Ask the Spud: Combining e-Series Funds and ETFs

I use the Global Couch Potato with e-Series funds in my TD Waterhouse account, but I eventually want to use the Complete Couch Potato. Once my portfolio gets to $50,000 and I qualify for $9.95 trading commissions, should I move everything to ETFs? — Mark V.

If you’re a client of any other brokerage, it makes sense to use ETFs to build the Complete Couch Potato portfolio. But with TD Waterhouse you have the unique opportunity to combine the e-Series mutual funds and ETFs in the same account. For five-figure portfolios (and perhaps even much larger accounts) a hybrid approach is likely to make more sense than using all ETFs.

The Complete Couch Potato has three asset classes that are absent in the Global Couch Potato: real estate, real-return bonds, and emerging markets. There are no e-Series funds for these asset classes, nor are there low-cost index funds from other providers. But that doesn’t mean you can’t create a hybrid portfolio of e-Series funds and ETFs. It would look something like this:

Asset class  % Fund name (ticker) MER
Canadian equity 20% TD Canadian Index – e (TDB900) 0.33%
US equity 15% TD US Index – e (TDB902) 0.35%
International equity 10% TD International Index – e (TDB911) 0.50%
Emerging markets equity 5% Vanguard MSCI Emerging Markets  (VEE) 0.55%
Real estate 10% BMO Equal Weight REITs (ZRE) 0.62%
Real return bonds 10% iShares DEX Real Return Bond (XRB) 0.39%
Canadian bonds 30% TD Canadian Bond Index – e (TDB909) 0.51%
100% 0.45%

A few words of explanation. Vanguard Total International Stock (VXUS), which makes up 15% of the Complete Couch Potato, includes both developed and emerging markets. TD International Index Fund (TDB911), however, includes only the former. So to keep the asset mix close you can use the TD fund for 10% and an emerging markets ETF for the other 5%. I’ve suggested Vanguard MSCI Emerging Markets (VEE) here because it’s the cheapest available on the TSX. The US-listed version has a much lower MER, but an investor with such a small allocation will find it more efficient to trade in Canadian dollars and pay the higher annual fee.

To reduce ETFs commissions further, you might even substitute the PH&N Inflation-Linked Bond Fund (PHN650) for XRB. While this is not an index fund, its MER is just 0.55% and there isn’t a whole lot of active management going on: the Canadian government has issued only six real-return bonds and these make up the lion’s share of every fund in this asset class. Over the last three years the PH&N fund has lagged XRB only slightly. And again, in a small account ETF commissions would likely overwhelm that small difference.

Tallying the costs

The MER of the hybrid portfolio is just 0.16% more than the all-ETF Complete Couch Potato. On a $50,000 portfolio that works out to $80 a year. But it should save you more than that in trading commissions, bid-ask spreads, and currency conversion costs. It will also be far more convenient, since the mutual funds allow you to make preauthorized contributions and all the distributions are reinvested automatically.

As your portfolio grows much larger you can gradually phase out the e-Series funds, starting with those that have the largest price difference compared with ETFs. TD Canadian Bond Index (TDB909) should be the first to go: it has the largest allocation in the portfolio and iShares DEX Universe Bond (XBB) has a fee 0.19% lower. The comparable Vanguard Canadian Aggregate Bond (VAB) would knock off a further 10 basis points.

The larger the portfolio, the greater the advantage of using all ETFs. But you shouldn’t be in a huge rush to get there, especially if you have the opportunity to use the lowest-cost index mutual funds in Canada.

90 Responses to Ask the Spud: Combining e-Series Funds and ETFs

  1. Canadian Couch Potato December 26, 2012 at 9:37 pm #

    @Jeffrey: Sorry, I don’t. A quick call to their customer service desk will answer that for you.

  2. Ashish December 28, 2012 at 9:17 am #

    Hi Dan,

    Excellent post . I was wondering what would be asset allocation for the yield-hungry portfolio if we were combine ETF”s and e-Series.

    Thx

    Ashish

  3. Canadian Couch Potato December 28, 2012 at 9:36 am #

    @Ashish: I’m not sure it would ever make sense to build the Yield-Hungry portfolio with some combination of ETFs and index mutual funds. The products in that portfolio were selected specifically for their income and tax characteristics, and there are no mutual fund equivalents.

  4. Moving to the Couch December 28, 2012 at 5:16 pm #

    If investing without further contributions to the complete portfolio with a mix of TD e-series and ETF…
    Is it less expensive to keep a bit of Bonds in the e-series (instead of all ETfs) so I can rebalance between e-series bond and e-series equity? I know that this is not a perfect rebalancing, but this seems less expensive (but is it reasonable).

  5. Canadian Couch Potato December 28, 2012 at 5:38 pm #

    @Moving: It really depends on the specifics: i.e. how much money you’ll be holding in the more expensive mutual fund, how often you are rebalancing, etc. If you’re only making one rebalancing trade per year and the holdings are large, it’s probably better to just go with all ETFs.

  6. Moving to the Couch December 28, 2012 at 6:33 pm #

    Ok, let’s say on a ~ $100k portfolio with 20% in ETF and 10% in e-series, rebalancing once per year.
    You recommend paying the trading fee for the sale + the trading fee for the purchase?
    I am assuming that one must buy ETF share by the 100s.

  7. Canadian Couch Potato December 28, 2012 at 9:31 pm #

    @Moving to the Couch: If the ETF is 0.10% cheaper than the index fund, your cost savings would be $10 per year on every $10,000 held in the fund. Every trade you make also costs $10. So, really, we’re talking about nickels and dimes here. The choice will have zero effect on whether you achieve your long-term goals, so I wouldn’t worry about it at all. Just do whatever is most convenient.

    No, you do not have to by ETFs in board lots of 100. You can buy any number of shares you wish.

  8. Matt December 30, 2012 at 9:53 pm #

    Hello!

    Great blog.

    I’m a new reader, and I am wondering something here: If the difference between holding an e-series and an ETF portfolio is “nickels and dimes” (even for a one hundred thousand dollar portfolio)…when all factors are taken into account, such as ETF trades, forex, fees etc…then at what point does holding ETFs make any sense at all? In other words, it seems as if you would have to own a very large portfolio (say, around 300,000+) in order to really make the “nickel and dime” difference relevant.

    I realize that with ETFs you can further diversify large holdings (such as with REITs etc..) but is that diversification really worth the hassle for smaller portfolios?

    Any help you can offer to further my understanding of this would be greatly appreciated.

    Thanks.

  9. Canadian Couch Potato December 31, 2012 at 9:25 am #

    @Matt: You’ve pretty much anticipated my answer. If you are currently using TD e-Series funds, it’s probably not worth switching to ETFs unless your portfolio is quite large (at least $100K) and you really want the added diversification of REITs and emerging markets. (And even then, you can use a combination, as described above.) This is especially true if you make regular monthly contributions.

    Whenever you make a decision like this, it’s always important to do the math. The difference in MER between an e-Series portfolio and an ETF portfolio might be 15 basis points or so. That’s $15 annually per $10,000 invested. So at $100,000 your added cost is $150 a year. If you make eight ETF trades a year, you’re spending $80, so now your savings is down to just $70. If you are buying US-listed ETFs, you are highly likely to lose all of that on currency exchange. The index funds also give you the advantage of automatically reinvested dividends, etc.

    I always like to remind people that index investing is not just about ETFs. The benefits are low cost, broad diversification and the discipline it imposes. The tools you use are important, but too many people agonize fund choices and it’s distracting them from what really matters.

  10. delboybc December 31, 2012 at 1:07 pm #

    I agree with you Dan. I have been using a combination of mutual funds (mainly e-series) and ETF and have found the use of ETF’s have only made a big difference with asset classes like emerging markets, short term bonds and real return bonds.

    I still use some US-listed ETF’s as they are in an RRSP and from the calculations I have looked at the loss on currency exchange is nothing compared to the loss on the withholding tax on dividends. Does that sound correct to you or am I missing something with this calculation?

    Keep up the good work.

    Del

  11. Canadian Couch Potato December 31, 2012 at 1:22 pm #

    @delboyc: As you know, I’m a big fan using US-listed ETFs, but you do need to be careful with those currency exchange fees. The typical brokerage spread is about 1.5%, though this is a one-time fee, not an annual one. (There would be another 1.5% cost when you eventually convert back to CAD.) Plus you’re paying $10 per trade.

    Meanwhile, the withholding tax on US equities amounts to about 0.30% annually, based on a 2% yield. Of course, you also pay a higher management fee for the e-Series fund, so let’s add another 0.25% for total additional cost of 0.55% annually. On the flip side, though, you have commission-free trades and reinvested dividends.

    So if you can reduce your currency exchange fees dramatically (by using Norbert’s gambit, or by using USD you already have), then it absolutely makes sense to US-listed ETFs, especially for larger amounts. But the differences are probably smaller than many people believe.

  12. Jas January 17, 2013 at 8:45 pm #

    @CCP: How about using CIBC’s emerging market index fund instead of Vanguard’s ETF? It has the advantage of being a canadian fund… The MER is reasonable at 0.65% if you qualify for the “premium” rate.

    http://www.theglobeandmail.com/globe-investor/funds-and-etfs/funds/summary/?id=87302

  13. Canadian Couch Potato January 18, 2013 at 1:03 am #

    @Jas: To qualify for the premium class, you need $50,000. At that point I’d have to think using VWO would be a much better option.

  14. Jas January 18, 2013 at 6:55 am #

    @CCP: Good point. Although I would argue that with VWO, which is a US fund, there are two levels of withholding taxes but only one you can recover. As you already explained in another post (see below), the additional withholding tax on international equities would amount to about 0.30% annually, based on a 2% yield. So if you add 0.3% to the 0.2% MER of VWO, it comes out just a bit cheaper than CIBC’s fund (0.5% vs 0.65%)

    http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/
    http://canadiancouchpotato.com/wp-content/uploads/2012/09/DFA-Foreign-Withholding-Taxes.pdf

  15. Canadian Couch Potato January 18, 2013 at 8:16 am #

    @Jas: Yes, though another important issue to consider is tracking error. I am not sure whether the CIBC fund tracks the index as tightly as Vanguard’s ETFs typically do. Note also that VWO recently switched to the FTSE index, so these two funds no longer both track MSCI.

    Either way, if you do qualify for the premium pricing of the CIBC the convenience of trading in Canadian dollars with no commissions may well make it a better choice.

  16. Rob February 19, 2013 at 1:39 pm #

    Dan
    I make contributions every two weeks, which are matched by my employer, into my global couch potato e-series portfolio. I also make a lump sum contribution every year matched by my employer. My portfolio is now above $50,000 and was going to start a complete couch potato portfolio with this annual lump sum while keeping the other portfolio for the biweekly contributions. Does this make sense? Any suggestions?

    Thanks Rob

  17. Canadian Couch Potato February 19, 2013 at 1:49 pm #

    @Rob: I’m increasingly inclined to recommended people just continue to use the e-Series funds until the MER difference becomes really significant. With a $50,000 portfolio, 20 basis points works out to just $100 a year, and all of that will likely be eaten up by trading commissions, bid-ask spreads, currency conversion, the drag from cash dividends, the limited ability to rebalance, etc. Don’t underestimate the value of simplicity and convenience in your portfolio.

  18. Ike February 25, 2013 at 7:10 pm #

    My wife has about $175K in 3 different Group RRSP’s due to multiple jobs in the last few years. I plan to merge all of these grrsp’s to a discount broker of our choice into the Global Couch Potato Portfolio. I am thinking to use a combination of TD’s e-funds and ETF’s to create a hybrid portfolio to keep annual re-balancing costs low. Am I over-thinking this. She has no allegiance to any brokerage as this will be a new account and we were only thinking TD due to its e-funds. At this time there will no additional contributions. Would appreciate our thoughts.
    PS: Excellent work on the CCP. Really informative and appreciated… Ike

  19. Canadian Couch Potato February 25, 2013 at 7:18 pm #

    @Ike: Your plan sounds totally reasonable to me. I think the e-Series/ETF combination is a great way to go.

  20. Jeffery March 3, 2013 at 10:36 pm #

    Hi CCP,

    For the fund, PHN650, do you know if there’s a commission that I have to pay to sell the mutual fund? Whenever I try processing the transaction, my discount brokerage, TD Waterhouse charges me a commission of 33.50 regardless of the amount that I sell. I’ve checked the prospectus, and it says its a no load fund. I also don’t see anything about commissions being charged for selling it. I contacted my discount brokerage and the person said there is a fee, but he can’t direct me to the information because his info was from his internal system..

  21. Canadian Couch Potato March 4, 2013 at 8:30 am #

    @Jeffrey: I think what’s happening here is you are being charged an “early redemption fee.” The brokerage or the fund itself often charges a fee of $30 to $50 if you sell units of a fund within a certain period after buying them: usually 60 to 90 days. This info should be available from TD Waterhouse or PH&N.

  22. JM July 19, 2013 at 4:14 pm #

    I’m currently in the process of building up the Complete Couch Portfolio using a hybrid of e-Series funds and ETFs. I have 75% of my portfolio at Questrade; the remaining 25% is at TD, and it’s my group RRSP from my employer. The balances at Questrade will be pretty static, while the balances at TD will (hopefully!) grow continually with contributions by myself and my employer.

    I was originally thinking about using the Questrade portion to hold the portions that are a bit expensive or unavailable in e-Series form: Canadian bonds (XBB), real return bonds (XRB), REITs (ZRE), International equity (VXUS) and maybe some US equity (VTI). For the e-Series side of things I was planning to hold Canadian equity (TDB900) and the remainder of the US equity portion (TDB902). However, as I start to plan the portfolio I realize that the continual additions to the TD side will start to skew the percentages–for example, the REITs and real return bond percentages will decline as more money gets added to TD.

    I wonder if it would make rebalancing easier to simply set up the TD portion following the e-Series version of the Global Couch Potato and then have the Questrade portion follow the Complete Couch Potato model? Each institution would be a self-contained portfolio, each following their own model.

    I’m certainly enjoying the free ETF purchases at Questrade. The majority of the funds at Questrade were moved by me from TD, which took about a month to complete. Since TD charges transfer fees and Questrade doesn’t refund fees for (I think) transfers of under $50K, I don’t expect to move funds from TD to Questrade very often…

  23. Canadian Couch Potato July 21, 2013 at 10:07 am #

    @JM: Without knowing the specifics I can’t offer any concrete suggestions about how to allocate the funds across two accounts. I would certainly avoid transferring any money from one account to the other: come up with a solution that is as simple as possible.

  24. Ken October 31, 2013 at 7:31 pm #

    So I recently switched over from Questrade to TD Waterhouse because I foolishly thought ETF’s were traded commission free with them. So now I’m having second thoughts about it and am hoping someone could justify my actions so I don’t feel so bad. I don’t mind the extra work of managing my own ETF’s so I don’t stand to benefit from the conveniences of TD Waterhouse.

    Mainly… I’m just wondering approximately what the difference in profits I’m looking at between the two brokers given a $25k account.

  25. Tony December 4, 2013 at 11:29 pm #

    TDW has a promotion now. Up to 50 free trades if you open an account with them before dec 20th, i think. You have to fund the account by the end of Jan next year and make the trading by the end of March. Check the details.

  26. Prasanna Thani February 21, 2014 at 10:32 am #

    Very interesting stuff here.

    I know the TD e-series presents a lower MER fee than most index funds, but I haven’t seen any discussion regarding the trailing commission fee they charge (0.25%). I understand the basics when it comes to MERs, but when reading the fund facts, I noticed a ‘trailing commission’ of upto 0.25% is paid out each year.

    Does this mean those that invest in this series pay the MER as well as the 0.25% each year?

  27. Canadian Couch Potato February 21, 2014 at 11:38 am #

    @Prasanna: Trailing commissions are included in the MER. I doubt whether these are even paid with the e-Series funds, since TD is both the fund manager and the dealer, so it would effectively be paying itself.

  28. Newbie March 20, 2014 at 12:50 pm #

    Hi Dan,

    Great post! My question is: if I create the hybrid portfolio of td e-series and ETFs, when I make preauthorized contributions, how does this avoid the ETF trade commissions since the funds allocated monthly will include three asset classes that are ETFs: emerging markets equity, real estate, and real return bonds?

    Also, what do you consider a large enough portfolio to start phasing out a td e-series fund?

    Thanks!

  29. Canadian Couch Potato March 20, 2014 at 2:40 pm #

    @Newbie: You can never avoid the ETF trading commissions, and you can’t make preauthorized contributions to ETFs either. But you can make all the preauthorized contributions to the e-Series funds and then make just a few trades when rebalancing.

    I would not be in a big hurry to drop the e-Series funds if you are making regular contributions. That’s what really makes the difference at this stage. I would be at least $100K or so before looking at all ETFs.

  30. Corey April 29, 2014 at 12:58 pm #

    Hey Dan – some great information and insight throughout your site! Quick question for you on this same topic.

    I am with TD DI and am gradually setting up the Couch Potato program. Total portfolio value between $200-250K. Monthly contributions around $5K. Could it make sense to apply a hybrid ETF/E-Series model as you’ve described in this post, but funnel your monthly contributions only into the E-Series funds. I would knowingly be going overweight in e-series in between re-balances (every 6 or 12 months), but I would still capture the benefit of the lower ETF MERs and limited trade fees. Worth the extra hassle?

    Thanks for all of the great information!

  31. Canadian Couch Potato April 29, 2014 at 1:07 pm #

    @Corey: I would suggest not getting into the habit of contributing to mutual funds and then selling shares every few months: you find yourself getting hit with early redemption fees. Plus it’s just a big hassle. A better idea might be to set up an systematic investment plan to each e-Series fund in proportion to its target weight in your portfolio. For example, if you contribute $5,000 a month and Canadian equities are 20% of the portfolio, set up a SIP for $1,000 a month to the Canadian equity fund. Any amounts that would be allocated to ETFs can just sit in cash for a few a months and you can make a few trades a year as necessary.

  32. Sebastien July 8, 2014 at 12:09 pm #

    Question 1: With a small RRSP and broker that allow US$ RRSP, would that be a good idea to buy US-listed EFT if using Norbert’s Gambit?

    Question 2: If we don’t use Norbert’s Gambit, how much should we have to trade in US$ before using US EFT?

    Question 3: If not using Norbert’s Gambit, is is OK to start with a Canadian EFT then switch to the US equivalent as soon as we get the amount specified in your answer for Question 2 ? If not, when should we do the switch?

    I wish I can find answers here. Thank you in advance for your time.

  33. Canadian Couch Potato July 8, 2014 at 12:34 pm #

    @Sebastien: There are no simple answers to your questions. It all depends on the details, including how much your brokerage charges for trading commissions. In general, I would say doing Norbert’s gambit with less than $10,000 is probably not worth it if you are paying $10 per trade. And yes, it is always OK to use Canadian-listed ETFs if you don’t have enough to do Norbert’s gambit. This blog may help:

    http://canadiancouchpotato.com/2013/12/09/ask-the-spud-when-should-i-use-us-listed-etfs/

  34. Sebastien July 24, 2014 at 11:12 am #

    Does holding the 4 core assets with TD e-series should delever better return on the long term compared to a mutual fund with 2% MER or do I need the 3 other assets listed in the Complete Couch Potato to beat most of the mutual funds on the market?

    Does someone with 500 000$ or more could stick to the 4 core assets and still get better returns than 80% of mutual funds on the long term.

    Thank you for your advice.

  35. IP September 30, 2014 at 1:12 pm #

    I tried different places on the blog, but alas could not locate information I’m curious about (I’m guessing it’s in the blog somewhere). I think this is the most apporpriate place for my question. I’m finalizing my TD eSeries set up today and I have a silly question. Most people reference TD eSeries US-TDB902 and Ineternational-TBD911. What’s the difference between the above indexes vs US-TBD-904 (0.16% higher MER) and International-TBD905 (0.03% higher MER) besides the higher MER’s and when should one consider the later options (if at all)?

    PS. Currently enjoying ‘Guide to the perfect portfolio’…Thanks!

  36. Canadian Couch Potato September 30, 2014 at 1:18 pm #

    @IP: THDB904 and TDB905 use currency hedging, which is designed to protect Canadian investors from a rise in the Canadian dollar (which would cause the value of foreign equities to fall). This post may help:
    http://canadiancouchpotato.com/2010/08/11/will-the-real-sp-500-please-stand-up/

    I don’t recommend using currency hedging because it adds cost without reducing risk:
    http://canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/

  37. Sebastien November 17, 2014 at 1:57 pm #

    @CCP: What about replacing VEE (actual MER of 0.44%) by XEC (actual MER of 0.37%) ? I know that XEC holds more emerging markets equity, but as you suggest to use XEC in your model portfolios, I am curious to know why you don’t recommand XEC for a mix between TD e-series and ETFs.

  38. Canadian Couch Potato November 17, 2014 at 3:42 pm #

    @Sebastien: This blog post is two years old. VEE has since dropped its fee to 0.23%, but XEC is also a fine choice. I am mostly indifferent between the two.

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