Archive | Index funds

RBC Revamps Its Index Fund Lineup

In my last post, I reviewed RBC’s forthcoming lineup of traditional ETFs, which will appear later this summer. The launch of these ETFs will also spark some changes in RBC’s index mutual funds: they’ll be getting new benchmark indexes and lower fees, and in some cases they’ll use the new ETFs as their underlying holdings. It’s good news for investors who want to use index mutual funds rather than ETFs, so let’s take a closer look.

We’ll start with the two equity funds that will see only a new benchmark, with no change to their structure.

The RBC Canadian Index Fund (RBF556) currently tracks the S&P/TSX Composite Index, but as of September it will be pegged to the FTSE Canada All Cap Domestic Index. (You can find the factsheets for all of FTSE’s indexes here.) These two indexes are very similar, so this is not a terribly meaningful change. The FTSE index is the same one tracked by the soon-to-be-launched RBC Canadian Equity Index ETF (RCAN), but the mutual fund will not use this ETF as its underlying holding—at least not yet.

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RBC Gets Back to Basics With New ETFs

When RBC entered the ETF marketplace back in 2011, it tested the waters with a family of specialized bond ETFs. Since then they’ve created a number of equity ETFs, all with active strategies. However, RBC recently filed a preliminary prospectus for a new family of plain old index ETFs covering the core asset classes you’ll find in a classic Couch Potato portfolio.

Normally the appearance of more “me too” ETFs wouldn’t be newsworthy, but RBC’s entry is interesting for a couple of reasons. First, the new lineup will include at least one unique product: a global bond ETF. And second, it will significantly improve the bank’s lineup of index mutual funds.

I’ll discuss the mutual funds in my next post. For now let’s look at RBC’s seven new ETFs, which will hit the market in early September. The four equity ETFs are traditional cap-weighted funds of large and midcap stocks:

ETF name
Ticker
Benchmark index

RBC Canadian Equity Index ETF
RCAN
FTSE Canada All Cap Domestic Index

RBC U.S. Equity Index ETF
RUSA
FTSE USA Index

RBC International Equity Index ETF
RINT
FTSE Developed ex North America Index

RBC Emerging Markets Equity Index ETF
REEM
FTSE Emerging Index

All of the new funds track indexes from FTSE,

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How TD Put the “Managed” in ETF Portfolios

What Canadian bank was first to launch a line of ETFs? You might think it was BMO, which is by far the biggest bank in the industry today, with more than 70 ETFs and some $37 billion in assets. But in fact it was TD, who were ahead of the curve when they created a small family of ETFs way back in 2001. Five years later, with truly terrible timing, they shuttered those ETFs because of lack of interest. Of course, the industry exploded in popularity almost immediately afterwards.

TD re-entered the ETF marketplace in 2016 with six funds covering the core asset classes: Canadian, US and international stocks (the latter two available with or without currency hedging) and Canadian bonds. The ETFs were copycats of what’s long been available from iShares, BMO and Vanguard, and the launch had almost no fanfare: one suspects TD just wanted to provide another option for their advisors who had been fielding questions about ETFs from clients.

But this week TD launched something innovative: a lineup of five mutual funds that use the bank’s ETFs as their underlying holdings. Each has a different target asset allocation:

Fund name
Bonds
Stocks

TD Managed Income ETF Portfolio
70%
30%

TD Managed Income &

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Model Portfolio Update for 2017

After two years with no changes to my Couch Potato model portfolios, the 2017 edition comes with an update to the ETF version.

Before I get to the details, I feel compelled to stress that if you’re currently using the older ETF portfolio, there is absolutely no reason to change. The funds I’ve swapped here are a wee bit cheaper, but the cost of selling your existing ETFs and buying the new ones almost certainly outweighs the benefits. And if the transactions would involve realizing taxable gains, then making a switch is downright nutty. To put this in perspective, the new portfolios will reduce your management fees by 0.03% annually, which works out to 25 cents a month on every $10,000 invested.

I’ve also updated my model portfolios page with historical returns to the end of 2016. As always, we’ve used actual fund performance wherever possible: for earlier periods we’ve used index data, subtracting the fund’s current MER to account for costs.

With that out of the way, here are the changes.

Zigging over to ZAG

First, I’ve replaced the Vanguard Canadian Aggregate Bond Index ETF (VAB) with the BMO Aggregate Bond Index ETF (ZAG).

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Ask the Spud: Switching From e-Series Funds to ETFs

Q: “I currently have $30,000 invested in the TD e-Series funds. When the time comes to move to ETFs, what is the best way to do this while still making automatic contributions? Should I put my biweekly contributions into a money market fund and then make ETF purchases four times per year?” –  C.D.

Too many investors think of the TD e-Series funds as little more than a stepping stone, and they can’t wait to “graduate” to ETFs. The appeal is understandable, since a portfolio of ETFs will typically carry a management fee of about 0.15%, compared with about 0.45% for the e-Series funds. But when I get this common question, I encourage the investor to think carefully before making the leap to ETFs, especially if their portfolio is small and they’re making automatic contributions.

For starters, management fees don’t tell the whole story. Index mutual funds are more investor-friendly than ETFs, and while the cost difference can be dramatic on large portfolios, the gap is narrower on smaller accounts. A fee difference of 0.30% shaves off just $30 annually per $10,000 invested, and that will be reduced—perhaps eliminated—by $9.95 trading commissions,

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Are Index Funds Fatally Flawed?

“No one pretends that democracy is perfect or all-wise,” Winston Churchill famously said in a 1947 speech. “Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried.”

I recalled this bit of wisdom recently when two readers sent me links to articles that question the safety of index funds. Both identify genuine flaws in traditional cap-weighted index funds. But the problem—as always—is that the alternatives turn out to be worse. In this post, I’ll look at some of the arguments levelled at equity index funds. Next time, we’ll turn the focus to bond indexes.

Earlier this month, the venerable New York Times ran an article called The Ease of Index Funds Comes With Risk. The piece acknowledges the many benefits of index ETFs but then warns that “their simplicity harbors some simmering problems, which have grown more troubling in the course of the bull market in stocks.” It goes to say that “cracks in the edifice of passive investing are beginning to show.”

Experts in the article are concerned that the mere inclusion of a stock in a major index—particularly the S&P 500 of large-cap stocks and the Russell 2000,

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Decoding International Equity ETF Returns

How have international equities performed over the last year? If you research the returns of index funds in this asset class, you may wind up with more questions than answers.

I recently received an email from David, a reader who wanted to know why the recent performance of three international equity index funds looked so different. It’s an excellent question, because unless you understand what’s going on here you’re liable to make a poor decision when choosing one for your portfolio. Exhibit A, their returns over the last year (period ending December 4), according to Morningstar:

TD International Index Fund – e (TDB911)
7.66%

iShares MSCI EAFE Index ETF (XIN)
10.21%

iShares MSCI EAFE ETF (EFA)
1.80%

All of these funds have the same benchmark: the MSCI EAFE Index, which covers developed markets outside North America, including Japan, Europe and Australia. In fact, XIN uses EFA as its sole underlying holding, so the two funds have identical stock exposure. Why, then, is their performance dramatically different?

Peeking over the hedge

Let’s begin with the TD International Index Fund,

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How Taxes Can Affect ETF Performance

In our recent white paper, After-Tax Returns, Justin Bender and I introduced a methodology for measuring the effect of income taxes on ETF returns. Justin also created a downloadable spreadsheet you can use to estimate the after-tax returns of funds in your own portfolio.

As we explain in the paper, funds with similar pre-tax returns can look quite different when you compare their performance after the CRA has taken its cut. Remember that on a pre-tax basis investment gains are reported in the same way whether they’re Canadian dividends, fully taxable income or capital gains. If you’re investing in a tax-sheltered account, it’s all the same. But in a non-registered account, distributions are taxed in different ways, and this can dramatically affect the amount of money you actually keep.

Here’s a real-world example that illustrates how large the difference can be. Justin collected the distribution and price data for the iShares Core S&P/TSX Capped Composite (XIC) and the DFA Canadian Core Equity Fund (DFA256) over the nine years ending in 2013. Both funds track the broad Canadian stock market, so you would expect similar returns. And indeed,

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The Couch Potato Mutual Fund is Here At Last

[Note: This was an April Fool’s joke!]

One of the perennial problems with ETFs is they require you to open a discount brokerage account and learn to trade individual securities. That can be intimidating, especially for those who are accustomed to buying mutual funds.

For several years now, I’ve been investigating ways to bring the Couch Potato portfolios to more investors, including the millions of Canadians who aren’t comfortable with ETFs. So I’m excited to unveil the Complete Couch Potato Balanced Fund, a traditional mutual fund that will launch later this month.

Creating a new mutual fund is far more difficult than many people realize, and I could never have done it on my own. That’s why I decided to partner with a large, well-known investment firm based in Winnipeg. (I’m not yet at liberty to disclose its name because the final prospectus is being translated into French.) This firm’s capable sales force will make sure advisors across Canada sell the funds to clients even if they don’t understand the strategy.

An enhanced strategy

The new fund is based on the Complete Couch Potato in my model portfolios,

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