Tangerine Expands Its Lineup

The Tangerine Investment Funds have long been part of my model portfolios, as they’re a simple way to build a broadly diversified index portfolio with a single product. With a management expense ratio (MER) of 1.07% they are not the cheapest option, but they offer a lot of convenience for investors who aren’t ready to manage a portfolio of individual index funds or ETFs.

This month the Tangerine family grew for the first time in five years with the launch of the Tangerine Dividend Portfolio.

As with the existing members of the Tangerine lineup, the Dividend Portfolio includes a mix of Canadian, US and international equities. But whereas the older funds track traditional indexes of large and mid-cap stocks, the new one is focused on yield. It tracks three MSCI indexes that screen for companies with dividend payouts at least 30% higher than average, as well as “quality characteristics” that suggest these yields will be sustainable.

  • The MSCI Canada High Dividend Yield Index currently holds 22 stocks, including the usual suspects such as Fortis, TransCanada, Telus, and the big banks. About 44% of the index is made up of financials, while another 23% or so is energy stocks.
    .
  • The MSCI USA High Dividend Yield Index, not surprisingly, is much larger and more broadly diversified. It includes 128 companies, including blue-chip stalwarts like Microsoft, Johnson & Johnson, Exxon Mobil, and Coca-Cola. The largest sectors are information technology and consumer staples, each at about 21%.
    .
  • The MSCI EAFE High Dividend Yield Index includes 120 companies in developed countries in Europe and Asia, as well as Australia. The UK, Germany, and France together make up almost two-thirds of the index. Financials are 23%, with other large slices are in health care, materials, and consumer staples.

Halfway home

Unlike the three balanced Tangerine portfolios—which allocate equal amounts to Canadian, US and international equities—the new dividend fund has a 50% target for Canadian stocks, with 25% each allocated to the US and overseas. That’s probably not rampant home bias: rather, it’s likely because dividend-oriented investors often focus on domestic stocks for their favourable tax treatment.

Consider an Ontario investor who earns $40,000 in employment or pension income, plus an additional $1,000 in dividends. If those dividends are from eligible Canadian companies, they would carry a negative tax rate, reducing the investor’s tax bill by almost $70. An additional $1,000 in foreign dividends, by contrast, would add another $200 or so to her tax bill.

At higher income levels the benefits of the dividend tax credit are more modest, but still significant: even with $100,000 of income, eligible Canadian dividends are taxed at 25.38% in Ontario, compared with 43.41% for foreign dividends and interest. (Ontario is roughly average among provinces.) So it’s no wonder a dividend fund would allocate half its assets to Canadian stocks.

The downside of high yields

Despite these tax benefits, however, I wouldn’t recommend the Tangerine Dividend Portfolio as a core holding for a couple of reasons.

The first is the lack of diversification. The 50% allocation to Canadian equities is already high, and it’s made worse by the fact that the index holds just 22 companies. Even a traditional Canadian equity index fund has some diversification problems with 240-plus companies and 34% in financials. The focus on dividends just makes this concentration risk that much higher.

Let’s also remember that the tax-efficiency of Canadian dividends will be irrelevant for many investors in this fund, since it applies to non-registered accounts only. I don’t have any data to back this up, but I’m guessing that many (if not most) people using the Tangerine portfolios are investing in RRSPs or TFSAs, where the dividend tax credit is a non-issue.

Moreover, while Canadian dividends are favourably treated in non-registered accounts, a high-dividend strategy for foreign stocks isn’t tax-efficient at all. Dividends from US and international companies are taxed at your full marginal rate, just like interest. Meanwhile, capital gains from those same stocks can be deferred until you eventually sell them, at which point they are taxed at only half your marginal rate. So before taxes, a 5% capital gain plus a 2% dividend—what you might expect from a broad-market US equity index fund—is equivalent to a 3% capital gain plus a 4% dividend. But the former would lead to a higher after-tax return.

Finally, focusing on dividends for US and international equity holdings is likely to be less tax-efficient even in a TFSA or RRSP. When you hold mutual funds in these accounts, dividends from foreign companies are subject to withholding taxes: 15% on US dividends and a somewhat lower percentage for overseas dividends (the rate depends on the country). So, again, assuming a broad-market fund and a dividend-focused fund deliver similar pre-tax returns, even a TFSA or RRSP investor would earn a higher return from the one with the lower yield.

And now the good news

The launch of the new Tangerine Dividend Portfolio prompted a change in one of the other funds in the family. The Tangerine Equity Growth Portfolio, launched in 2011, had previously been the only member of the lineup to exclude bonds. It tracked the same equity indexes as its sister funds: the S&P/TSX 60 for Canadian stocks, the S&P 500 for the US, and the MSCI EAFE for international. However, the Equity Growth Portfolio allocated 50% to Canada.

But not anymore. Since the arrival of the new dividend fund, the Equity Growth Portfolio has changed its mandate and now holds equal amounts of Canadian, US and overseas stocks, just like the three balanced funds in the Tangerine lineup.

In my view, this makes the fund more attractive for investors seeking a global all-stock index fund. If you’re not ready to go 100% equities and you’d like to hold your investments at Tangerine, you could even combine the Equity Growth Portfolio with some cash and GICs and build your own balanced portfolio. That would lower your overall volatility and bring down your costs as well.

 

27 Responses to Tangerine Expands Its Lineup

  1. aslam November 7, 2016 at 9:22 am #

    CCP, Is my my understanding correct? if I want to have dividend etf in my portfolio, then I should consider Tangerine or other Canadian dividend etf (low cost off course) rather then an international or US dividend etf because high income tax on dividends from US and international etf would reduce my over all return?

  2. Canadian Couch Potato November 7, 2016 at 9:29 am #

    @aslam: If you look only at the tax issues that might make sense. But your portfolio also needs to include US and international equities for diversification. That’s why I recommend simply using broad-based index funds for all equities rather than focusing on dividend-oriented funds.

  3. BruceMcK November 7, 2016 at 10:37 am #

    Wow. Great analysis on the diversification and tax implications. Your clear explanation helps me better understand the implication of taxes on my existing simple ETF portfolio.

    One interesting thing about this fund is its distributions are paid annually in December, which is not great for investors that want regular monthly income. I believe core dividend ETFs like ZDV, XDV and VDY pay distributions monthly.

  4. Dan P November 7, 2016 at 11:14 am #

    Great Post Dan,
    I figured that this fund would be fairly tax inefficient in many situations but as usual your insight is clear and straightforward. I like the changes to the Equity-growth portfolio. That makes a lot of sense.

    I had two questions for you. Where to fund companies come up with the “risk rating” that they all seem to have? Is this a requirement for a fund to have outlined in Canada? They seem like they could be quite misleading for a new investor.

    For example the equity growth is considered medium to high risk, which makes sense (globally diversified, over 1000 stocks but no bonds). The Dividend portfolio says medium with less diversification, 50% weight to 1 country, zero allocation to bonds. There is no way that the dividend portfolio is comparable in risk to the growth portfolio with 25% allocation to bonds. Does this just come from the misconception that dividend stocks are “safe”?

  5. Canadian Couch Potato November 7, 2016 at 11:58 am #

    @Dan P: The methodology used to determine the risk ratings in Fund Facts documents has been criticized by others, too, and seems to be an ongoing source of discussion:
    http://www.osc.gov.on.ca/en/SecuritiesLaw_ni_20151210_81-102_mutual-fund-risk-classification-methodology.htm

    I agree completely that 100% equities should not be classified as “medium risk.” It seems that if afund includes dividend-paying stocks and/or large and mid-cap stocks only it will get a lower risk rating. I suppose it is true that a portfolio of small growth stocks would be more risky, and something like a precious metals funds might be riskier still, but most investors do not understand that distinction. A dividend fund can easily lose 50% in a downturn, and some did in 2008-09. That’s not what most people would describe as “medium risk.”

  6. Mark November 7, 2016 at 12:30 pm #

    So who is this fund for, exactly? I have RSP’s in Tangerine’s Balanced Growth fund at the moment. Is there any advantage in adding in this new fund to my savings strategy in addition to the Balanced Growth fund? (Not having one replace the other, but having both.)

  7. Canadian Couch Potato November 7, 2016 at 12:47 pm #

    @Mark: I don’t think there’s any situation where it would make sense to own more than one Tangerine fund. The general idea is to choose the single fund that is the best fit for you.

  8. Nathan November 7, 2016 at 1:43 pm #

    So, to continue my question from last week, in what situation would you recommend a Tangerine balanced fund over Nest Wealth, and vice versa?

  9. Indexer November 7, 2016 at 2:58 pm #

    Hi Dan, great article. In your opinion what would hard core dividend investors think about this fund? Their portfolios are always very concentrated and almost always all Canadian, I believe, being more risky than they think. This fund gives them international diversification (impossible without a mutual fund). Anyhow, for new investors you wrote an extensive series on dividends vs indexing. (Sorry, I
    don’t know how to Link). Great insight. Glad to see the change in the all stock portfolio .

    @Nathan. In my opinion, both tangerine and nestwealth (and other roboadvidors) offer the same thing. They are both completely taken care of for you. The robosdvisors might be a bit cheaper and give minimal financial advice. With a small portfolio, the cost will be negligible. (Tangerine is pretty much the e-series portfolio just keeping larger cap with the more heavily traded TSX 60 – almost identicle return to VAB). To me their portfolios are overcomplex, and the choice of funds would bug me forever, just like when I had a broker. However they are valid choices. I would go Tangerine with a small portfolio, graduate to e-series non brokerage, read Dan’s book and website and if comfortable, finally go ETF model portfolios. They are SENSIBLE, CHEAP, SIMPLE, COMMONSENSE, EASY TO RUN portfolios. I am “old school” afterr reading the old articles on VXUS VTI, and Norbits Gambit. Therefore, I am VAB, VCN, VTI, VXUS, Canada Trust Savings for Cash. I have no Reit’s as I like direct real estate holdings and extensive/by luck research showed REIT’s in the indices are already about 5%, the recommended amount. They are also volatile mostly small cap, and complicate the portfolio. All in a .1% expense ratio. Can’t beat. If you get a large enough portfolio where more advice is needed or you are uncomfortable DIY use Dan’s non affiliated full setvice management or a fee only advisor (a nice combo). Sorry about the essay. Happy investing! It’s fun!

    Oh by the way, I believe robo advisors are reviewed here or check out a website
    that compares them all with Tangerine. It comes up when you google it.

  10. Canadian Couch Potato November 7, 2016 at 3:08 pm #

    @Indexer: “In your opinion what would hard core dividend investors think about this fund?” You’d have to ask a hard-core dividend investor, which I am not. 🙂 But you’re right, the international diversification is an improvement over an all-Canadian dividend strategy, and I would rather see a dividend investor start out with a funds like this as opposed to picking individual stocks.

    @Nathan: Honestly, I am pretty agnostic on the Tangerine vs. robo-advisor decision. Overall, the larger your portfolio, the more important the cost savings of the robo-advisor become: they are trivial if a young investor is starting out with just a few thousand dollars. I think if you’re interested in ETFs specifically, the robo-advisor model will also make you a little more familiar with how the moving parts work together.

  11. Indexer November 7, 2016 at 3:46 pm #

    Dan, you are now known as the oracle! Reddit : New Tangerine Dividend Fund:
    “The Oracle Speaks”…link to this article.

  12. Canadian Couch Potato November 7, 2016 at 4:17 pm #

    @Indexer: In a previous Reddit threat I was referred to as the Messiah, so this is something of a downgrade. 🙂

  13. CharlieFox November 7, 2016 at 5:00 pm #

    I’d rather just jump straight into BMO dividend ETF instead but that’s only cause I’d rather force myself to learn how to use a broker to save money on the MER.

  14. Clarita November 8, 2016 at 12:47 pm #

    Unclear why having investments in two tangerine funds is unrecommended. Why not part in a balanced portfolio and part in the equities growth fund? thanks!

  15. Canadian Couch Potato November 8, 2016 at 1:23 pm #

    @Clarita: There’s nothing specifically wrong with that, it just seems unnecessary. I would think simply choosing one of the four Tangerine funds that fit your risk profile would be adequate (i.e. 30%, 60%, 75% or 100% equities). Though I suppose that you could combine two of the funds could get you an asset mix in between those targets (say, 50% or 80% equities).

  16. Neil Doherty November 12, 2016 at 5:31 pm #

    How do you rate MAWER Balanced fund ty Neil!

  17. Hilary November 14, 2016 at 10:53 am #

    Would anybody be able to recommend a Couch Potato Portfolio through RBC?

    Tangerine and the TD e-series seem great for ease and price respectively. However, I (and perhaps many others), are tied to RBC because of employer offered GRSP/DPSP plans. I believe the DPSP contribution matching, 30% for the first year and 50% each year after (for me), outweighs the respective benefits of the Tangerine and TD portfolios.

    This is, of course, a personal question, and maybe shouldn’t be asked in this thread. Any guidance or literature sent this way would be greatly appreciated.

    Thanks so much 🙂

  18. Canadian Couch Potato November 14, 2016 at 11:45 am #

    @Hilary: RBC does offer a family of index funds that are roughly equivalent to the TD e-Series portfolio: they’re just more expensive. I am not sure whether these index funds are available through your employer-sponsored plan, however. Most (but unfortunately not all) group plans offer some kind of index fund options, so it should be relatively easy to mimic the Couch Potato portfolio. Feel free to email directly if you have other questions.

  19. Hilary November 14, 2016 at 12:37 pm #

    Thank you! Will do!

  20. jar November 18, 2016 at 5:59 am #

    Hello,
    starting as a new investor. planning to buy a home in the next 3 years but wants to start investing for long term as well. what funds would you recommend me putting my savings for the downpayment of a house thru TFSA? I have looked into and applied for e-series TD fund and have an appointment at RBC soon. I also hold an account at worldsource thru my bank. what would you recommend for the fund for the long term that I want to start now while also saving for a downpayment?

  21. Canadian Couch Potato November 18, 2016 at 9:07 am #

    @jar: Any money set aside for a down payment should be in a savings account or GICs (if you think you will buy in less than three years, make sure you use only one- or two-year GICs). For the long-term savings, that depends on how involved you want to be. Something simple like Tangerine may be best at this point until the portfolio grows and you have more experience as a DIY investor. Good luck!

  22. Jon November 21, 2016 at 7:49 am #

    CCP, curious as to your thoughts on the growing number of investing articles saying investors should consider taking on a little more risk in there portfolio as the traditional 60/40 split may not provide the results it has in the past due to bonds heading into a period of lower returns. Any opinion on this strategy or the notion that the bond index is in for a long period of limited growth? One such article was recently in Moneysense.

  23. Canadian Couch Potato November 21, 2016 at 7:58 am #

    @Jon: Thanks for the comment. This should help:
    http://canadiancouchpotato.com/2013/01/21/does-a-6040-portfolio-still-make-sense/

  24. Daniel S. November 27, 2016 at 5:23 am #

    Hi Dan,
    Great article. So why are dividend funds seem to be so popular? At least it seems to me.

  25. Adrian January 5, 2017 at 2:43 am #

    Hello,
    First off, great resource, I’ve learned a lot from CCP.

    I’m looking to switch my mutual funds to index funds for the lower MER (I currently have mutual funds with a MER of 2.12%)

    I am interested in the Tangerine options as I am not ready to manage my own funds but have a couple of questions on the 1.07% Mer. As part of the fine print on every Tangerine portfolio web page is:

    – As at December 31, 2013, the management expense ratio (MER) for the Tangerine Investment Fund Portfolios was 1.07%. At the end of 2015, the asset-weighted average MER for Long Term Funds is 2.13%. Source: Investor Economics Insight, January, 2016. –

    1. Does this mean the fee is actually 2.13% now? It “was 1.07%”?
    2. I’m a bit confused on MER vs asset-weighted average MER, what is the difference?

    Thanks for any advice.

  26. Canadian Couch Potato January 5, 2017 at 8:39 am #

    @Adrian: The comment on the Tangerine site simply means that the average “long-term” mutual fund (that is, ones that include stocks) in all of Canada has a fee of 2.13%. They are just trying to point out that their funds are half the average cost.

    By “asset-weighted,” they mean that large funds count more than small funds when this calculation is made. To give a simple example, if one fund has $100 million in assets and a fee of 3% while another has assets of $10 million and a fee of 1%, the simple average of these two is 2%. But the asset-weighted average would be 2.82%, because the more expensive fund is 10 times larger. This better reflects the plight of investors as a whole.

  27. Adrian January 5, 2017 at 10:19 am #

    Thanks for the clarification! Cheers,

Leave a Reply