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.
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@Jeffrey: Sorry, I don’t. A quick call to their customer service desk will answer that for you.
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
@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.
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).
@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.
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.
@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.
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.
@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.
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
@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.
@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
@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.
@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
@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.
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
@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.
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
@Ike: Your plan sounds totally reasonable to me. I think the e-Series/ETF combination is a great way to go.
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..
@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.
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