What Canadian bank was first to launch a line of ETFs? You might think it was BMO, which is by far the biggest bank in the industry today, with more than 70 ETFs and some $37 billion in assets. But in fact it was TD, who were ahead of the curve when they created a small family of ETFs way back in 2001. Five years later, with truly terrible timing, they shuttered those ETFs because of lack of interest. Of course, the industry exploded in popularity almost immediately afterwards.
TD re-entered the ETF marketplace in 2016 with six funds covering the core asset classes: Canadian, US and international stocks (the latter two available with or without currency hedging) and Canadian bonds. The ETFs were copycats of what’s long been available from iShares, BMO and Vanguard, and the launch had almost no fanfare: one suspects TD just wanted to provide another option for their advisors who had been fielding questions about ETFs from clients.
But this week TD launched something innovative: a lineup of five mutual funds that use the bank’s ETFs as their underlying holdings. Each has a different target asset allocation:
|TD Managed Income ETF Portfolio||70%||30%|
|TD Managed Income & Moderate Growth ETF Portfolio||55%||45%|
|TD Managed Balanced Growth ETF Portfolio||40%||60%|
|TD Managed Aggressive Growth ETF Portfolio||20%||80%|
|TD Managed Maximum Equity Growth ETF Portfolio||0%||100%|
In the press release announcing the launch, the president of TD Mutual Funds said, “We are excited to offer self-directed investors a new suite of all-in-one index solutions.” That sounds like they’re going toe-to-toe with the Tangerine Investment Funds, the one-fund solution I include in my model portfolio recommendations. But how do these new funds really compare with Tangerine’s?
So much promise
There is a lot to like in TD’s new offering. For starters, they’re quite cheap. The management fee is 0.55%, plus an additional 0.15% administration fee. (The fees on the underlying ETFs are rebated, so there is no double-dipping.) Add seven or eight basis points for taxes and one or two more for trading expenses and you’re looking at less than 0.80% all-in, compared with Tangerine’s 1.07% MER.
TD is clearly aiming at DIY investors here, not advisors. The new funds are available in a D-series version, which pay only a small trailing commission to the dealer or brokerage (this is included in the fund’s management fee, not an additional expense). The all-in costs are significantly lower than BMO’s family of D-series mutual funds built from that bank’s ETFs, which have MERs between 0.83% and 0.94%.
Another welcome feature is that you can hold the TD Managed ETF Portfolios in RESP and RDSP accounts, something you can’t do with the Tangerine Investment Funds.
Finally, the underlying holdings of these funds are all traditional ETFs that track cap-weighted indexes. The Canadian equity ETF mirrors the S&P/TSX Capped Composite Index (making it a clone of XIC and ZCN), while the US equity ETF is pegged to the S&P 500. The international equity and bond ETF track lesser-known S&P indexes, but their exposures are virtually the same as their well-established counterparts from iShares, Vanguard and BMO. No smart beta, no narrow asset classes, and no actively managed ETFs. That’s a great place to start.
When passive gets active
The problem is, TD didn’t stop there. While each Managed ETF Portfolio lays out a target mix of stocks and bonds, the mix of Canadian, US and international stocks is not specified. According to the prospectus, “Depending on the outlook for the markets, the weighting for any asset class may deviate from the neutral weighting” by as much as 10 percentage points either way. In other words, the managers have leeway to make active calls, overweighting and underweighting asset classes based on their forecasts.
TD calls these funds “all-in-one index solutions,” but I think they’re better described as actively managed solutions that use index ETFs as their building blocks. The managers are making tactical asset allocation decisions that will cause the funds’ performance to vary considerably from a true index fund. It might work out well for TD and the funds’ investors, but there is no reason to believe that anyone can consistently add value this way.
Compare TD’s strategy to the one used by the Tangerine Investment Funds, which also set a long-term target for the mix of bonds and equities, and go a step further by dividing that equity allocation equally between Canadian, US and international stocks. According to the prospectus of the Tangerine Balanced Portfolio, the fund manager “will rebalance the asset classes back to the target allocations if, in the case of the Canadian bond index component, the actual allocation is higher or lower than the target by 2% or, in respect of any of the other components, the actual allocation is higher or lower than the target by 1.5%.” Notice there’s no mention of “outlook for the markets,” just a simple mathematical rule. Given the atrocious record of fund managers to correctly guess the next hot asset class, I’ll take the math every time.
It would be wonderful if someone would build a family of balanced mutual funds that simply held four or five broadly diversified, super-cheap ETFs and stuck to a target asset mix with no tactical moves. The ETFs would cost no more than 0.15% and the fund company could add 40 or 50 basis points for managing the fund: with an all-in cost of less than 0.70% including taxes, it would be cheaper than Tangerine and ideal for DIY index investors, no matter what online brokerage they used. It would also be more attractive than many robo-advisors, most of whom seem reluctant to simply offer traditional index portfolios that stick to the core asset classes.
Maybe some day.
Expanding on my post just above, the new TD Managed ETF Balanced Growth fund has the same management team as the long-running TD Managed Index Balanced Growth fund. This, plus the fact that their descriptions, strategies, etc. are the same make me think the two are managed the same, except one is built from TD index mutual funds and one from TD ETFs. Morningstar shows that since 2013 the equity percentage in the TD Managed Index Balanced Growth fund varied only between 59.54% and 60.68%.
Looking in morningstar at the other products in the TD Managed Index funds lineup (Max Equity, Income, etc) it looks like they typically don’t stray more than about 5% from their targets, and they’re usually within 1% or their targets. So, given that it looks like they’ll be managed the same as the TD Managed Index funds, perhaps we can expect the new TD Managed ETF funds to vary only slightly from their target weights. This seems to make them attractive one-fund solutions.
Hey Dan, my significant other has recieved a substantial windfall, and wants to invest a good portion of it. We’re going to set her up with XAW, VCN and VSB, but I’m wondering wether it’d be better to dollar cost average over a few years or just dump it all in at once. I’m tempted to just get it all in there now, and Andrew Hallam recommends that in his updated version of millionaire teacher. Though it’s a tricky one when I know markets are soaring and hitting all time highs. I’m curious what your thoughts are on this?
@Greg: Many thanks for looking more deeply into this. I do hope that you’re right, and TD’s managers will just leave well enough alone and stick to a long-term strategic asset mix with no tinkering. I would prefer, however, if they would make this official by putting it in the prospectus, as Tangerine does.
@Jeremy: This is a common question, and I think you might enjoy the podcast where I discussed this idea:
These may also help:
https://canadiancouchpotato.com/2013/05/28/ask-the-spud-should-i-buy-in-now/ (Note that markets were at a “record high” in 2013 as well!)
Dan: Assuming that a hypothetical long term investor truly has no foreseeable cash need for invested funds within the next 15-20 year horizon, does the decision to substitute VSB for VAB (or ZAG) out of your simplified recommended CCP portfolio amount to the same sort of muddled (or at least irrational) thinking as that used to hedge a large initial lump sum cash contribution by dividing into multiple tranches over a few years?
Thanks for the advice Dan! Really enjoyed the podcast and those two articles. We’re gonna put it all in and get the money working.
All the best,
Hey Dan. I’m very new at investing. I have very little funds for savings at the moment but my plan was to put 25$ a week into an e-series fund at TD and then expand next year when funds are more ready. Since I can only afford 25$ a week am I better off using one of these plans to diversify or just keep it cheap?
Hi. I tried doing a little research on the TDAM website but it’s an organizational disaster.
While on there, i did notice they are saying that the e-series mutual funds are no longer offered. Is that right?
@Marc C: The e-Series funds are still available:
Maybe worth looking into. Here is the TD lady’s response to my ask on the TD site. (Hope the link works):
Could be a big deal.
@Marc: I have confirmed with TD that this was a misunderstanding. The e-Series funds are still business as usual. They have updated the TD Helps page to reflect this.
Dan, you wrote “The managers are making tactical asset allocation decisions that will cause the funds’ performance to vary considerably from a true index fund”. Not sure what you mean by “true index fund”. The underlying investments are pure index, the overall fund is a portfolio of index ETFs. Underlying performance of each ETF constituent should approximate the performance of the ETF’s index. The asset allocation of the overall fund is TD’s call. Just like Tangerine’s aggressive portfolio decided to of an asset allocation decision to equally weight Canada, US and EAFE (which they recently changed) – not sure there is any science behind the 33% x 3 Tangerine AA call, but its also a bet. Seems like your concern is that TD may allow the portfolio to drift by a maximum of 10% where as Tangerine allows their portfolio to drift by 2%. I would rather take the cheaper MER offered by TD since Tangerine charges a 35% higher MER, but then again, I am frugal. The Brison study suggests that AA explains 90% of the variability a portfolios return, so the most important question is which AA, TD’s or Tangerine will outperform in the years ahead. Not sure anyone can answer that with any certainty.
@Jake: There are two components of passive investing: one is using index funds and the other is sticking to a long-term strategic asset mix, rebalancing when necessary. To use an extreme example, an investor who uses only plain-vanilla ETFs but varies between 100% in the market and 100% cash is not a passive investor, he’s a market timer using index funds.
The TD funds won’t do anything like that, but according to the prospectus, they can not only let the allocations “drift,” they can also make active calls. If they decide US stocks look overvalued and they think Canada will outperform next year, they can sell the former and buy the latter and go 10% US and 30% Canada, instead of 20% each. This is a form of active management called tactical asset allocation, and there is no evidence that it adds value. There is nothing magical about the equal split used by Tangerine (and by my model portfolios), but the point is that it is a disciplined process that removes any potential for a manager to act on his or her hunches.
Greg’s comment above suggests big tactical moves are not likely to occur in practice, however, which is a good thing.
Dan, thanks for your insightful comments. From what I see TD’s AA is 40% US, 34% Canada, 26% EAFE while Tangerine is 33.3% US, 33.3% Canada, and 33.3% EAFE. Do you have any evidence to support Tangerine’s asset mix is worth the 35% higher MER. I’m not yet convinced, nor have I ever seen any empirical evidence that suggesting that a 10% AA tolerance (unlikely, as stated above) produces inferior returns to a 2% AA tolerance. I think the key factor here, is TD’s decision to underweight EAFE relative to Tangerine, Please point me to any study that can validate the need to pay 35% more for Tangerine’s equal weight. Thanks in advance.
National Bank Financial has a product called “Investcube” that is very similar, except it uses 3rd party ETF’s. There are five choices for risk tolerance with no tactical moves, they are rebalanced reularly back to the target. The MER is about 1% all in. Ive been using it for my wife’s RIF for a year, no problems so far.
Can you please expand on:
“The all-in costs are significantly lower than BMO’s family of D-series mutual funds built from that bank’s ETFs, which have MERs between 0.83% and 0.94%.”
Am I right in understanding that the BMO fund fees are significantly lower than the Tangerine funds, and these TD funds should be even lower?
Based on your estimation the MER should be ~0.78-0.80, so between 5 and 15 bp lower than the BMO D-series.
@Jonathan: Yes, you are correct that the Tangerine funds are slightly more expensive than the TD and BMO products. I’m guessing your next question will be why I favour the Tangerine funds in my model portfolios. The reason is that I like the asset mix better (no currency hedging, no high-yield bonds, etc.) and there is no potential for tactical shifts to that asset mix. Tangerine is also more user-friendly (no need to open a discount brokerage account). This is worth a few basis points in costs in small portfolios. Remember that a fee difference of 0.12% works out to $1 a month on every $10,000 invested.
Like Bob, I was wondering if you have thoughts on the National bank Investcube. It looks to be similar to this, but the a 10% allowance from the target allocation is not active. The balanced portfolio contains 44% bonds, 20% Canadian and 34% global. I’d be interested in your thoughts on this tool. Also it says it rebalances monthly, is there any downside to doing it so often? Thanks, I’m a new investor and looking to transfer my (small) RRSP into a decent passive tool.
@Cam: Investcube (like many other robo solutions) includes a active ETFs and/or narrow asset classes that I feel subtract value. And they are not particularly cheap: they are significantly more than the TD e-Series funds.
Hi, Dan, could you please tell that US ETF and International ETF these funds hold are currency hedged or not?
I try to find but could not find.
@vishal: The underlying ETFs in these funds are the unhedged versions.
From your article above:
“The new funds are available in a D-series version, which pay only a small trailing commission to the dealer or brokerage (this is included in the fund’s management fee, not an additional expense)…”
Question: Did you have a change to confirm with them if trailing commissions are included in the MER?
I am asking because TD redesigned the statement document in July and now they publish fees details on it. The trailing commissions got my attention and I called them. I talked with one TD Broker representative, and he mentioned that a trailing commission of 0.25% is charged for new purchases and DRIPs and it is not included in MER. However, he was not 100% familiar with the fees. He mentioned several clients are now confused and called them after they redesign the document.
Thank you in advance.
@Bruno: Trailing commissions (i.e. ongoing commissions paid to advisors, in this cases, the brokerage) are always included in the MER. Any one-time commission that might be paid for the purchase of a fund is not, by definition, a trailer. To my knowledge, TD does not charge a commission for purchasing new units of mutual funds, and certainly does not charge from DRIPs. So I think the rep you spoke to did not communicate things very clearly.
@Dan: I checked the fund facts from July 2017 and it is mentioning that the trailing commissions are included in the MER as you said.
They probably made made a mistake in June, because they removed the detailed fees in July that generated all the confusion.
Thanks for our support!
do you still recommand this fund for 2018? Thanks!
I have 150000.00 in TD mutual funds. I am thinking about switching to e-series. Should i put the full amount in the e-series or split it between e-series and ETF. My MERS are way to high in the mutual funds. Looking at lower cost.