Your Complete Guide to Index Investing with Dan Bortolotti

Dollar-Cost Averaging With ETFs: Part 2

In yesterday’s post, I introduced a reader’s idea for overcoming the main drawback of exchange-traded funds. Donald plans to contribute $2,000 a month to his RRSP (currently $65,000), and to minimize the trading commissions associated with ETFs, he’s created a “mirror portfolio” with index funds. This will allow him to set up pre-authorized payment plans and take advantage of dollar-cost averaging. Donald plans to move the money from the mutual funds into the lower-fee ETFs once a year.

Let’s look closer at his plan. To get started, Donald will have to purchase index mutual funds in the same asset classes as his ETFs. Because he uses TD Waterhouse, he has access to TD’s e-Series funds, and these are the best option in all cases except emerging markets. (The only no-load emerging markets index fund in Canada is CIBC’s.) Here’s how his ETFs and mutual funds compare in terms of annual management fees:

Exchange-traded fund Ticker MER
Canadian equity XIU 0.18%
US equity VTI 0.07%
International equity VEA 0.14%
Emerging markets equity VWO 0.27%
Canadian bonds XBB 0.33%


Corresponding index fund Code MER
TD Canadian Index – e TDB900 0.31%
TD US Index – e TDB902 0.33%
TD International Index – e TDB911 0.48%
CIBC Emerging Markets Index CIB519 1.37%
TD Canadian Bond index – e TDB909 0.48%

To make his monthly contributions, Donald can set up pre-authorized contributions to all five mutual funds. He would divvy his $2,000 monthly deposit so it matches the asset allocation he wants to maintain in the portfolio:

TD Canadian Index – e 30% $600
TD US Index – e 20% $400
TD International Index – e 20% $400
CIBC Emerging Markets Index 10% $200
TD Canadian Bond index – e 20% $400

By contributing to these funds every month, Donald can “average into the market” 12 times and doesn’t have to worry that his one annual ETF purchase might come at a bad time. When he does buy new ETF shares, he can also use the opportunity to rebalance his portfolio back to its target allocation and reinvest any cash dividends that were paid into the account by the ETFs.

So, does the strategy make sense?

Readers who commented on yesterday’s post pointed out several factors to think about before following Donald’s strategy:

The MER savings will be very small. While ETF management fees are lower than those of index funds, the differences are not necessarily large. The gap between the TD Canadian Index Fund – e (0.31%) and iShares XIU (0.18%) is trivial in a small portfolio: $13 on every $10,000 invested. Overall, the weighted MER of Donald’s ETF portfolio is 0.19%, while the index funds would cost 0.49% (0.38% if we get rid of the CIBC fund). While 30 basis points is significant in a large portfolio, it works out to only $195 in a $65,000 account.

Even then it might be worth it, but If Donald rebalances once a year, he’ll spend $145 on trades  ($29 × 5 ETFs), plus he’ll incur currency conversion fees on the Vanguard ETFs. That virtually wipes out any cost advantage of the strategy. He would likely be better off simply holding the whole portfolio in e-Series funds. (He should probably keep the Vanguard ETF for his emerging markets exposure.)

It’s unnecessarily complicated. Even in a large portfolio, where you could make a better case for using Donald’s hybrid strategy, there’s value in keeping things simple. Uncluttered portfolios are easier to monitor and maintain. Keeping track of the asset allocation and rebalancing with 10 funds rather than five will require some skill with a spreadsheet. As one commenter wrote: “Maybe we’re trying to pile too much stuff on that proverbial couch.”

Early redemption fees may be a danger. Money put into the TD e-Series funds normally must remain there for 90 days or a 2% early redemption fee applies. In addition, a brokerage may automatically cancel a preauthorized contribution any time you liquidate a fund. Before implementing this strategy (whether it’s with the e-Series or other index funds) call your brokerage and ask about their policies so you don’t get whacked with a fee.

There are alternatives. Claymore ETFs give investors access to a unique pre-authorized cash contribution (PACC) plan, which allows you to add shares each month with no commissions. However, if you’re considering this plan just so you can do dollar-cost averaging with ETFs, that’s getting things backward. Claymore’s ETFs are not only more expensive than the iShares and Vanguard products Donald uses — and more expensive than the e-Series funds, for that matter — they also have embedded strategies that investors may not want to follow, such as fundamental indexing. (The PACC plan is also not supported by several brokerages.) If you’re using Claymore ETFs because you prefer their strategies, then the PACC is nice feature. But it shouldn’t drive your decision about which ETFs to use.

If you’re an ETF investor, what strategy do you use for keeping costs low when making monthly contributions? Share it with your fellow readers by posting a comment below. I’ll reward the most helpful commenter with a copy of Moshe Milevsky and Alexandra Macqueen’s new book, Pensionize Your Nest Egg.



  1. Michel September 15, 2010 at 6:59 am

    My opinion is that there very little to be gained by investing ervery month instead of every quarter. I would invest in ETFs every quarter with a $4,95 per trade broker. Some studies have shown that per month vs per quarter makes very little difference in the long run.

  2. Simon September 15, 2010 at 9:12 am

    I agree that this is a complicated strategy for a small portfolio, but still a clever idea. With the variety of discount brokers available, no one should be paying $29 per trade anymore.

  3. Greg September 15, 2010 at 9:16 am

    I agree with the post above. But, for various reasons, not everyone will choose the lowest cost broker (I use Investoreline). You can have a hybrid portfolio of index funds plus ETFs. This is how it would work:

    1) Monthly contribution to core equity component of the portfolio – e.g. – the e-series funds for Canada, US and Int’l. You would hold these permanently.

    2) Annual contributions to an emerging markets ETF (where the MER difference between the ETF and the mutual fund is the greatest) and the bond ETF (where there is probably less benefit to dollar cost averaging or where you can select something like Claymore ladder funds with ultra low MER) during the period where you would be rebalancing.

    While I am a huge proponent of set it and forget it investing, I do a variation of this with my wife’s RSP. I dollar cost average on index mutual funds and once a year (at rebalance time/RSP contribution deadline) I buy more of the one ETF that she holds (a REIT ETF).

  4. Sean September 15, 2010 at 12:59 pm

    I think this is an excellent idea to invest small amounts and a good way for Canadians to get out of the 2-3% MER mutual funds provided the tracking errors of the fund and ETF are low. For higher dollar amounts, it won’t work because of the diffrence in MER.

  5. Canadian Couch Potato September 15, 2010 at 8:18 pm

    Lots of great ideas in these comments. I’ll throw one more suggestion out there. Rather than using five different index funds to mirror the ETF portfolio exactly, Donald may want to think about using the TD Balanced Index Fund (TDB965). This is about 50% bonds, 30% Canadian equity and 20% US and international equity, so it’s a rough proxy for the whole portfolio (albeit more conservative). He could just set up a PPP to this one fund withdraw it once a year when he rebalances. The MER is 0.83%, and it accomplishes the goals of keeping things easy to manage while still taking advantage of dollar-cost averaging.

  6. Financial Cents September 15, 2010 at 8:57 pm

    Nice incentive!

    Totally agree, PACC is a nice feature for Claymore ETFs but it shouldn’t drive the entire decision behind which ones to use. My wife and I hold XIU and XBB in our RRSPs, and love them both for the dividends.

    My question for Donald is, does he have anyone else in the household with a brokerage, investment, RRSP account?

    If so, Donald could switch that investment account to his institution (if not already with them) and ask that institution to place all investment accounts under a “household” banner. For example, TD Waterhouse reduces transaction fees to $9.99 each when $100,000 K is invested as a “household”. That would reduce Donald’s rebalancing fees by one-third (was $145 on trades ($29 × 5 ETFs)).

    You can’t get much cheaper than that.


  7. Greg September 15, 2010 at 9:22 pm

    If he goes the route of 1 fund, to invest in something closer to his target allocation, he could use the ING Streetwise growth fund. That would give him a 1/4 split between CDN bonds, CDN equities, INTL equities and US equities. He would have to open an RSP account at ING and transfer to the other account once per year so slightly more work. MER for ING may also be slightly higher than the TD.

    But, is the higher MER of these products worth the convenience over the e-series?

  8. telefantastik September 16, 2010 at 2:08 am

    woa, $2,000/month? that’s $24k/year – or $2k over 2010 RRSP contribution limit ( surely you can overcontribute $2k (without the benefit of tax deduction), but why lock up this extra money in RRSP when you can divert it to an un-registered or a TFSA…?

    I agree, this is a bit complex and you are much more likely to lose money on 90 day penalties and FX conversion fees than save any money at all. Plus, in that period of 1-2 weeks that you’re transferring the $24k (assuming it’s once a year) from TD to your brokerage you may miss out on market action – which could well go either way. E.g. it’s not atypical to have price swings of a few percent within a week, so for $24k even +/- 1% translates to +/- $240: quite comparable to the +$195 savings estimate above. So with this strategy you are not quite guaranteed to save a consistent amount of money either, if at all.

    Why not slightly reduce the frequency with which you’d purchase ETFs, and not bother with eFunds? With the $195 MER advantage of ETFs (for Donald’s allocation quoted above) he can trade about 39 times per year at a discount brokerage ($5/trade) before breaking even with eFunds. Because he would purchase 5 ETFs each time, that would translate to trading about every 45-46 days (or 1.5 months). Furthermore, the more Donald’s portfolio grows, the more often he can trade, while breaking even with eFunds’ MER. E.g., only a year later at ~$89,000 (assuming portfolio grew only by amount of contributions) he can buy the 5 ETFs as often as every 34 days, etc.

    In my opinion dealing with ETFs is much simpler even in this case. As long as you have a handle on true costs, you can set your own thresholds for buying them.

    keep it simple.

  9. Mike September 16, 2010 at 6:05 am

    “With the variety of discount brokers available, no one should be paying $29 per trade anymore.”

    Would someone be kind enough to list a few discount places you can buy and sell ETF’s (and bond funds) at rather than through a financial advisor? My FA is charging 1% upfront fees on buying ETFs and a +1% to MER for any bond funds. It would be for very large transactions so 1% is a lot.

    Many thanks. :)

  10. Canadian Couch Potato September 16, 2010 at 8:08 am

    @telefantastik: Many investors have carried-over RRSP room that allows them to contribute more than $22K. I’ve also simplified some of the details of Donald’s situation to make the post more useful for a wide audience.

  11. Canadian Couch Potato September 16, 2010 at 8:12 am

    @Mike: This is a good place to start:

    If you have over $100K in assets with one of the bank brokerages, you can usually get trades at $9.95. (ScotiaMcLeod and CIBC are exceptions.) Please make sure you read up on the process before making the leap to do-it-yourself investing. Some of the brokerages allow you to set up a simulated acount and make some play-money transactions to get comfortable.

    I’d also forewarn that if you do talk to people at the bank or brokerage arm they will usually do their best to steer you into higher-priced investments. That’s their job, after all.

  12. Chantl01 September 16, 2010 at 11:37 am

    I’m also a proponent of the hybrid e-fund and ETF portfolio. I keep the three largest holdings in my portfolio in the the e-series funds for Canada, US and International. As I make contributions during the year, I add to these three funds. I also hold smaller portions of the portfolio in bond, small cap, REIT and preferred shares ETFs. I rebalance these to maintain my preferred percentages across classes by selling off some of the e-funds and purchasing into the appropriate ETFs. I only do this when they get out of balance by 20% or more. So not on a fixed schedule, although I do at least calculate the relative percentages every month or two. This really limits my trading costs.

  13. Weekend reading: Assessing probability September 18, 2010 at 6:39 am

    […] Clever Canadian strategy to reduce dollar averaging costs – Couch Potato […]

  14. The Salt Shaker | In Search of Salt September 20, 2010 at 3:08 am

    […] Canadian Couch Potato has a two-part series on dollar cost averaging with ETFs. As I only put a few hundred to work each month in Canada, I’ll be sticking with mutual funds for now, but it’s something to consider for the future. […]

  15. Jungle September 21, 2010 at 5:56 pm

    My solution:

    1. On Jan 1, Start a pre-authorized purchase plan in your Waterhouse TFSA, using the e-series funds.
    2. On December 28, sell all e-series funds, purchased before Sept 28
    3. Request to withdraw sold funds as “cash in hand.” Waterhouse will mail free cheque in 3-4 days.
    4. Take the cheque and deposit the money into your brokerage account.
    5. If purchasing ETF in USD, gambit the money first in non-reg account, then move USD into RRSP. Save big on currency conversion. (PS, you can’t gambit in RRSP)

    1. No tax paid on capital gains, dividends, ROE, other income, etc.
    2. Once Jan 1 comes, all your TFSA room comes back. Start contributing again.
    3. Allows you to convert currency before you contribute in RRSP
    4. Sounds complex, but once PPP is started, everything is auto pilot.


    1. You may loose a couple days of market exposure, when waiting for cheque.

  16. Canadian Couch Potato September 21, 2010 at 10:38 pm

    Thanks to everyone for their comments. I’ve chosen “ABC,” who commented on the first part of this post, as the winner of the book giveaway. Congrats, and enjoy Pensionize Your Nest Egg.

  17. James Chen April 25, 2011 at 10:09 pm

    I happen to find your post descrbing the way. This is what I have designed and started my contribution for myself. Two points:

    A. I scheduled myself for the contribution qarterly instead of monthly.

    B. Diversification and Allocation are important. But It does not mean we have to keep exact percentage for each product. We can have 30 – 35% range for a designed 33% for a perticular product for example. This way we can contribute a ONE index mutual fund and transfer to its corspondent ETF during ONE year. Do the next fund/ETF next year. Such way will save a lot from the brokerage fee. It may be not easy if you have small variation limt and small fund amount at your begining investment stage.

  18. Canadian Couch Potato April 25, 2011 at 11:58 pm

    @James: Thanks for your comment. Yes, I agree, it is often better to deviate slightly from your asset allocation in order to reduce trading costs. I think your technique is a very cost-effective one.

  19. Rick May 14, 2011 at 11:10 am

    I just want to correct jungle’s statement regarding using a gambit to transfer Canadian into US currency. In fact you can use a gambit in TD waterhouse RRSP (and other registered accounts), but it is done differently than in a non-registered account (in fact it is much easier). The financial webring forum has a good thread on it under cross border investing.

    Basically you buy the inter-listed stock on the Canadian exchange and then immediately sell the same stock on the US exchange to get US dollars. If you have your account set up for auto wash for US currency these US dollars will be washed into a TD US money market fund saving the FX spread with only moderate risk. Alternatively you can immediately buy a US listed ETF and that purchase will be washed from the proceeds of the inter-listed stock you just sold.

    It sounds simple, but to read about the procedure by googling Norbert Gambit as it is not risk free. I would suggest starting with a smaller amount say 5-10K.

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