Archive | Index funds

Will the Real S&P 500 Please Stand Up?

I received an email recently from Scott, a reader with a great question about index funds and ETFs that track the S&P 500. He agreed to let me share his letter and my response.

“I’ve been using index funds for some time now, but have been giving ETFs more thought. Specifically, I’m interested in switching my TD U.S. Index Fund (e-Series) to a U.S.-listed ETF such as the SPDR S&P 500 (SPY). Before I proceed though, I’d like to know why the TD fund has lagged behind SPY in terms of return? I was told in a forum that it may be due to the currency in which I am purchasing the funds. TD e-Series funds require me to use Canadian dollars. However, buying SPY would require me to use U.S. dollars. Do you have any insight about why there is much of a difference between the two?”

First, it’s important to note that there are actually three e-Series funds that track the S&P 500, and they all have very different characteristics:

Scott owns the TD U.S. Index (TDB902) fund, which is bought and sold in Canadian dollars,

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Would You Like Fees With That?

I’ve grown used to the antics of mutual fund companies and commission-based fund hawkers who criticize index investing. It’s predictable, pathetic and unlikely to change. What really disappoints me, however, is when the antics come from an investment company that I thought was one of the good guys.

Readers of this blog and my work in MoneySense know that I have often recommended the TD e-Series index funds for Couch Potato investors. They have the lowest MERs of any retail funds in the country, a long record of low tracking error, and the added benefit of being available online without a discount brokerage account. But this week I got an alarming email from Shannon, an investor in western Canada who is untangling herself from a large and notoriously expensive financial services firm. Shannon has decided to get started with index investing and, having read about the e-Series funds, gave TD a call. Here’s how she described the bank’s behaviour:

“First, we were encouraged to invest in regular TD mutual funds. When we said no, we wanted the e-Series index funds, we were told that the I-Series were just as good and could be bought at the branch.

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Does This Thing Work?

This week I received an email from a reader of MoneySense magazine, where I write regularly about the Couch Potato strategy. Kate was concerned that index investing wasn’t delivering on its promises. With her her permission, I’d like to share her email and my response to her concerns, which I’m sure others share.

It’s important for new index investors to understand that the strategy guarantees simplicity and low fees, but it’s still at the mercy of Mr. Market. It’s also another reminder that ETFs may not be appropriate for small portfolios.

Dear Dan,

I have a financial advisor who oversees my investments. I was shocked to read in your articles about how much commissions and fees add up over the years. I am not financially savvy and have left it up to my advisor to deal with my investments, and I have been disappointed in how little they have grown.

Then I read an article about the Couch Potato strategy in the February/March 2007 issue of MoneySense and wanted to give it a try.  I took $10,000 and invested it in the High-Growth Couch Potato portfolio.

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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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