[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, the commission charged by your brokerage, how many trades you make, and whether the brokerage charges an annual account fee.

To help you make this comparison yourself, I’ve built a spreadsheet you can download here. You can fill in the each of the yellow cells according to your individual circumstances and it will calculate the total annual cost of several different options. I have pre-programmed the spreadsheet with three versions Global Couch Potato as well as the Tangerine Balanced Portfolio, which has the same asset allocation. You can customize it any way you like, but be careful not to mess up the formulas.

If you’re an investor who focuses only on MERs, you’ll be surprised at some of the results. For example:

  • If you’re investing $50,000 in the Global Couch Potato and plan to make 12 ETFs trades annually at $9.95, the TD e-Series funds are a less expensive option.
  • If you plan to make quarterly ETF trades (16 per year) then even the RBC index funds are essentially the same cost for balances up to $30,000. This is why ETFs are often inappropriate if you’re building a balanced portfolio in a TFSA or RESP, since these accounts are unlikely to be larger than that.
  • For small accounts, many brokerages charge an administration fee. If you assume a $50 to $100 annual fee, then the Tangerine Investment Funds become appealing for accounts under $20,000 or so, despite their 1.07% MER. In many cases they are cheaper than the ETFs and the RBC index funds, and while it may be slightly more costly than the TD e-Series funds, it is far more convenient for new investors.

Download the spreadsheet and give it a try. Compare your own portfolio’s costs to the Global Couch Potato options, being sure to include all trading costs and account fees.