The Globe and Mail announced its annual discount brokerage rankings yesterday and crowned a new winner. Virtual Brokers took top spot for 2012, ending a six-year run by Qtrade. In his article about the rankings, Rob Carrick commended the winner for its low costs and innovation, noting that “new for this year, commissions to buy any and all ETFs have been waived.” I have to admit that was news to me.
Following Scotia iTrade and Qtrade, Virtual Brokers became the third in Canada to offer a menu of commission-free ETFs last fall. (I’ve summarized the offerings of all three brokerages here.) VB’s current list of eligible ETFs has 100 names, including many from iShares and BMO, as well a few dozen US-listed funds, most of them very narrowly focused. All these ETFs can be bought and sold with no commission, as long as the two trades do not occur on the same day. However, what I had not realized—it’s not clearly explained on the site—is that Virtual Brokers now allows its clients to buy any ETF with no commission. You only incur a commission when you sell the ETF, and even then you pay only a penny per share, subject to a minimum of $0.99.
And yes, they confirmed with me that this policy applies to US-listed ETFs as well as those traded on the Toronto Stock Exchange.
I think it is fair to say that Virtual Brokers now offers the most compelling suite of services to ETF investors. I have often discouraged people with small accounts from using ETFs because the trading costs can make them far less efficient than index mutual funds. But with VB, you can now add new money to your portfolio every week or every month at no cost: you’d only pay commissions once or twice a year if it becomes necessary to trim a holding or two while rebalancing. The brokerage also levies no annual account fees on TFSAs, and no fee on RRSPs and other registered accounts as long as the balance is at least $15,000. (The one exception is a $25 annual fee for RESPs.) You can even hold US dollars in your registered accounts, although this service comes with a $50 annual fee.
Experienced investors know that low cost is not the only factor to consider when choosing a discount brokerage: user-friendliness and customer service are also important. For example, Rob Carrick pointed out that VB could improve by offering personalized performance reports—something all brokerages should do, though most do not. If any readers are using Virtual Brokers for their ETF portfolios, please share your experiences in the comments section.
Just a precision: VB offers free TFSAs, whatever the balance is.
That’s great news for small investors such as myself. Would you go as far as to recommend an all-ETF portfolio with VB instead of a portfolio of TD e-Series funds?
@Jason: Thanks for pointing out that lack of clarity in the sentence about annual fees: I reworded it to make it clearer.
I would be happy to recommend VB over TD e-Series funds if I had some assurance from investors that the service is good. I would also point out that index mutual funds are likely to be easier to maintain for more hands-off investors.
This sounds very good. The $50 annual fee to hold USD is a bit disappointing. Most other brokerages don’t charge that. It may be that I’m just too principled against annual fees, but $50 = 10 trades at Questrade, where I don’t pay any annual fees.
So just thinking this business model through – what in your opinion is VB’s strategy behind this offering? I get why brokers allow mutual funds to trade for free – the more they hold, the more trailer fees they collect. But I am unaware of anything like this with ETFs? Is it possible the ETF companies are offering any kind of kick-back to VB? I thought this may be the case based on the way the “commission free ETF lists” are shaped at other brokers (ie they tend to be the more obscure, less funded ETFs – the kind the ETF companies likely are more inclined to sell at a discount to get people in). Or is VB simply intending that people will build up such a high amount of assets in their accounts that they will collect sufficiently on other fees, such as the USD fee, eventual selling fees, etc?
@Danno: ” The $50 annual fee to hold USD is a bit disappointing. Most other brokerages don’t charge that.” Most other brokerages don’t offer USD in registered accounts. Qtrade charges for it, too. I think only Questrade, BMO and RBC offer it for free.
As for the business model, I’m just speculating here, but my guess is that VB is looking to differentiate itself in a dramatic way. They probably recognize that some investors will be leery about going with an independent rather than a bank-owned brokerage, and they also have Questrade to compete against in this respect. I am virtually certain there is no kickback involved.
You’re right that there are not a lot of core ETFs in most of the commission-free lists: they do seem more aimed at traders and tactical investors. That’s not an accident. My guess is that people attracted to these ETFs will also be inclined to trade other ETFs and individual stocks, thereby generating revenue for the brokerage. Very few investors are inclined to simply buy, hold and rebalance half a dozen diversified ETFs. Most people are more inclined to do core and explore.
I just filled in an application for Virtual Brokers with the idea of doing monthly contributions to ETFs. I figured at $1 a trade, it would cost me $12 a year, which is pretty close to rebalancing yearly at TD Waterhouse at $10. To my surprise I found out about all ETFs being free to buy. Well, that’s just a bonus. Now I can buy them every 2 weeks, when I get paid. Came here to ask your thoughts on it, and the info is already posted. Do you sleep?
I do have one question. I read somewhere that buying an ETF with a large bid spread may increase cost so that it would not be worth it to buy ETFs so frequently. What are your thoughts?
@Donj: I’ve slept a few times, but I think it’s overrated. :)
RE: bid-ask spreads, the frequency of trading makes no difference to your costs in this respect. Think of the spread in terms of a percentage of the ETF’s market price. If the spreads is 0.1%, you’d pay $10 on a single $10,000 transaction or $1 on a $1,000 transaction (and therefore $10 on ten $1,000 transactions).
Seems like some people are trying to save a penny and missing the dollars. What does VB charge to exchange USD to CAD and vice versa? That’s by far the biggest cost after MERs. Questrade seems to charge around 1% of the market price.
@Leon: Good point. One benefit of free ETF trading, however, is that you can do Norbert’s gambit with no commissions on DLR and exchange funds at a rate of about 0.2% (based on the typical bid-ask spread of DLR).
Thanks Dan. That makes sense.
I copied some snippets from the post I read about this. I hope that’s OK – are there copy right issues :-O
What are these guys talking about? I was thinking about buying VCE and VAB.
Post:
That super low commission means that you can purchase ETFs monthly as though they were indexed mutual funds and still end up with a lower total MER than even TD e-Series. :P
Reply:
MERs and commissions are just part of the costs of ETFs. Depending on the ETFs used and the amounts invested, bid/ask spreads will have an impact that might tilt the scales back to e-series.
Reply:
That’s a good point that I hadn’t considered. The spread for VCE is at 19.8 bps, XWD is 26.3 bps, and VAB is a massive 51 bps. Any one of those raises the total/weighted MER above that of the TD e-Series portfolio I am considering. And then there’s tax issues, the adjusted cost base, and so on.
Damn. Information is supposed to make decisions EASIER, not HARDER.
I think VB should raise it’s fees and hire a marketing manager. Offering free commissions on every ETF buy is huge news, but I too only heard about it yesterday with Rob’s ranking.
@Leon – When I last checked (about a year+ ago) on the forex rate (for my brokerage comparison), VB had a very competitive rate of 0.75% (call for exact rates) which is on par with Questrade and much better than most other brokerages. Not as cheap as Norbert’s gamble, but for smaller amounts – it’s probably worth paying the fee.
@Donj: Where is the post you’re quoting? Can you provide a link?
Sure,
It’s from the personal finance forum at Redflagdeals.com. One of the poster seems to know his stuff and from previous posts, sounds like some kind of financial advisor??
http://f.redflagdeals.com/archive/index.php/t-1008603.html?mobile_type=basic
@Donj – Just get your info from this site and skip the forums and you will be much better off.
The ‘cost’ of the spread is a one time cost which can’t be directly compared to an MER.
I just checked VCE and the spread was 3 cents which is 0.12% of the share price.
So if you are buying, say $1,000 per month – the ‘spread commission’ will be $1.19 per month.
If you are building an ETF portfolio at VB, then your only costs are the ETF MERs plus the spread commission.
The MER of an ETF is easy to compare to a TD series efund. To add in the spread commission, just add that dollar value to your annual ETF costs.
So for example if you have $50,000 of a TD efund with a 0.45% MER – you will pay $225 per year.
An ETF with an MER of 0.1% will only pay $50 in MER per year.
In order for that ETF holding to be more expensive than the TD efund holding – the total spread commissions paid for the year would have to be at least $175 which would represent about $145,000 worth of purchases.
Of course if you actually bought that much, you would have more assets and then the MER variables change.
Bottom line is that if you aren’t a frequent (and large) trader, there is no way that a cheap ETF will cost more than an mutual fund with a much higher MER if you are not paying commission fees.
Thanks for the vote of confidence, Mike.
Bid-ask spreads are an issue with ETF, but they are widely misunderstood. The real cost of transacting an ETF is the difference between your buy/sell cost and the NAV, and that is not easy to measure. In the examples provided on the RedFlags forum, the bid-ask spreads for funds like XWD are a bit of an illusion that results from low trading volume. If you place a limit order, the market making mechansism kicks in and it will typically get filled close to NAV. You are not likely to lose 0.5% on a trade as the RedFlag poster implies.
More about this idea here:
https://canadiancouchpotato.com/2012/09/10/etf-liquidity-and-trading-volume/
https://canadiancouchpotato.com/2012/09/13/an-etf-pricing-puzzle/
Wow Mike, I can’t believe you did all that math and wrote all that 2 min after my post. So what I get from this is that the ETF purchases will have to be frequent and large, not just frequent. And if I’m still worried, to place a limit order.
Thanks guys. And by the way, I do come here for all my ‘trusted’ info. I just use the other forums for reviews of discount brokers and things like that.
@ Canadian Couch Potato: Your comment that ‘They probably recognize that some investors will be leery about going with an independent rather than a bank-owned brokerage’ was the first concern the friend of mine (whom I just constructed an index portfolio for) mentioned. He asked what the insurance was per account. I quoted the universal CIPF $1M minimum coverage (which would only kick in after the remaining brokerage assets were first disbursed) for CIPF members. BSS Securities Inc., of which VB is a division of, is a CIPF member. But, nonetheless, going with one of the big banks does seem to give many a more secure feeling than going with an independent brokerage, even if their account is well under $1M and covered by the CIPF insurance anyway. The current CIPF list is at http://cipf.ca/Public/MemberDirectory/CurrentMembers.aspx . The rules can be a bit complex with RRSP’s, etc but there’s a lot of info on the net.
Also, may you or @Donj could explain his comment that ‘ I figured at $1 a trade, it would cost me $12 a year, which is pretty close to rebalancing yearly at TD Waterhouse at $10.’ But, rebalancing involves at least 1 buy and one sell, so that’s $20 at TD if all you have to do is sell one index and by another. If you were using the Complete Couch Potato and did the absolute minimum of rebalancing and contributing at the same time once a year that could be as little as 3 buys and 3 sells or 6 buys and 6 sells, so between $60 and $120 per year. Surely the trading cost at VB would be well under TD, not ‘close’. What am I missing?
@Noel: I honestly don’t think using a smaller brokerage is a significant risk. CIPF protection (like CDIC protection for GICs and savings account) amounts to a government guarantee.
I will have to ask Donj to explain his own math—there are a lot of assumptions in those numbers that are not explained, such as how many ETFs are in the portfolio and how frequently the rebalancing is done.
Noel,
I’m by no means an expert. Only bought one ETF so far, ZRE. The rest of the money is in e-series, while I learn.
My thoughts were for one ETF. You can multiply by how many ETFs you have. It’s also based on the assumption that I do not have to sell any ETFs, and just re-balance by buying the ETFs that are low. So if I contribute monthly at VB, the cost would be $12 at the end of the year for one ETF. This is compared to TD where I would only buy more at the end of the year at $10 per trade.
@Donj: Thanks, that makes sense. Don’t be in a hurry to abandon the e-Series funds. If you can combine e-Series funds and ETFs (to cover other asset classes, as you’ve done with ZRE) in a TD Waterhouse account, you’re doing great.
Thanks Dan. I’m starting to realize that. I am going to be keeping the TDW RRSP account for awhile. I’m only opening up a TFSA and a non-registered account at VB for now. I’ll try them out and if I like them, I’ll transfer my RRSPs over. Or maybe have my US and foreign RRSPs at VB and Canadian RRSPs at TDW. And if I don’t like VB, then it’s easier to transfer my TFSA and non-registered accounts out of VB without any fees.
This is exciting news. I was waiting to have a larger portfolio before switching from e-series to ETFs but with no comissions to buy it might make sense for me to switch already. I’ll need to look into it some more but if I decide to switch I should sell my e-series TFSA close to the end of the year and then buy ETFs in a VB TFSA in the new year right? Is closing an e-series account as simple as selling all of my funds and then asking them to close it? I guess with ETFs you can’t just purchase a fixed dollar amount of each fund on a recurring basis, right? Do you need to manually place orders each time?
Lastly, I’m sure that I’m getting well ahead of myself here but you mention that your Uber-tuber portfolio is likely only efficient for accounts of $200K. Is this due to the trading costs of managing 10 ETFs or something else? Might this be worthwhile, albeit complicated, for people with smaller portfolios to invest in if you can buy commission free?
@Rob: As I mentioned to Donj, I would not be in a hurry to abandon the e-Series funds, especially with a small portfolio. Switching to ETFs might save you 10 bps a year in MER. It’s trivial.
https://canadiancouchpotato.com/2012/03/05/some-advice-for-new-potatoes/
As for the Uber-Tuber, yes, the concern was mainly the cost of trading 10 ETFs regularly, but there is also the complexity to consider. More and more I coming to appreciate simplicity, especially for people who don;t have a lot of experience with ETFs.
Too bad not one ETF in the Complete Couch Potato is commission-free at VB.
Not included: XIC, VTI, VXUS, ZRE, XRB, XBB, but XMD & HXT are if you want to split up XIC, but then Qtrade offers those latter two commission-free also, along with XRB (which VB doesn’t). So I guess for now I’ll stick with Qtrade for XMD, HXT & XRB and TD for the rest.
@Noel: I’m not encouraging you to switch, but the fact that you can buy any ETF (including the US-listed funds) free at VB is a pretty huge advantage. Many investors in the accumulation stage may not even need to sell when they rebalance if they can so so with cash inflows. Even if they do have to sell occasionally, they can dump 100 shares for a buck.
Not everyone will agree with this, or feel it is the appropriate way to manage a portfolio, but even at $9.95 a trade with around 7 ETFs in a portfolio, the total cost to rebalance in one year might top out at $90 included a purchase and sale of DLR/DLR.U for US investments.
The question then becomes, is it worth it to the investor to just pay themself back and deposit $90 cash to the investment account? This could really add up if you were replacing MER but trading fees regardless of portfolio size could really looked at as an annual bill that could be paid for separately.
Of course everyone has a different savings threshold, but treating trading as a bill to be paid rather than a drag on returns could make just that little difference to saving over the years.
@Canadian Couch Potato: You are correct, it might not be worth it to switch to ETFs for a portfolio my size. But don’t I greatly increase my diversification with ETFs over the e-series? ETFs would also give me greater access to emerging markets, small caps and exposure to REITs. I guess your point still stands though, it is unlikely to make a noticable difference at this stage. I was planning on switching over to ETFs in a couple years anyway, so I may still get a head start and do it now since it’s free. I’ll have to research more. Thanks for responding.
Hi Dan,
I was wondering if it’s possible to get some clarity on which of the Couch Potato Model portfolios can be easily assembled or well approximated using Virtual Brokers and what, if any, modifications need to be made to them, e.g. approximating XIC using HXT and XMD as noted in your other post comparing commission-free ETFs. That’s probably a bigger question than it seems like to me right now.
For myself, after much procrastination, I’m still trying to get around to opening an e-series account to start with the Global Couch Potato. However, I’m now wondering if it would be more worth my while to go with Virtual Brokers if it would allow me to implement the Complete Couch Potato in a manner that would be competitive with the Global Couch Potato e-Series version for a small account (~$15k). Or, am I just stressing details too much at too early a stage?
Thanks.
@Canadian Couch Potato: Yes I do realize you are not encouraging anyone to switch and I appreciate the timely updates you provide. :)
Even though I read your new post twice and looked at the VB website a few times (and have 3 degrees, lol), I still didn’t realize, even though you seemed to spell it out, that you can buy any ETF commission free (as they state on the ‘Free ETF Investment’ link on the ‘Commissions & Fee’s tab of the main ‘Commissions & Fees’ tab) but can only ‘trade ‘the ‘Eligible ETF List’ (shown on the ‘Commission-Free ETF’s tab on the main ‘Commissions & Fees’ tab). The should be more specific and specify by trade they mean sell (and maybe also state, with a link, the fact that commission-free sales are restricted to certain ETFs where they mention buying is free for all ETFs)
@Donj – What can I say, I’m bored. :)
Another thing with transaction costs is that they only apply to the transaction, but if you are trying to calculate an overall “MER”, those costs will get spread over your entire holding.
So if the transaction amount is a small percentage of the entire holding (or portfolio even), then the transaction costs won’t be that significant in terms of your portfolio MER.
On a different topic – The discussion of switching from TD eseries to a brokerage or from one brokerage to another usually assumes some long-term continuity in terms of fees. The changes that have taken place in the discount brokerage space in the last 6-7 years (which is my experience) have been incredible.
There is no guarantee that in 6 years, VB will be offering free ETF commissions. Or maybe everyone will offer them. Or will Questrade & VB have been bought out by the banks? Will TD eseries still exist?
My point is that there is only so much that fine-tuning will accomplish. If your costs are low with TD and that’s working for you – you might get more bang for your buck by looking at asset allocation or increasing your savings rate – or just watch a movie. :)
@Rob: Yes, as you’ve anticipated, I would argue that the diversification benefit of emerging markets, REITs, etc. is trivial in small accounts. It becomes important later on, but you can add these asset classes gradually.
@Simon: I commend you for getting started with an investment plan, but to be honest, yes, I think you’re probably worrying too much about small details. The fact that you mention you’re procrastinating about opening an e-Series account jumped out at me.
https://canadiancouchpotato.com/2012/11/15/blog-for-financial-literacy-a-simple-plan/
With less than $15K, your priority should be opening an account, contributing regularly, and sticking to a simple investment plan. The tweaking can come later.
@Noel: I agree that Virtual Brokers should make their offer clearer. Personally, I would have trumpeted this from the rooftops.
@Mike: Which movie? :)
@Dan – I just picked up “Goon” from the library. I know it will be good. :)
Since people seem to be interested I thought I’d throw in this quick tip. You can imitate XBB using commission free ETF’s. At QTrade, you would use equal parts PGL, CLF and CBO. At VB you would probably substitute ZFL for PGL. You end up with almost exactly the right proportions of shorts corporates, short gov and long government. You do end up missing any bonds maturing in the 5 to 10 year bin, which I think does something to the convexivity? To get a guess at the numbers, I just averaged the characteristics of the three funds together, which is WRONG (especially the duration), but should be close enough.
PGL + CLF + CBO:
MER = 0.24%
YTM = 2.14%
Duration = 6.7 years.
XBB
MER = 0.33%
YTM = 2.29%
Duration = 6.9 years.
Can someone confirm? I hear that VB bans certain form of Norbert’s Gambit.
That would be a shame.
http://canadianmoneyforum.com/showthread.php/13327-Discount-Broker-will-not-journal-interlisted-stocks
Can any other VB clients confirm that VB does not allow journalling for the purpose of a Norbert’s Gambit (as mentioned in Badcaleb’s thread)? That would completely overwhelm the commission costs for many people.
Otherwise this sounds like a fantastic deal.
From Rob Carrick’s article, looks like TDW is going to offer US $ RRSP account. Any one have any idea when that will occur? Will there be US $ TFSA, by any chance?
@leeder. A US$ TFSA would not be nearly as advantageous. In a US$ RRSP, US-domiciled ETFs would have the 15% withholding tax waived. The TFSA is not a qualified retirement plan so you cannot get the waiver. It’s even less advantageous than investing in US-domiciled ETFs in a taxable account since in the taxable account you can always claim the withholding tax on your tax return.
@Russ – True about US-domiciled ETF’s in an RRSP vs TSFA, but if you maxed out your RRSP and all you had left was a maximum of $5,000 to invest and had $5,000 contribution room left in the TSFA for the year and you wanted to invest in a US-domiciled ETF then it would be better in the TSFA than a taxable account notwithstanding the fact you cannot claim the withholding tax. This is because none of the gains are taxed in the TSFA.
I was actually planning to use the US $ TFSA to invest in international equities. With international equities, I’m going to get hit by the withholding taxes anyway. There’s also really no point of me investing int’l equities in a taxable account, just because I want that withholding tax amount back.
Sorry for the double post, but I should clarify that I don’t want to get the withholding tax back only to get back taxes on gains in the taxable acct.
Rob Carrick’s column in Saturday’s Globe points out that Virtual Brokers charges a $1/month fee for DRIPs. This fee applies to the account as a whole, not each individual ETF, so overall that seems trivial for all but the smallest accounts.
https://www.virtualbrokers.com/contents.aspx?page_id=16#_Toc302478554
I agree. The drip would be trivial in most cases as it states that its applied per account. In addition, if the account were large enough then you could just DIY the drip and buy when the dividend has accumulated large enough since ETF buys are free. If VB did allow swapping CDN$ to US$ using the gambit then I would most likely a few accounts to VB, not just my RRSP.
Did anyone else notice the following fine print under their fees page:
Note that with respect to RRSP accounts (RRSP, Spousal RRSP, LIRA, RIF & LIF) they have the following fine print:
††† $50 annual fee will be charged for accounts under $15,000 in assets.
This will lead me back to a TD waterhouse self-directed RRSP and do the e-series.
@Mark: I mentioned this in the post. In my opinion, it doesn’t make a lot of sense to use ETFs with a portfolio smaller than that anyway. The e-Series funds are a great choice for small accounts, but I believe if you buy them through TD Waterhouse (as opposed to a TD Mutual Funds account) your annual RRSP fee is $100 on accounts less than $25,000.
http://www.tdwaterhouse.ca/document/PDF/apply/forms/tdw-apply-forms-521778-pdf.pdf
I missed your reference to the $50 annual fee for Virtual Broker accts under $15K, but unless, I am mistaken (quite possible), could I not buy the e-series through TD’s Basic Self-Directed RSP account (details below)? If, I am not banking with TD would this not make sense, i.e. be cheaper then having a TD acct with a monthly fee?
Basic SDRSP
The TD Waterhouse Discount Brokerage Basic RSP* is a low-cost, self-directed plan designed to meet the needs of investors who want to hold some of the most popular registered plan investments. They include load and no-load mutual funds, GICs, money market instruments, Canada and Provincial savings bonds, corporate and government issued bonds, strip bonds, mortgage-backed securities and cash. However, you cannot hold equities, options or mortgages in the Basic RSP.
Your Basic RSP plan is administered by TD Waterhouse Canada Inc., which charges an annual administration fee of only $25 + GST or HST.
@Mark: That’s interesting: I did not even know about this “Basic RSP” that allows you to by the e-Series funds but not ETFs through Waterhouse. Were you able to learn what would be involved in upgrading to the full service account once you have over $25,000? Presumably it would be fairly easy, since there would be no actual transfer from one brokerage to another.
That is a good question and one I will ask TD Waterhouse (and let you know their response) – for the sake of full disclosure I bank with TD and have had a version of your e-series portfolio in my RRSP for several years now – however, my wife is looking to start her RRSP acct this year and does not bank with TD. so, initially I had looked at this $25 a year basic self-directed option with TD waterhouse, and then got excited about the Virtual Broker option. with the $50 annual fee for smaller accts, I would agree with your advice about going back to the e-series portfolio.
I still get charged commission when buying ETF’s at Virtual Brokers as of this week.
@BRI: I’d suggest calling them to figure out why. If you’d be willing to share your findings, other readers would appreciate it. Thanks!
I called Virtual Brokers. They have several commission structures and you have to select one at the start of each trading day.
They are:
The 99
Per share
Per trade
Free ETF Investment —> new commission structure.
I had set my commission structure to “The 99” by default and for free ETF trades I need to select “Free ETF Investment” otherwise they still charge trading commissions.
If I select “Free ETF Investment” I don’t know how that will affect regular stock trading. I was under the impression that every time you select a commission structure it is in effect for 24 hours.
I am a little disappointed that Virtual Brokers did not communicate this information to me and I had to find out about it here at CCP. Props to this website for keeping everyone informed about the world of investing and trading.