: Do you currently have an account with a discount brokerage, or is that part of your decision making process? And approximately how large is the portfolio, and how often will you contribute new money?

Scott Kwasnecha June 29, 2012 at 11:24 am

I recently set up a Scotia I Trade account to take advantage of these free ETFs. I have about $8k I plan to transfer in and think I will contribute $500 per month /$1,500 quarterly/$3,000 semi – whichever makes the most sense.

Thanks.

Canadian Couch Potato June 29, 2012 at 11:36 am

@Scott: If you want to stick with the commission-free ETFs only, you could use HXT and XMD for Canadian equity, HXS or CLU.C for US equities, VEF or CIE for international equity, and CLF and CBO for bonds.

If all of your portfolio is commission-free ETFs, then monthly contributions are probably best, but you may find yourself adding tiny amounts to each fund. Remember that ETFs have bid-ask spreads, so there is a cost to trading them even if there’s no commission.

Scott Kwasnecha June 29, 2012 at 11:49 am

Awesome! Thanks!

Jas June 29, 2012 at 9:30 pm

@Dan: If you are a long term investor, how important is it to be careful with the bid-ask spread? CBN has a very low daily volume, is it an absolute “turnoff ” for a couch potato investor?

Stephen June 30, 2012 at 7:33 am

Thanks for the great article.

It might be worth mentioning that the commission-free offers may have attached conditions. In the case of Qtrade, you have be signed up for their electronic document system, and the minimum trade is $1000, for example.

Canadian Couch Potato June 30, 2012 at 12:02 pm

@Jas: For a long-term investors making very few trades, the bid-ask spreads are not necessarily a big deal. But of you are making frequent transactions, they can certainly erode your returns if they are large. It’s important to note that trading volume may or may not be an important factor: some ETFs with low volume still have pretty tight spreads. The more important factor is the liquidity of the underlying holdings.

In my experience, CBD and CBN have unusually large spreads. I’m not sure why that’s the case.

Dave July 1, 2012 at 9:33 pm

This a great idea to help you to get started investing. Why not get you in the door free. Then take the small yearly fee and have happy customer. In the U.S. Schwab has been doing this for a while. It’s a good business model that the company can make up any initial loss with a long term perspective.

Oldie July 4, 2012 at 1:17 pm

@CCP: just to understand the benefits of these deals vs other options — these 3 discount brokers are offering to give up their buying and selling commissions, which would be about $10 or less per transaction, in return for, what?
yearly fee?
do the discount get a portion of the annual MER percentage of the ETFs?

Darby July 4, 2012 at 3:53 pm

You asked Scott:
“@Scott: Do you currently have an account with a discount brokerage, or is that part of your decision making process? And approximately how large is the portfolio, and how often will you contribute new money?”

Where would you have recommended if he had not yet chosen a discount brokerage – regardless of free ETFs? For a portfolio of 250K to 500K with minimal new money to contribute but rather with the plan to start drawing from it in the near future – say 5 to 10 years?

Canadian Couch Potato July 6, 2012 at 1:21 pm

@Oldie: I expect that the brokerages are making this offer to attract new customers, and once those new customers arrive they will probably trade other stocks and ETFs and generate commissions. Remember that the list of eligible ETFs is pretty small, so few people will build complete portfolios using only these funds.

@Darby: I honestly don’t see many significant differences among the brokerages. These days they all offer low commissions and usually have no account fees for larget portfolios like yours. I would start by considering the one associated with your bank: it is certainly more convenient to work with single institution. If you are not planning to do a lot of trading, then choosing an independent with lower commissions does not necessarily offer you a big advantage.

You might want to consider using a brokerage that allows you to hold US dollars in registered accounts: currently only RBC Direct Investing, BMO InvestorLine, Questrade, Qtrade and Virtual Brokers allow this. If you are buying US-listed ETFs, this can save you a fair bit of money in currency conversion costs.

Randy August 8, 2012 at 6:36 am

I recently signed up with iShares at their downtown T.O. location. I’ve been a long term mutual fund investor but not too pleased with the returns and MERs.

Is it not possible to set up regular monthly contributions to an ETF (DEX)? I told the rep I wanted to do this and he never said it wasn’t possible. Logging in to the site (‘TRADE’ tab) under Equities I see …

- Price Type: Market, Limit, Stop, Stop Limit, Trailing Stop $, Trailing Stop %
- Term

But I also see it under Options
- Option Type: Select, Call, Put
- Order Type: Buy to Open, Sell to Close, etc …

I called to ask how I could make regular contributions and was told I wasn’t able to do that. I would have to “manually” go in each month to make the buy.

That said, all these other settings and terms have me befuddled. I’ve been going through the iShares site but haven’t found any tutorials about this. Perhaps I’m just looking in the wrong place. I’m sure I need to some more broad based research.

I think I was expecting that this would be as easy as contributing to a mutual fund.

Any recos on how I should be approaching this?

Thanks in advance.

Canadian Couch Potato August 8, 2012 at 9:29 am

@Randy: I’m a bit confused. You cannot open an account with iShares, which is simply an ETF provider and not a brokerage. Do you mean iTrade?

If so, then the customer service person was correct. You cannot set up automatic purchases of ETFs like you can with mutual funds. Each order has to be entered individually, just as if you were buying an individual stock. There is a commission payable on each trade, except in the cases of the ETFs listed above.

To learn how to buy ETFs, this post may help: http://www.moneysmartsblog.com/how-to-buy-an-etf-or-stock-using-a-canadian-discount-brokerage/

You may also find my book helpful. It will walk you through the whole process:
http://www.moneysense.ca/perfect

Randy August 9, 2012 at 6:49 am

Doh! Yes … iTrade …

That link is very helpful, thanks. And I’ll check out your book.

Brad August 14, 2012 at 5:44 pm

For fairly short term savings (2-3 years) in my RRSP with the intention of eventually using the Homebuyers Credit. Would it be more advantageous to go the route of short term bonds such as either CLF or CBO (or maybe CAB, but the maturity doesn’t necessarily fit my goals), even with the prospect of interest rates rising?

I would be looking at $1000 contribution a month using a PACC plan with iShares. I already have an account through Questrade so that’s why the commission-free ETF is more appealing then TD e-series.

Canadian Couch Potato August 14, 2012 at 6:54 pm

@Brad: First off, CAB is definitely inappropriate. It’s designed only for taxable accounts. So scratch that off the list.

If I were saving for a home with a 2-3 year horizon, I would use a high-interest savings account. The current rate (usually 1.25% or 1.35%) is the same as the yield to maturity on CLF (after fees), and you don’t have to worry about any loss of principal. Indeed, if rates rise, you’ll do even better. With CBO the yield-to-maturity after fees is about 2%, but you won’t get that if rates rise.

I would encourage you not to take risk with bonds in the the hopes of scratching out a slightly higher return. Remember, you’re saving, not investing here. With the amounts we’re talking about, over only three years, small differences in your rate of return will translate to extremely small dollar amounts. Based on $1,000 a month for three years, compounded monthly, I ran a few numbers through this calculator:
http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Here’s the final amount you would have based on various rates of return:

1.25%: $36,702
1.5%: $36,844
1.75%: $36,988
2%: $37,131

Is it worth it to take risks with the hope of getting 2% if all that would mean is extra $400 over three years?

Andrea August 27, 2012 at 1:53 pm

I am just at the point of starting to invest. I have been reading everything I can get my hands on and have picked a few funds that fit my couch potato portfolio I would be comfortable with. But I am starting with only about $15,000 – well below the $50,000 you need to qualify for the reduced ETF trading cost. So my question is : Do I continue to save and accept the low saving account interest rates until I have the required $50,000 to qualify for low cost trades? Should I bite the bullet and invest in the no commission options until I reach $50,000, even though they are not the funds I had decided to purchase? Or would putting the money into TD index mutual funds be the best bet? I currently am leaning towards the mutual funds but I don’t know what to do. I don’t have any brokerage account set up yet. Given my rate of savings it would take me about 2 1/2 years to reach the $50,000 level.

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