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, bid-ask spreads, and the drag caused by uninvested cash.
More important, the benefits of an automated savings plan are likely to trump a modest reduction in management fees. Sure, you could keep contributing cash to the account and make a few manual trades every quarter or so, but I have seen this type of arrangement turn a disciplined investor into a market timer. When it comes to make those quarterly purchases, it’s easy for doubts to set in: “Should I really buy more Canadian equities now, when the economic news is so grim? Do I want to add more to this bond fund that seems to be falling in value?”
When you make automatic contributions and then rebalance only once or twice annually, you’ll make fewer tough decisions.
Testing the waters
Of course, if you can overcome these obstacles, there are indeed many advantages to using ETFs, especially as your portfolio gets larger and more complex. So if and when you decide to move away from the e-Series funds, here’s a strategy I’ve recommended for several DIY investors: start by switching to an ETF for your bond holding only, while continuing to use e-Series funds for your equities.
This makes sense for many reasons. First, your bond fund is probably your largest single holding, representing 40% or 50% of a balanced portfolio, so this one move will make a big impact. The e-Series version of the TD Canadian Bond Index Fund has an MER of 0.50%, which is expensive in this era of low expected returns on fixed income. Replacing it with the Vanguard Canadian Aggregate Bond (VAB) or the iShares High Quality Canadian Bond (XQB), which have fees of just 0.13%, would quickly reduce your portfolio’s cost from 0.44% to 0.29% (assuming a 40% target allocation for bonds).
Now that you have one ETF in your portfolio, you can get familiar with trading techniques. If you’ve only used mutual funds in the past, it takes a while to be comfortable reading ETF quotes, calculating the number of ETF shares to buy or sell, and placing limit orders properly. If you’re used to managing your portfolio on the weekend or after work, you’ll need to start trading during market hours and understand that your orders will be filled immediately rather than overnight.
Limiting all of this activity to just a single bond fund will reduce your stress and the likelihood of making a significant error.
The other benefit of this hybrid strategy is that it allows you to continue with your regular monthly contributions—though you will need to make an adjustment.
For example, let’s say you’re using a balanced portfolio of e-Series funds in your RRSP, with 40% in bonds and 20% each in Canadian, US and international equities. You’ve set up an automatic contribution of $500 a month and a systematic investment plan that puts $200 into the bond fund and $100 into each equity fund. If you switch to an ETF for your bonds, you can keep adding $500 to the RRSP and continue the systematic purchase of $100 of each equity fund. But the $200 that used to go to your bond fund would now just sit in cash.
You can add the cash to your bond ETF once or twice a year if necessary, and pay TD’s usual $9.95 commission. In any period where stocks happen to fall in value, however, you could also add the cash to your e-Series equity funds to rebalance your portfolio at no cost. This can reduce your costs and the amount of guesswork compared with an all-ETF setup.
During the transition, count the idle cash as part of your fixed income: if your target allocation is 40% bonds and you’re holding 36% bonds and 4% cash, that’s fine. Sure, there is some opportunity cost to sitting in cash rather than being invested in bonds, but it’s likely to be modest. With the expected return on a broad-based bond fund at barely 2%, you’re not missing out on much by having a couple of thousand dollars out of the bond market for six or 12 months.
See how this goes for a year or two: after that, go ahead and switch to an all-ETF portfolio if you’re comfortable. If you decide it’s not worth the extra work, just sell your ETF and go back to using the e-Series bond fund. You can try again in the future, but don’t feel compelled: you’re not settling for a second-rate solution. On the contrary, chances are you’ll execute your plan more consistently than many ETF investors, and you may even wind up with better returns as a result.
@Artur: In terms of costs there is no question that using ETFs at Questrade (or other brokerage with no-commission ETFs) is cheaper, so it’s not about math. My thoughts here:
Question: what if you have TD Direct Investing accounts but don’t have room or cash to contribute and need some form of growth?
I switched my RRSP accounts from e-series to ETFs that pay at least quarterly with a drip.
I plan on contributing to the RESP at least annually but can’t my RRSP (down worry folks, I have biweekly contributions with my work group RRSP).
Wouldn’t having ETFs make more sense for getting real cash and rebalanced using said cash in a year?
@Tamir: Why can’t you just rebalance (for free) using the e-Series funds? I’m not sure why ETFs would be superior in this context.
The products that you’re using for your investing plan seem reasonable if it fits your readiness, willingness, and ability to take risk.
If you don’t sell using the Questrade platform, you shouldn’t have selling fees.
I believe that Questrade waives their inactivity fee if you have a certain amount (over 15000 I believe).
Going forward, if you’re using a TFSA as a long-term investment vehicle, you could benefit from having your equity position in your TFSA and avoiding bonds here if possible. Growth of investments and dividend income is tax free as your have already been taxed on the income used to invest.
Your RRSP is designed as a tax deferral vehicle shifting tax burden from your higher earning years into your lower earning years.
For assistance with rebalacing, I have been using Dan’s simpler spreadsheet that aids me in where to direct new purchases. You could create one for each account
@ Canadian Couch Potato
Because TD’s dividends for those Mutual Funds are either annual or quarterly, while a lot of ETFs have monthly dividends. When I look at the activity month to month I see little movement and without dollar-cost averaging the TD e-Series doesn’t work.
I’m actually becoming a fan of PowerShares PLV as a one-fund stop for balance like your Model Portfolio, Option 3, Assertive Balance. Upside is held back because of the Low Volatility but worth the risk I say.
A few weeks back I emailed TD Direct with the suggestion that they make their new ETFs available to existing TD Direct customers commission free. I’ve yet to hear back. Quelle surprise.
@Malnar (if you’re still reading this thread) if you’re investing in a taxable account it does, and generally if you’ve used up all your tax-sheltered space and are investing in a taxable account, you will like be dealing with larger dollar amounts and so it could make sense to skip straight to ETFs.
However, to look at some numbers, let’s say you invest $10k per year, in a taxable account, split across four funds. Each year you liquidate the e-funds and buy ETFs. You will pay four commissions for a total of $40 per year. You will also pay taxes on the gains for that year. Let’s optimistically assume the portfolio averages 8% annual gains, and say you’re taxed at 40% of marginal income. That will mean 20% tax on capital gains.
Since your 10k will be contributed throughout the year, on average you will have half that amount in the e-funds, so ignoring intra-year compounding, your gain is going to be about $400, on which you’ll pay $80 in tax. So your total expense is $120, and you increase your ACB by a bit.
On the other hand, say you buy straight into ETFs. So as not to miss out on those intra-year gains, you want to contribute fairly often. Even if you only contribute quarterly though, you’re looking at $160 in commissions at $10 each, plus all the added work of buying ETFs as opposed to having your contributions be automated.
Of course you could try to save a bit more buy not buying every fund at every contribution, but regardless the point is that the added capital gains taxes will be minimal, and likely smaller than the added commissions of using ETFs. Of course, if you can buy ETFs for free and you don’t mind entering the trades on a regular basis, then there’s no reason not to.
Comparing the TD e-funds and the Vanguard ETFs used in the “3 etf portfolio”, there is some difference in the indexes tracked. In real terms, how much difference is that likely to make over the long term and if there is much difference, which tracked index would be better?
@John: In general the difference in the TD versus the Vanguard indexes are small and neither can be considered “better.” However, overall the Vanguard indexes have more compete coverage of the markets. For example, VXC includes emerging markets and small and midcap US stocks, which are not available through the TD e-Series funds. Another issue is that the Vanguard bond index is a little more conservative (a higher allocation to government versus corporate bonds).
You can see how these differences can affect short-term returns in the discussion here:
Why not just convert to ETFs, but have your regular contributions continue to be to the free e-series funds? Then, twice a year, sell the funds and rebalance your ETFs with the cash.
Dan and others have felt this to a reasonable option if you have a TD Direct Investing account.
If you did this in a non-registered account, you would trigger capital gains upon the sale of the e-series funds being the downside.
Best wishes with your financial journey!
My nest egg is lumped into bank mutual funds. I’ve been wanting to get away from large MER’s and tax inefficiencies by moving into ETF’s. My advisor suggested that I wait until I retire (5 years) because I would generate huge capital gains during my peak earning years. What are your thoughts?
@John: Obviously hard to say too much without knowing the specifics, but there is some truth to that. It doesn’t make a lot of sense to realize a huge taxable gain to save a much smaller amount in fees, especially it you plan to be in a much lower tax bracket in a few years. But there are likely a few things you can do to make the transition gradually, including selling any funds that currently have losses to offset some of those gains, selling anything in registered accounts, and so on.
Can someone check some math…
My work (through myself, and matching contributions) will be making $1000 deposits to my rrsp each month. I’m working out if this will go into etf’s or e-series funds. Thus, I’ve made a spreadsheet to do some quick calculations. I won’t include everything, but can anyone see a glaring mistake?
ETF portfolio will be ~0.15 MER. If I’m planning on having 5 different ETF’s in the account, I can drop $1000 each month on a different one, rotating across all 5. Because I wont own each for a whole year, the math will be slightly off, but I’m thinking it’s essentially negligible. The ETF commission is $10, and I’m assuming (in many years) I’ll be selling them again at about double the rate I’m dropping them in (deposit $1000, withdraw $2000), so total in-out cost is $15 per transaction. I’ll be making 12 transactions a year (once a month for $1000 each), so commission cost is $180. Running the numbers, MER + commission in the first year is $198, but by the 30th year (I’m 32), it’s only $720. Adding everything up, I come to ~14,000 in fees over 30 years.
TD portfolio woud be 0.45MER, and obviously free trades. It starts out low at $54 on the initial $12,000 invested, but by year 30 I’m paying $1620 on the $360k in the account. Adding it all up, ~25,000 in fees over 30 years.
I know most of what people say is don’t buy ETF’s on a regular basis, thus, did I make a mistake, or is it simply because my account is getting larger faster than the “average”.
I imagine at some point there is an inflection where ETFs with $10 commissions would become less expensive. Dan wrote a post with his own spreadsheet a while back, so you can compare yours to his. Fifty thousand invested seems be the transition point where ETFs become less expensive.
Ultimately, what you’re doing now with the small differences involved ultimately wouldn’t affect your long term financial goals. The most important thing with small accounts is your savings rate.
Why don’t you just put the money in high interest savings account? After 30 years of investing you say you will have $360,000 in the account after fees which is the same amount you have put in (12k per year for 30 years) is no return at all, at least with interest you will be way ahead of that
When I started investing I was really hell bent on minimizing fees but consistent with an article that Dan previously wrote (can’t recall) – I found that controlling behaviour can have a much larger impact on my portfolio compared to battling over a couple 10th of percentages in my portfolio. I find the e-series does a great job of controlling my behaviour. I don’t get sucked into daily movement of stocks (when to buy bid/ask spreads) and the urge to sell is pretty much gone b/c of the required 30 day holding period. Further, it’s nice that you never have dead money sitting in your account. All dividends are fully invested and you can buy fractional shares. It’s just super easy – exactly what a couch potato is supposed to be.
Sure, if I’m making a purchase over $5K or so I’ll buy the equivalent ETF rather than an e-series but besides that, it’s e-series all the way for me.
I’m in my early 30s and have been following the Couch Potato strategy for a while with maxed TFSA and nearly maxed RRSP. However I’ve been hearing a lot of advice lately saying that younger folks should limit their RRSP holdings to only amounts needed for Home Buyers Plan/mat leave/additional schooling, and that to consider instead keeping a sizeable portion of holdings unregistered. The thinking is obviously that you don’t want too many eggs in a taxable basket when broke governments come sniffing around for more dough as you approach retirement (~20 years). Anybody have any thoughts?
Why do you not consider Preferred share ETFs or individual preferred stocks when looking at Fixed Income ? With typical rate reset dividends above 4 % equal to a bond rate of 5.2%, surely these are a better buy then short term bond funds. For eg, a recent TD Bank 5 year bond yields 1.81% per year if held to maturity.
Please forgive the novice question, but how are e-series prices set? You put in an order, then in the next day or so they tell you the price. You never know the price when you make the order. At the beginning, I thought there was a time of day to make your order that brought you closest to the time of setting the price, but that didn’t work as expected when I tried it a year ago. Obviously, the price will have a lot to do with the value of the underlying index, but other factors could come into play, such as whether the market is going up or down. What interests me more, though, is what they do with the volume of buy versus sell orders. For example, on day X, they know they are selling 10 units to, and buying 5 units from, customers. Wouldn’t they want to set a higher price on such a day? Conversely, on a day when they sell 7 units and buy 17, they would be tempted to set a lower price. With over 200 “day X”‘s in a year, these housekeeping measures could add up to a considerable risk-free income for the series issuer. OTOH, if such considerations are forbidden, what is the formula prescribed by regulation? Thanks. And please forgive the OT, but I think it does relate a bit to the talk of “uncertainty” in other comments.
@Jonathan: A lot of questions to unpack here, but the important idea to understand is that the price of a mutual fund (also called the net asset value, or NAV, per share) is not “set” by the mutual funds company the way a store sets the price on a pound of sugar. It is the combined value of all of the assets in the fund, and since the assets are publicly traded, a fund cannot game this system (at least not without breaking the law). At the end of each business day, orders to buy and sell are all filled at the same price (NAV), so the relative number of buyers and sellers on any day does not affect the price.
This is a US source, but the concepts are the same here:
I’ve had nothing but trouble with TD Index funds. Application process was a nightmare that took over a month and several phone calls.
Then, I set-up SIPs to avoid the quartely fees, and yet they keep deducting fees,
so I have the “privilege” of contacting their “excellent” customer service.
So far I think I’ve made about $100 from my fund, but this is less than the cost in my time and phone calls.
Check your accounts regularly – make sure they are not stiffing you! And TD doesn’t provide you with a complete list of activities – just the most recent ones. Their computer system leaves much to be desired.
Looking for advice re US equity part of an RSP portfolio:
if you were to replace a US Equity fund (from Canada) in an rsp of a sizeable amount of money (over 50K in a current fund), would it make sense to replace this with an ETF or use an index fund that is not the e series if you don’t have an rsp account through TD? If contributions to such a fund would be less than 4 times a year, would it be better to consider one of these options:
switch the fund to either the I shares or Vanguard ETF for the US, listed in canadian dollars? and then perhaps use an US index fund to build this up again, then sell and buy more shares in the EFT when the time comes i.e. maybe once a year?
or for simplicity, just buy something like the TD US index fund or any bank listed index fund (MER around 0.50) and not worry about the MER being higher than what the ETF’s are (considering trading costs, convenience). I am looking at this as an option to reduce the MER costs in my RSP (since the current US fund I have is north of 2%, I know, time to change)
@sue: I think you will find this strategy (holding both a mutual fund and an ETF in the same asset class) to be unwieldy and not worth the added complexity. Better to use only an index mutual fund, or to use an ETF and simply make two to four purchases a year to invest new cash.
Hi Dan, I’ve just opened an account on Questrade and am planning to adopt your ETF Model portfolio. I just have a super dumb question here, sorry for the inconvenience:
In regards to the MER and/or admin fees, how exactly would I be paying them? Do most brokerages deduct the fee directly from my portfolio? I’ve spent an hour looking for the answer on Questrade’s website and couldn’t find any, I was wondering if there was a general rule about this that I didn’t know about.
@Will: ETF management fees (MER) are deducted at the fund level, usually resulting in slightly lower dividends or interest payments than you would otherwise receive. You never see them: they just show up in the form of slightly lower returns. I don’t believe Questrade charges any admin fees, but if a brokerage does charge these (e.g. $25 quarterly on RRSPs) you usually need to keep a small cash balance in the account, and the charge is deducted from that.
A quick call to your brokerage will usually clear up these questions in a few minutes.
Hi, I’m turning 20 this year and have read articles on this site and more for the past 3 days. Please redirect me if this is not the right place to ask for advice.
When is the right time to start switching to ETFs? What salary should I have and be able to invest to start investing in ETFs?
I expect to have a salary of 35,000$ in three to four years. In my 30s I expect to have a salary of 50,000$ that would gradually grow to peak at around 120,000$. Now I feel like I could invest at least 12,000$ a year in average knowing how frugal I am.
Say I want to start investing now (20) with Tangerine Investment Funds (TFSA) with an initial deposit of 500$ and then 50$ every month until I’m 23. Until when should my main focus stay on Tangerine and when should my main focus go to ETFs? Thank you!
(I just don’t feel attracted to TD e-series as much as Tangerine. Is that a valid reason for choosing Tangerine over TD?)
@Khang Li: This should help:
For the sake of further diversification, I am considering/hoping to add commodities to my e-series portfolio, which is currently made up of 4 index funds (as prescribed in the couch potato model) including Canadian Index, US index, Canadian Bonds and International Index, all e-series funds.
There seems to be no access to commodities through the e-series funds, but could you please recommend another fund that I could use/buy into a commodities index? As well, do you suggest Canadian or international commodities? Also, I would really like to be able to buy the fund through my TD web-broker account, rather than have to open another account elsewhere.
Thanks for all of your help over the years, and thanks in advance for your comments to these questions!
@Sean: I don’t suggest adding commodities to your portfolio at all. While there may be some diversification benefit, it’s very limited, and it’s outweighed by the additional costs and complexity. A portfolio that includes hundreds of stocks from around the world is already well-diversified enough.
With Vanguard’s new one fund solution VCNS, VBAL, VGRO, more and more couch potatoes are probably looking to switch from e-series over to these vanguard ETFs. What’s the simplest way for a couch potato like myself to move from e-series to one of these ETFs, while still keeping things simple and automatic going forward.
– discount broker with commission free ETFs buys
– making automatic contributions monthly or quarterly
– a 200k portfolio across RRSP and TFSA e-series accounts
@Brian: Transferring the accounts is simple enough: first open an RRSP and a TFSA at the new brokerage, then fill out their transfer forms to move the accounts from TD. You cannot transfer e-Series funds in-kind to another brokerage, so you will have to sell the e-Series funds and transfer the cash. Once the cash transfers to the new brokerage you can buy your ETFs.
Just be aware that, unlike with the e-Series funds, you cannot set up automatic purchases with ETFs. So you will need to make a trade every time you add new money.
Hi Dan! Thanks for the article, I’ve been searching everywhere for information on this topic. My TD e-series RRSP will reach $100K this summer and I’d like to switch to a discount brokerage sooner rather than later, so I can familiarize myself with the platform and with ETFs before I come into larger amounts of money (eg: sale of my house). I’m not with TD Direct Investment, just a mutual fund account, and if I’m going to switch to a brokerage, I’d rather go with Questrade or QTrade (which one could be the topic of a whole other question) than with TD. From your reply above, I take it you don’t recommend going the route proposed by @Jason in an earlier comment (move the money to a single mutual fund available at the discount brokerage and transfer it over)? If I simply move the cash, do I need to sell my e-Series funds myself first and then apply for the transfer, or will my funds automatically be converted to cash through the transfer? I guess I’m just a bit frustrated with the “black box” nature of the transfer process itself. I know it can be done online, but I have no idea what information I need and what I need to do at my end to make it happen. Too bad TD Direct Investing doesn’t have commission free ETFs – it would make for an easier transfer.
@Annie: Don’t be intimidated by the transfer process: your new brokerage (Questrade or Qtrade in this case) will help, because they’re motivated to get the new assets. The first step is to open an RRSP with the new brokerage. Then you fill out the transfer form provided by that brokerage, and you request the transfer be made “in cash” rather than “in kind.” Then TD will sell the e-Series funds before they initiate the transfer.
Not sure how I missed your reply for so long, but I’m glad I came by today to check out the discussion. Thanks so much Dan, relieved to know it’s going to be that simple!
I have both ETFs and e-series because I got too excited and did not do enough research. Should I get rid of the overlap ASAP?
@Kiko: I don’t think there is any need to do anything “ASAP.” Overlap is not harmful, just inefficient. Take some time to get a feel for what you are more comfortable with (mutual funds or ETFs) and then make your decision.
I currently have my TFSA and RRSP in two separate TD e-series accounts. Both have the same allocation of 18% bonds and 27-28% Canadian, International, and US equities. My TFSA has roughly $17,000 and my RRSP roughly $45,000. I will be adding a lump sum to each account of $30,000 to my TFSA and $24,000 to my RRSP.
Most recently both accounts have been suffering overall from the market; however, I will have enough money in both accounts to make the switch from the TD-series to ETFs. my question is: should I continue to invest the lump sum amounts into my current accounts and wait for the market to break even before selling and making the switch? Or should I eat my current losses (roughly $2000) and make the switch right away?
More information about myself – I’m 28 years old, secure income, and don’t plan on touching this money for 10-15+ years.
@Mark: If you are keeping the same asset mix and simply switching from e-Series funds to ETFs, and all of the trades are in tax-sheltered accounts (i.e. no capital gains or losses to consider) then the timing of the switch is irrelevant. You may be “selling low” now, but you would also be buying equally low.
After years of losing money and with 2 different investment advisors, at 50 years of age, I’ve decided to go the self-directed route and opened a Questrade Account. The Problem…Where to start? What to read? How to learn to design a simple portfolio for myself. and not lose everything.
I was thinking the best bet for an unsavvy, inexperienced investor to keep what I have worked for and see a bit of growth, would be to buy ETFs with Growth /Balanced. I see you all talking about costs and doing these advanced calculations – what’s an everyday person without financial savvy or mad math skills to do? How do you know what is working for you.
Any suggestions would really be appreciated.