Your Complete Guide to Index Investing with Dan Bortolotti

Podcast 4: Charles Ellis and the Index Revolution

2018-06-21T07:15:41+00:00January 25th, 2017|Categories: Podcast|Tags: , , |32 Comments

For the latest episode of the Canadian Couch Potato podcast, I was privileged to have the opportunity to interview Charles Ellis, who has been called “Wall Street’s wisest man.”

Mr. Ellis’s best-known work is Winning the Loser’s Game, a book that had a big impact on me when I was beginning my education on index investing. After spending decades as an analyst and consultant for pension and endowment funds, here was Ellis arguing that individuals—and even many institutional investors—would be better off simply using index funds. And while that seems like a familiar argument today, Ellis first made it some 42 years ago, in a hugely influential article called The Loser’s Game. That paper appeared in The Financial Analyst’s Journal in the summer of 1975, a few months before John Bogle launched the first index fund at Vanguard.

In our interview, Mr. Ellis and I discuss his latest book, The Index Revolution, which looks back over his long career and concludes that, alas, things haven’t changed very much. The financial industry still behaves as though the data in favour of indexing doesn’t exist—or at least doesn’t apply to them.

At the end of our discussion, I mention Mr. Ellis’s book The Elements of Investing, co-written with Burton Malkiel (author of his own landmark book from the 1970s, A Random Walk Down Wall Street). I reviewed this approachable volume when it was released back in 2010. Although it’s written for a US audience it contains the essence of both authors’ wisdom in a short read.

ETFs in taxable accounts

In the “Ask the Spud” segment of the podcast, I answer a question from Jakob, a listener who has been investing with ETFs in his RRSP and TFSA and is just getting started with a taxable account. He wanted some help with the additional record-keeping.

In his question, Jakob references As Easy as ACB, a white paper co-authored by Justin Bender and me back in 2013. The paper explains how taxable investors can keep track of their ETFs’ adjusted cost base (or book value) so they can accurately report capital gains and losses when they eventually sell their funds. This involves a lot more than simply recording all of the buys and sells:

  • When an ETF distributed return of capital, you need to adjust the cost base downwards, which will increase your eventual capital gain (or decrease the loss) when you sell the holding.
  • When an ETF distributes a reinvested capital gain, you need to adjust the cost base upwards or you may end up paying tax twice on the same gain.

Here’s a case study of how we did this calculation for a client and saved her an estimated $500 in taxes.

My first tip for Jakob was to consider using, an excellent free service that does the calculations for you—though you still need to keep careful records and make your inputs carefully.

One of the most difficult parts of the process is determining exactly how much return of capital and reinvested capital gains your ETF is spitting out. It’s not obvious from the ETF providers’ websites. To get accurate information you need to use the CDS Innovations tax breakdown service. (The process is explained in our white paper.)

The good news is that since our paper appeared, has started offering a premium service that includes access to a database of these tax breakdowns for all Canadian ETFs. All you need to do is enter the ticker symbol and the year, and the return of capital and reinvested distributions are imported automatically. The premium service also allows you to import your brokerage’s transaction history from a spreadsheet so you don’t have to key in all of the entries. If you have a large taxable account with ETFs, the service is a bargain at just $49 per year.

In the podcast, I also make five suggestions for making your life easier with taxable accounts. I’ve summarized that advice in a separate blog post.