Archive | Discount brokers

Dollar-Cost Averaging With ETFs: Part 1

One of the most common questions I hear from budding Couch Potatoes is, “Should I use index mutual funds or ETFs?” While index funds generally have higher annual costs (MERs), they do allow investors to add and withdraw money with no fees. ETFs have the opposite problem: they can have much lower management fees, but they incur commissions (typically $10 to $29) every time you buy or sell shares. That usually makes them unsuitable for people who contribute to their accounts every month. As a result, dollar-cost averaging with ETFs can be impractical.

There’s no perfect solution to this problem, but a reader in Regina explained that he’s come up with a compromise, and I think other ETF investors might consider adapting it to their own situation.

Donald has $65,000 in his RRSP, and he’s using iShares and Vanguard ETFs to achieve the following asset allocation:

Asset class
ETF
Allocation
Amount

Canadian equity
XIU
30%
$19,500

US equity
VTI
20%
$13,000

International equity
VEA
20%
$13,000

Emerging markets equity
VWO
10%
$6,500

Canadian bonds
XBB
20%
$13,000

$65,000

Donald and his wife recently paid off their mortgage and he’s now planning to supercharge his savings by contributing $2,000 a month to his RRSP.

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Mackenzie’s Fund Report Misses the Point

Ah, the good people at Mackenzie Financial. Last year, they brought us I Thought I Wanted an ETF, a marketing brochure full of red herrings and half-truths about exchange-traded funds, clearly designed to discourage their clients from getting out of Mackenzie’s high-priced dreck and into low-cost investments. You can read discussions of this little gem on Larry MacDonald’s and Jon Chevreau’s blogs.

Now the consumer advocates at Mackenzie have released a new report called Canadian Mutual Fund Ownership Costs: Competitive Relative to the U.S. It looks to bust the popular idea that US investors pay dramatically lower fund fees than Canadians. You can download either the six-page research summary or the complete 14-page report. If you have a pronounced gag reflex, I suggest the briefer version.

Fees are calculated differently

I’ll concede that several points highlighted in the report are true, and that they’re often misunderstood by investors and the media, who tend to focus on Canada’s undeniably higher MERs. “The calculation of mutual fund expenses is different between the two countries,” the report rightly argues,

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TD Responds to e-Series Concerns

In a recent post, I shared a reader’s story about how difficult it was for her to open a TD e-Series Mutual Funds account. That elicited responses from dozens of readers who had similarly unpleasant experiences, as well as several who weren’t sure what all the fuss was about.

I contacted TD about the issue and received a response from Maria Leung of Corporate and Public Affairs, TD Bank Financial Group. Her explanations should help clear up some of the confusion surrounding these otherwise excellent index funds.

Many people who commented on the original post said they tried to open an e-Series account at a TD branch, only to encounter staff who had little or no idea what the e-Series funds were. So my first question was about that unfamiliarity:

While TD Mutual Funds offers a broad range of investment solutions, not all are actively promoted in each of our distribution channels. For our TD e-Series Funds, customers purchase the funds online, either through TD Canada Trust’s EasyWeb site, or if they are TD Waterhouse Discount Brokerage customers, online using WebBroker (discount brokerage accounts can be opened at any TD Canada Trust bank branch or TD Waterhouse Investor Centre across the country).

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BMO Offers Free ETF Trades For New Clients

In a post I wrote back in February, I issued a challenge to BMO, whose line of ETFs was just eight months old at the time. In the US, Fidelity and Charles Schwab had just started allowing clients to buy and sell ETFs without trading commissions. (Vanguard later followed suit.) I suggested that the new guy in the Canadian ETF space consider something similar: “If BMO is going to make its ETF venture succeed,” I wrote, “it should offer something Canadian investors can’t get anywhere else. By allowing clients to trade ETFs without commissions, BMO would attract a wave of new customers and grab at least some of the market share from iShares and Claymore.”

Well, the good people at BMO must be avid followers of Canadian Couch Potato, because they have taken my advice — sort of. BMO is running a promotion that will give new InvestorLine clients 20 free ETF trades over a 60-day period when they open an account with at least $50,000. The promotion runs until October 29.

Here are some details from the fine print:

The ETFs do not have to be from BMO’s family.

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Should You Use Index Funds or ETFs?

[Note: A more up-to-date discussion of this idea, including a spreadsheet to help you with the math, can be found here.]

This week I got an email from a reader who is in the process of firing her advisor and becoming a Couch Potato. “I have decided it’s time to take matters into my own hands,” wrote Sarah. “I have $25,000 in mutual funds in my RRSP with my current adviser. I want to create a Couch Potato portfolio with ETFs, but I’m a little intimidated. I don’t even know how to set up a brokerage account.”

I surprised Sarah with my response: I suggested that she not open a discount brokerage account, and that she forget about ETFs for now. That’s because $25,000 is not enough to make ETFs efficient—index mutual funds are a much better option. The trading commissions Sarah would pay to buy and sell ETFs would outweigh the benefit of the lower annual fees. In fact, index mutual funds beat ETFs for most small portfolios.

I recently wrote an article in MoneySense about this issue, but I wasn’t able to go into detail about the math.

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ShareOwner: A Better Way to Buy ETFs? Part 1

Several weeks ago, a reader named Steve wrote to me about using Canadian ShareOwner Investments to build a Couch Potato portfolio with exchange-traded funds. I had no experience with this service, so I asked Steve to report back after he did his research, and he kindly followed up. In today’s post I’ll describe how ShareOwner works, and early next week I’ll pass along Steve’s assessment of its pros and cons.

ShareOwner Investments (formerly the Canadian Shareowner’s Association) is a dealer that allows investors to trade stocks and ETFs in both registered and taxable accounts. But unlike a discount brokerage, ShareOwner uses a dollar-based trading platform that enables you to buy and sell small amounts, and to own fractional shares. For example, you can place an order for $500 worth of a stock or an ETF, and if it’s trading at $27.36, you’d receive 18.2749 shares. ShareOwner also reinvests all dividends including partial shares, something traditional DRIPs don’t allow.

The other important feature of ShareOwner’s platform is that you can place a single order covering as many securities as you want. If you have $1,000 to invest, you can order $50 worth of 20 different stocks or ETFs,

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Tips for Trading ETFs

I happened to have Google Finance open on my computer last week when the “flash crash” happened. While the market’s whipsaw on May 6 affected almost all stocks, it seems that ETFs were particularly hard hit: I watched my position in the iShares S&P/TSX Capped REIT Index Fund (XRE) fall 15% in a matter of minutes. The ETF, which opened the day at $12, eventually fell to $6.89. I missed that low point, as I was standing on the ledge of my home office window, poised to hurl myself onto the dandelions below.

I’m not sure we’ll ever know the full story behind the madness of May 6, and for long-term investors it’s probably not worth fretting about. But the day was a reminder that ETFs, unlike mutual funds, are potentially vulnerable to the insanity that occasionally plagues stock exchanges in this era of automated trades. If you’re building a portfolio of ETFs in a discount brokerage account, here are a few suggestions to make sure your trades go smoothly:

Choose frequently traded ETFs. In theory, ETFs are supposed to be infinitely liquid: that is, you should be able to buy or sell units at market prices very close to the net asset value (NAV).

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Will We Soon Trade ETFs for Free?

Exchange-traded funds may be the best products ever to come along for retail investors, but they still have at least one major drawback: they incur a trading commission every time you buy and sell them. If you’re a customer of one of the big bank’s discount brokerages, you pay as much as $29 per trade, a fee that makes monthly contributions and dollar-cost averaging prohibitively expensive.

Claymore took a big step toward improving this situation last year when it became the only ETF sponsor to offer pre-authorized cash contributions (PACCs): after making an initial purchase, you can arrange to make regular monthly, quarterly or annual contributions without additional fees. Unfortunately, not all brokerage houses have embraced this arrangement yet (I recently had problems setting up a Claymore PACC with Scotia McLeod), and it’s not as flexible as what you’d get from a portfolio of mutual funds.

But the game is beginning to change, at least south of the border. Beginning today, Fidelity Investments in the US will allow its customers to buy a lineup of 25 popular iShares ETFs with no trading commissions. The move follows a similar one by Charles Schwab,

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Should You Buy US-listed ETFs?

Jason, a reader of this blog, recently wrote to ask why an investor would want to invest in Canadian-listed  ETFs that hold US stocks when there are US versions with much lower fees.

For example, the iShares Canadian S&P 500 Index Fund (XSP) charges 0.24%, while the Vanguard Total Stock Market ETF (VTI) has an MER of just 0.09%. Jason had several specific questions—all very good ones—which I’ll attempt to answer.

Q: When one holds a US-based ETF, are the dividends paid out in US dollars and then converted to Canadian dollars by the brokerage, costing the investor conversion fees?

Yes, dividends earned from US-listed ETFs are paid in US dollars. If you hold the ETF in a taxable account, the dividends simply go onto the US-dollar side of the account. But if you hold the ETF in RRSP or other account that does not allow US dollar holdings, your broker automatically converts them before depositing them in your account. This usually incurs a fee of about 1% or more: check your broker’s website or call and ask.

While this conversion fee does cause a small drag on your dividend return,

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