Archive | Discount brokers

Will Robo-Advisors Ever Come to Canada?

Every investor who’s fired a bad advisor and become a do-it-yourselfer has probably had mixed feelings. On one hand, it’s liberating to get away from a costly strategy that was performing poorly. But if you’ve never managed your own portfolio, it won’t take long to realize it’s not as simple as you first thought. In the last couple of years a growing number of US investors has been bridging that gap with online services that design, implement and manage ETF portfolios for a fraction of the cost of a human advisor.

These so-called “robo-advisors” take you through a series of questions to determine your goals and your risk tolerance and then build a diversified portfolio using an appropriate mix of equity and bond ETFs. The service looks after rebalancing and reinvestment of dividends: all you do is contribute regularly and the software does the rest. Wealthfront, which bills itself as “the largest and fastest growing software-based financial advisor,” even includes tax-loss harvesting for accounts over $100,000.

The cost for all of this? At Wealthfront you can invest your first $10,000 for free, after which the fee is 0.25% annually.

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Norbert’s Gambit: The Complete Guide

[This post was updated in February 2015 to reflect recent changes at some brokerages.]

Norbert’s gambit remains the least expensive way to convert Canadian and US dollars at a discount brokerage. For investors looking to buy US-listed ETFs, learning this technique can save hundreds of dollars by sidestepping the wide currency spreads charged by brokerages.

With the 2013 launch of excellent unhedged foreign equity ETFs from Vanguard and iShares, there’s less of an incentive to use US-listed ETFs than there used to be. In fact, in a non-registered account or a TFSA it may not even be worth the added cost and inconvenience if the only difference is a few basis points of MER. But in an RRSP, there’s a significant benefit: using US-listed ETFs can dramatically reduce the impact of foreign withholding taxes, which can add an additional cost of 0.30% to 0.70% to US and international equity holdings.

The problem with learning to pulling off Norbert’s gambit, however, is that there’s no simple set of instructions that works at every brokerage. RBC Direct Investing and BMO InvestorLine both allow you to hold US dollars in registered accounts,

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The Hidden Cost of Bid-Ask Spreads

Trading commissions get a lot of attention from ETF investors, and rightly so. But depending which ETFs you use and the size of your trades, the impact of bid-ask spreads may be larger than you thought.

The bid price is what you expect to receive when you sell shares, while the ask price (or offer price) is what you would expect to pay to buy them. The difference between the two is called the bid-ask spread, and it represents the profit taken by the market makers.

Unlike with individual stocks, trading volume doesn’t have a major effect on the bid-ask spread of an ETF. The liquidity of an ETF is largely determined by the liquidity of its underlying holdings: if the fund holds frequently traded large-cap stocks, its bid-ask spread should be very tight even if the ETF itself doesn’t trade very often. If the ETF holds micro-cap stocks or illiquid bonds the spread will be wider even if units trade frequently.

The underlying story

But that’s not the whole story. If the liquidity of the underlying holdings was the only factor, ETFs in the same asset class would have more or less identical bid-ask spreads,

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Norbert’s Gambit at CIBC: A Case Study

Norbert’s gambit is an excellent way to reduce the cost of converting Canadian and US dollars, but not every brokerage makes it easy. Recently Justin Bender helped a client of our DIY Investor Service with a large currency conversion inside an RRSP at CIBC Investor’s Edge. It saved the client hundreds of dollars, but it was a complicated transaction and we thought other CIBC investors would benefit from learning the steps.

The difficulty stems from the fact that CIBC does not allow you hold US dollars in registered accounts. Whenever you buy or sell US-denominated securities, the brokerage forces you to convert the currency with the usual spread.

In the example below, the goal was to convert approximately $100,000 CAD to the equivalent in USD, and then use the proceeds to purchase a US-listed ETF. The prices and exchange rates were current at the time Justin made the transactions. For simplicity, we’ve rounded some numbers and ignored the $6.95 trading commission that applied to each trade.

Step 1

When doing Norbert’s gambit, we use the two versions of the Horizons U.S.

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ETF Investors: Avoid the After-Hours Club

One of the first rules of buying and selling ETFs is to always use limit orders, never market orders. A limit order allows you to specify the maximum price you’re willing to pay, or the minimum you’re willing to accept. By setting this limit a couple of cents above the ask or below the bid you ensure you won’t be surprised by a sharp move in the markets or a pricing anomaly.

That message seems to be well understood, but a related issue has come up a few times with clients of our DIY Investor Service. We’ll be working with a client who has a nine-to-five job, and when it comes time to implement the portfolio he’ll ask whether we can make the trades in the evening, after the markets have closed. Wouldn’t the orders just be filled the next day after the opening bell, he’ll ask? They might, but you may not like the results.

Prices that go bump in the night

It’s quite common for companies and governments to make important announcements in the pre-market or after hours, which may causes price of securities to open sharply higher or lower than their previous closing price.

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Scary When They’re Down, Scary When They’re Up

It’s been barely a month since Alexander Green remarked that we’re currently enjoying “the most disrespected bull market in history.” Green described how investors who were shell-shocked by 2008 were still pulling money out of equities and taking shelter in fixed income and cash. And until very recently, the financial media were fanning the flames of pessimism: a Wall Street Journal reporter called 2012 “another very difficult year for investors” even though the MSCI World Index was up over 16%.

I’m ready to declare this trend is reversing. I have no hard data, but in the last couple of weeks I’ve noticed a dramatic shift in the tone of reader emails. For almost three years, the common refrain was “I’m nervous about getting into stocks because the markets have been terrible lately.” But since the New Year, that’s changed to, “I’m nervous about getting into stocks because the markets have been so good lately.”

In case you missed the irony, let me hit you over the head with it: instead of being afraid because stocks fell sharply in 2008, investors are now afraid because they’ve risen sharply since 2009.

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How Much Are You Paying For US Dollars?

Currency conversion remains one of the biggest rip-offs in banking and investing. It’s made worse by the lack of transparency: if you call your discount brokerage they’ll quote their current rates, but it’s still hard to calculate the actual cost of your transaction. Don’t expect your brokerage to help with the math.

The first key point is, in practical terms, there isn’t a single exchange rate. While we might say “the US and Canadian dollars are at par,” that’s never quite true. On a day when the two currencies are theoretically equivalent, it might cost you $1.01 CAD to buy $1 USD, and if you sell $1 USD you might receive $0.99 CAD. That’s because currencies have a bid-ask spread just like stocks and ETFs that trade on an exchange.

There’s a simple formula to calculate the size of the bid-ask spread in percentage terms:

= (Ask Price – Bid Price) ÷ Ask Price × 100

Note that the bid price is always the lowest of the two rates you’re quoted. So if we plug in the numbers in the example above, the math works like this:

= (1.01 – 0.99) ÷ 1.01 × 100
= (0.02) ÷ 1.01 × 100
= 0.0198 × 100
= 1.98%

The bid-ask spread in this example works out to 1.98%,

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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.

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Virtual Brokers Becomes the ETF Leader

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.

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