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.