Archive | Discount brokers

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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Comparing the Costs of Index Funds and ETFs

[Note: This post was updated in May 2014 when the ING Direct Streetwise Funds changed their name to the Tangerine Investment Funds.]

The growing popularity of index investing has a lot to do with the increasing number of ETFs available, and that’s largely a good thing. ETFs generally have lower management expense ratios (MERs) than index mutual funds in Canada, so they are usually the best choice for large portfolios, especially if you make infrequent lump-sum contributions.

But ETFs carry additional costs that are often ignored by beginning investors. Trading commissions are the most obvious: it typically costs $10 to buy or sell ETFs, while index mutual funds can be traded for free. (Some brokerages do offer a limited selection of commission-free ETFs, and a few independents offer trades for less than $10.)

Are index funds or ETFs right for you?

All of which is to say that as marvelous as ETFs are, they are often inferior to index mutual funds for investors with small accounts. My rough minimum for using ETFs is $50,000, but the actual cut-off varies a lot depending which specific ETFs or index funds you use,

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An Overview of Commission-Free ETFs

Three discount brokerages in Canada now offer a menu of commission-free ETFs. Scotia iTrade pioneered this feature in Canada last September, then Qtrade Investor announced a similar offering about a month later, followed soon after by Virtual Brokers.

While index investors welcomed this development, the lineup of ETFs eligible for commission-free trades at all three brokerages is less than ideal. Narrowly focused funds dominate all three lists, which is fine if you want to invest in copper futures, Indian large caps, or the Australian dollar. But if you’re a long-term Couch Potato investor, you have to look a little harder for appropriate ETFs.

To help with that task, I’ve compiled a checklist of commission-free ETFs available from each of the brokerages, limiting the selection to broadly diversified funds that cover core asset classes. Funds that use currency hedging are marked with an asterisk (*).

Scotia
Qtrade
Virtual 

Fixed income

iTrade
Investor
Brokers

iShares 1-5 Year Laddered Gov’t Bond
CLF
x
x
x

iShares 1-5 Year Laddered Corp Bond
CBO
x
x
x

BMO Mid Federal Bond Index
ZFM

x

BMO Long Federal Bond
ZFL

x

BMO Long Corporate Bond
ZLC

x

iShares Advantaged Canadian Bond
CAB
x
x
x

iShares DEX Real Return Bond
XRB

x

BMO Real Return Bond
ZRR

x

iShares Advantaged High Yield Bond *
CHB
x
x
x

Canadian equity

Horizons S&P/TSX 60
HXT
x
x
x

iShares S&P/TSX Completion
XMD
x
x
x

iShares S&P/TSX SmallCap
XCS

x

iShares Dow Jones Canada Select Value
XCV

x

iShares Canadian Fundamental
CRQ
x

x

iShares S&P/TSX Cdn Dividend Aristocrats
CDZ
x

x

iShares S&P/TSX Cdn Preferred Share
CPD
x

x

US equity

Horizons S&P 500
HXS
x
x

BMO US Equity *
ZUE

x

iShares US Fundamental Index *
CLU
x

x

iShares US Fundamental Index
CLU.C
x

x

iShares S&P US Dividend Growers *
CUD
x

International and global equity

iShares International Fundamental
CIE
x
x
x

BMO International Equity *
ZDM

x

Vanguard MSCI EAFE *
VEF
x

iShares Global Monthly Adv Dividend
CYH
x

x

iShares Global Real Estate
CGR
x
x
x

Emerging markets equity

iShares MSCI Emerging Markets
XEM

x

iShares Broad Emerging Markets
CWO
x

x

BMO Emerging Markets Equity
ZEM

x

A breakdown of each asset class

Fixed income.

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Vanguard Canada Gets a Six-Month Checkup

It’s now been a year since Vanguard set up shop in Canada, and just over six months since their ETFs began trading on the Toronto Stock Exchange. This week I had an opportunity to chat with Atul Tiwari, the affable managing director of Vanguard Investments Canada, about the company’s experience so far, and what we can expect in the future.

During their first six months, the Vanguard ETFs have gathered $230 million in assets under management. “I think we’re on track,” Tiwari said when I asked whether he’d expected that number to be higher. “We recognize there is a lot of competition in the market. Certainly mutual funds—although they are not growing to the same extent as ETFs—are still a formidable competitor that we’re up against.”

Vanguard is certainly competing in a difficult space. While it’s true that ETFs are attracting more and more dollars, much of that growth is driven by narrowly focused products. (The BMO Covered Call Canadian Banks ETF has attracted an astounding $758 million in its first 18 months.) But Vanguard has always stuck to broad-based, plain vanilla funds designed for long-term investors,

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A Perfect Plan for the Holidays

In the spirit of holiday giving, Justin Bender, portfolio manager with PWL Capital in Toronto, has approached me with an offer for Canadian Couch Potato readers. As part of his firm’s charitable giving program, Justin is offering to help up to four DIY investors design and set up a passive ETF portfolio in exchange for a donation to the Centre for Addiction and Mental Health (CAMH).

One of the reasons I wrote The MoneySense Guide to the Perfect Portfolio was to help the many would-be Couch Potatoes who are not sure how to get started with DIY index investing. Now here’s an opportunity to have a professional walk you through the process, and to support an organization that does incredibly important work.

Before you dismiss this as a thinly veiled attempt to snag new clients, let’s be clear that Justin is looking to work only with do-it-yourself investors on a one-time basis. His goal is to help you design a plan that you will execute on your own, not to manage your assets on an ongoing basis. There’s no ulterior motive here. PWL’s Toronto office has made a commitment to support CAMH because one of the firm’s staff members lost a close family member who struggled with addiction and mental illness.

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Qtrade Now Offering Commission-Free ETFs

The discount brokerage price war is officially on. After Scotia iTrade became the first online brokerage to offer commission-free ETF trades last month, Qtrade Investor has followed suit. The Vancouver-based independent has just launched its own zero-commission ETF program, with an even bigger list of choices.

Qtrade’s menu includes 40 Canadian ETFs from Claymore, iShares and Horizons, and even a couple from the new PowerShares lineup. More interestingly, the choices also include 20 US-listed ETFs from Vanguard, iShares and State Street.

Before long-term Couch Potato investors get too excited, however, the list of eligible ETFs does have several gaps. There are few broad-market funds: most have narrow mandates. The most popular broad-market Canadian and US equity ETFs are not there—not even Claymore’s CRQ or CLU, which are included in the Scotia iTrade program—and all of the US-listed ETFs are sector-specific funds. Sorry, no core Vanguard ETFs.

Covering the broad market

The Horizons S&P/TSX 60 (HXT) and Horizons S&P 500 (HXS) are both part of the Qtrade program, and would be fine for covering the large-cap Canadian and US markets,

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Commission-Free ETFs Arrive in Canada

It seems like every week we hear high-profile announcements about new ETFs, very few of which promise anything genuinely new. Then along comes something unique in Canada and I haven’t seen so much as a press release about it. Yesterday I logged on to my Scotia iTrade account and discovered that the brokerage now offers dozens of commission-free ETFs.

This is a big deal. While ETFs in Canada are dramatically cheaper than index mutual funds (with a few exceptions), one hurdle remains: buying and selling ETFs incurs commissions. In small accounts with the big banks’ discount brokerages, you can pay as much as $29 per trade. Of course, $10 trades are now commonplace, but even that fee makes small monthly contributions and dollar-cost averaging prohibitively expensive.

Last year, several U.S. discount brokerages—including Fidelity, Schwab and Vanguard—began offering commission-free ETF trades. I wrote a post in February 2010 wondering aloud if any Canadian brokerage would follow suit, and suggested that BMO was the obvious candidate, since they are the only firm to have both a discount brokerage and a family of ETFs. Now it turns out they’ve been beaten to the punch.

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Review: Scotia iTrade’s US-Friendly RRSP

The cost of investing has dropped dramatically since the advent of online discount brokerages, but there are a couple of transactions where Joe Retail stills get clobbered. One of these is currency exchange fees: charging clients 1.5% or more to convert Canadian dollars to US dollars—and the same to change them back—is a disgrace. Investors who use US-listed ETFs need to find ways to avoid foreign exchange fees or they risk giving back everything they save on the lower management fees.

As a client of Scotia iTrade, I had an opportunity to test-drive their US-Friendly RRSP program this month as I made some changes in my portfolio. I used to hold three separate ETFs for my international equities, but when the Vanguard Total International Stock (VXUS) was launched earlier this year, it made sense for me to merge them into a single fund when I next rebalanced. So I was in a position to sell three US-listed ETFs and buy another, and these four trades would have cost me hundreds of dollars in foreign exchange fees at the usual rate.

However, Scotia iTrade’s US-Friendly RRSP offered a solution.

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A DRIP in the Bucket

One of the downsides of using ETFs—as opposed to index mutual funds—is that dividends and interest are not automatically reinvested. Instead, they are paid in cash, where they often sit idly in your brokerage account for months. This happens even more frequently now that many ETFs have started paying distributions monthly, rather than quarterly as in the past.

To address this issue, both Claymore and BMO offer dividend reinvestment plans (DRIPs) for their ETFs. For those who are unfamiliar with DRIPs, they allow investors to receive distributions—whether dividends from stocks, interest from bonds, or return of capital—in new shares rather than in cash. Only whole shares are possible: so if the ETF is trading at $20 and you’re eligible for $67 in dividends, you’ll receive three new shares plus $7 in cash.

If the amount of email I am receiving is any indication, these programs are extremely appealing to investors. Indeed, I have heard from people who are specifically choosing ETFs from Claymore and BMO rather than those from iShares because of the DRIP feature. (iShares does not currently offer such a program.) I believe this is an error in judgment.

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