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:
Fund name | Bonds | Stocks |
---|---|---|
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.
Dan, thank you for this. Looks like they’re trying to ‘close the gap’ between TD e-series and mutual funds by offering these. Not really appealing to me – I’ll take straight ETFs.
Still, for the unregistered account, I’ve been looking for solutions that do not force me to track ACB, i.e. get into the more complicated aspect of ETFs which is necessary for proper tax filing. In this regard, I can’t help but feel a company like WealthSimple may be more effective owing to it’s tax loss harvesting feature (vs. TD e-series or mutual fund).
Perhaps a model portfolio could be built in such a way, e.g. iShares/Vanguard ETFs for RRSPs, TFSAs, but when it comes to the unregistered portion, sticking to a simpler fund, even if it costs a little bit more.
Has Tangerine reduced their costs in the past when competitors offer something similar, but with a lower MER?
@Adam: I am not sure that robo-advisors simplify any tax issues. One still has to make sure the book values are updated properly (they might be, but I wouldn’t take their word for it). As for tax-loss harvesting, I would want to see some real-world example of how this is done: robo-advisors talk a lot about it, but what are the thresholds, and what are the replacement funds? This is one of the problems with using non-core ETFs: you can’t do tax-loss selling without changing your market exposure.
I am a little confused… aren’t TD e series funds ETF’s . If so why wouldn’t stick with these as the mer is considerably cheaper?
Hi Dan,
Thank you for the article. To be honest I’m not sure who the target clients are for these active asset allocation funds. I’d rather use tangerine than these.
On an unrelated note, congrats on getting selected as a finalist for the financial journalism awards!! Well deserved. (I am invited to the event because of my CFA charter but too bad I cannot make it!)
So close, TD! I point novices to Tangerine, but with hesitation – because even 1.07% is 7X higher than what you could pay DIYing. On the other hand, e-Series is a tough sell to novices because it involves getting onboard with a philosophy, taking the effort to re-balance, etc. I would love a single passive product, priced around 50 basis points, that I could point at and say “Here. This mutual fund is how mutual funds should be. Buy this one.” I currently can’t and DIYing is a bigger sell to a novice.
Honestly though, even with the active management it’ll still be better than most of what’s out there. Not to say that market timing is a worthwhile exercise, but if we listen to guys like Bogle (and we should), lowering fees is the bigger factor in performance. Maybe TD will eventually improve the product? Maybe Tangerine will bring their rate down if enough banks do something like this? Baby steps. Just nice to see the winds shift a bit.
How can TD clients buy series-D funds such as these? Can a regular mutual funds account (or even one ‘converted’ to have e-Series access) do it? Or would you need to have a Waterhouse account? If the latter, once again, it makes it a tougher sell to novices.
@Gwen: Many thanks for the congrats: it’s really gratifying to be recognized by CFAs.
@Brendan: D-Series funds should be available through any online brokerage (not just TD Direct) but also through a TD Mutual Funds account, which you can open at TD Canada Trust branches.
Hi Dan,
Oh wow more to choose from the TD E-Series fund! I didn’t know about the ETFs they offered and now something like a crossover of ETFs and Mutual funds are being offered. I still feel the E-Series funds are the way to go since the MER is lower of D series funds but you don’t need to pay commissions each time you top up like the ETFs. What do you think?
@Km: The e-Series funds are a great choice, but you do need to commit to building and rebalancing the portfolio yourself. The balanced fund structure has the benefit of looking after all of that for you, and paying an additional 10 or 20 basis points for that service would be worth it for a lot of people. Unfortunately, the active nature of these funds makes them much less appealing than they would have been otherwise.
Hello,
Just new to investing, been reading up as of late. I’m currently with TD bank and I’m contemplating purchasing this new TD Managed Aggressive Growth ETF Portfolio.
But the only thing is the MER of .80 seems high. With a minimum investment of $2000.
I want to make monthly contributions that may not range as high as 2k. How would the MER effect my monthly payments? Would it still make sense for me to invest a smaller amount?
Or on the other hand, I could just do the couchpatatoe TD E series Aggressive fund and re-structure my allocation once a year for the MER of 0.41%
Almost double for the allocation? Doesn’t seem right to me betting on them to make smarter decisions throughout the year to make only a little more gain or even a loss.
Any advice is appreciated as I’m new to investing and just getting started.
Thanks,
Vee
One issue that I have with all of these approaches is that they don’t factor in the needs of retirees, who generally want income and legacy. Almost all of these approaches are aimed at asset accumulation rather then income maximization. There seems to be no recognition in Canada’s financial industry that people need more then bonds to generate income – REITS, Dividend stocks and Preferreds for example.
I don’t really see the market for these new pseudoactively managed products.
Seriously, how complicated is it to buy three ETFs and rebalance every quarter, semester or year ?
“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. ……”
Dan, why don’t you do this :)? If Wealthsimple and others like them could do it why not you.
For sure you will have for start many clients (most of your readers, otherwise they would not be interested in your blog).
What a shame. TD almost got there, then screwed it up at the last step. They knew (or should have known) that tactical asset allocation doesn’t work as well as fixed asset allocation, but couldn’t resist fiddling with it at the the last moment. I wonder if Vanguard will bring it’s LIfe Strategy Funds and Target Date Retirement Funds to the Canadian retail market.
Dan, Is an actively managed fund with a lower MER not preferable to an index fund with a higher MER? Active management does not necessarily add value, but it does not necessarily detract. The real disadvantage of active funds is that they cost more. But when they are actually cheaper – they might be better than an index fund.
Is this only available at td brokerage/bank or all brokerages?
Thanks for your reply Dan. Its true with the extra basis points, it could be expensive. I also have another thought that investing in the E-series now might be a bit late as it has risen up quite a lot over the years. I was contemplating to make a lump sum move on them when there was a drop. But also thinking, would it be a better move to invest in the D-series funds now since I have up front cash to invest now and also since the D series are new to the game and market, there is much more room to grow in capital gains? What do you think of this approach?
@Joey: It’s true, cost is the primary reason that actively managed funds tend to lag, and I agree that it usually makes little sense to go out of your way to pay more for an indexing approach. You could certainly do a lot worse than a fund like this: 0.80% for a globally diversified portfolio is better than what most people are doing. I would take a wait-and-see with this approach and see how active they really are. If the managers tweak the asset allocation by only a few percentage points then it’s unlikely they’ll do much harm. If they make larger tactical calls, then I would be much more worried.
@Christina: These funds should be available at any online brokerage.
If you don’t mind this off topic question but I searched the blog and didn’t find an answer.
I recently mentioned to someone that, as you wrote in the article
http://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/
in retirement we can add a GIC ladder to a CCP strategy. They asked if someone who is using automatically rebalancing Tangerine funds would still want to use a 5 year GIC ladder. They wondered why they wouldn’t just withdraw the annual amount and put it in a HISA.
Is the role of the GIC ladder just to reduce the volatility of the fixed income portion of the portfolio?
“…one suspects TD just wanted to provide another option for their advisors who had been fielding questions about ETFs from clients.” This strikes me as pretty dubious unless the TD products have a more attractive value proposition.
Nick de Peyster
http://undervaluedstocks.info/
@Laura: The GIC ladder is primarily there to guarantee several years of cash flow. In a portfolio with many moving parts it can be very useful by providing flexibility for rebalancing. But if you happen to be using a balanced fund for your whole portfolio, you can definitely just withdraw the annual amount each January and put it in a HISA to keep you going for a year.
TD continues to be the “close but not quite” in terms of investing. The E-series Index Funds are GREAT, except they don’t play well with the TD Mutual Funds front end. This again seems like something better than most, but still not quite?!?
Good to hear I can use in an RDSP, and good to see other writers, writing about the RDSP too :-) !
I do like the idea of having a single fund for “Kind of DIY” investors.
Hello Dan,
What is your opinion of income vehicles like XTR, ZMI and FIE for retirees? I was thinking of using these along with a GIC ladder.
Thanks,
Jim
@Jim: I don’t believe it is necessary (or wise) to change your focus to income-generating ETFs in retirement. I explain why here:
http://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/
Would these mutual funds be a decent option to put money into biweekly/monthly until a yearly re-balance/purchase of ETFs/shifting of assets to registered accounts? If not, what is the best place to put money being saved up for the start of the next year? (I generally do a lump sum to max TFSA/RRSP at the start of the year, and rebalance at the same time. This saves on commissions for ETF purchases and gets my registered accounts filled at the start rather than the end of the year)
@David: I would just use the e-Series in that situation and not use ETFs at all.
@Canadian Couch Potato: I’d just rather avoid opening a TD mutual fund account just to throw money in for part of the year.
I have all my investments at another brokerage, would rather avoid the hassle of buying mutual funds at TD throughout the year, then selling and transfering once a year, and my portfolio as a whole is large enough that putting everything in the e-series costs more than ETFs, even after a few commissions a year.
Essentially just looking for a good place to put money left over every paycheck until I have enough to purchase ETFs.
I just noticed under etf risk it lists trading costs. Looks like the e series is still the way to go. Too bad the managed index funds fees are so high.
@ccp..thank you for this information. .how does this Td product compare with the mutual funds built with ETFS from blackrock and bmo? Any preference/recommendation?
> 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.
Serious question: what’s stopping you?
@Steven: A few reasons. There is a lot of regulatory and administrative work in the mutual fund business that we’re not prepared to shoulder. (An existing fund company could do this very easily, but to start something from scratch is daunting.) I’m also concerned about conflicts of interest: I don’t think I want to be involved in the product business.
Hello Dan,
Thank you for responding to my question by referring me to the excelent MoneySense article. Don’ t know how I missed it since I read both MS and Canadian Money Saver.
The article was helpful, but what I need is a systematic plan to spend 90% of my portfolio over the next fifteen years. Any suggestions as to who I might contact or what I might read? Most plans are about not spending capital in retirement, but my friend Pete has informed me that I may as well enjoy it since I can’t take it with me.
Thanks again,
Jim
A little off topic, i did a search on the site and nothing about the 7Twelve multi-asset balanced investment or a review on it.
The Author claims a Double digit return over the last 40 years, I know the couch potato tests at about 6-7 over 20 year period. Thats a huge difference, 10 percent as opposed to 7?
Its a little more complex, but passive based anyones thoughts?
http://www.7TwelvePortfolio.com
I am with BMOInvestorLine, and hold TD Dividend Growth fund TDB 972 in an investment account.
I tried to switch to the D series version TDB 3088 since the latter has a lower MER. However their online platform did not allow the switch. Their service representative indicated that TD does not facilitate such a switch at any discount brokerage other than their own TD Direct.
I am guessing the same may apply to buying D Series TD funds from “any” discount brokerages other than TD Direct.
@Jim: Any financial planner will be able to help you with this question. As for spending only income and not touching the capital, that is an impossible goal for all but the wealthiest. Even with a 3% yield (which you cannot get risk-free) you would need $1 million for every $30K in pre-tax income. And as your friend points out, unless you specifically want to leave a large legacy to your heirs, you should expect to draw down your capital in retirement.
@Be’en: Thanks for sharing this. Were you able to switch to the D-Series at BMO after you made the phone call? Or does InvestorLine just not offer any D-Series funds from providers other than BMO?
Hi Dan – You mention BMO has similar funds with much higher costs. However, investors who use BMO Investorline have access to Series D funds that have much lower costs. For example, the BMO Balanced ETF Portfolio that you identify in your article and that carries the prohibitively high MER of 1.72% in A series has a D series equivalent with a MER of 0.9%. Here is a full list of the BMO D Series available through investorline: https://www.secure.bmoinvestorline.com/selfDirected/pdfs/FundList_EN.pdf
@Greg: Many thanks for pointing this out: I was not aware of the D-Series versions of these BMO funds: I have edited the blog post accordingly.
@mark: I see Dan didn’t reply about that 7Twelve portfolio. It looks a little complex, 7 types of assets, 12 mutual funds or ETF. I’m not sure where you got “double digit returns” over 40 years. Looking up their performance, they got a 7.51% annualized return over the past 15 years. Dan’s “balanced” 3 ETF portfolio got between 5.3% (in 10 years) and 6.5% (in 20 years). Looking back 15 years includes the immediately post-dotCom bull market and the last 9 year bull market (and obviously the recession in 2008/2009) so is a pretty favourable time. They also did “back-test” 47 years, showing 9.75% annualized returns which I think is very comparable to simply the S&P 500 over that time frame.
It strikes me as an unnecessarily complex portfolio (with regards to having to manage/rebalance 12 funds periodically) which can be costly with trade fees or annoying (recalculating ACBs). Even though it is technically passive
It’s also worth remembering that the “3-fund” portfolio is not really 3 funds but does cover a lot of these “asset groups”; XAW alone is US large, mid, small cap, emerging and developed non-US stocks. ZAG is govt and corporate bonds (Canadian) and VCN is Canadian large/mid/small cap (which is natural resource and commodity heavy already). It is also Canadian-domiciled with some tax and other benefits.
It strikes me that portfolios like 7Twelve are an even more complicated version of the old 6-ETF “Complete” CCB portfolio which included REITs and RRB. I think Dan very smartly pointed out that the small diversification benefit was outweighed by the complexity involved in managing those funds.
I think we can’t get much simpler than the current portfolio. We all have some complexity in trying to manage allocation (including between TFSA/RRSP/non-registered accounts) and our own personal circumstances but I’ve very appreciative that we can have an incredibly diversified portfolio, that is easy to manage, for a very small sum. Add in free ETF purchasing (I use Questrade) and my “costs” of running this portfolio are minute.
@Mark and Craig: I’ve read the 7Twelve book, and my response is the same as it usually is to such ideas. There are roughly 4.78 million portfolios that beat a simple index strategy in a backtest. Yet the number of investors who actually achieve those returns when trying to implement such strategies is extremely small. One of the most important steps an index investor can take is to get past the idea that there’s something better out there. There undoubtedly are several strategies that will beat an indexed approach over the next 20 years. Unfortunately, you can never know what they will be except in hindsight.
https://canadiancouchpotato.com/2012/05/25/why-isnt-everyone-beating-the-market/
https://canadiancouchpotato.com/2013/07/18/why-your-problem-is-not-your-funds/
Hi Dan, I recently sold my one RRSP holding, a single balanced fund and decided to purchase TD-E series funds. I plan to buy the equity portion over time rather than jump in all at once but wondering if I should be buying bonds or a ladder of GIC s for the fixed income portion.
A GIC ladder (Oaken) seems tempting but is it a good short term solution to bonds or even a substitute for bonds for the long term?
Appreciate your advice.
@Craig: I think you got it right on. Thanks for doing a sceptic’s rational, objective-data-only thought-experiment/analysis of the current recommended Couch Potato portfolio, and coming up with an acceptable and reassuring conclusion. (I do this myself periodically, because the CP idea just seems too good to be true, you know what I mean, but as time goes on, I see less and less urge to keep on doing it. However, the practice of going through the reasoning and steps is useful in explaining and justifying the approach to one’s many unbeliever friends and relatives).
As an aside, I would comment that the fact of Canada’s index being “natural resource and commodity-heavy already” (and don’t forget Financials too) is not necessarily a good thing (i.e. we really should not be trying to target specific asset categories) but rather, if anything, a negative quality in that we are as a result not as diversified as we ideally should be, but we accept this situation as the price of doing business and investing in our home country and currency. But that’s likely too subtle a point for those unbelievers who are still searching for the silver-bullet magic portfolio.
@Jason: https://canadiancouchpotato.com/2015/03/27/ask-the-spud-gics-vs-bond-funds/
Thank you for the responses!
Mark.
“Were you able to switch to the D-Series at BMO after you made the phone call? Or does InvestorLine just not offer any D-Series funds from providers other than BMO?”
No Dan, the BMO rep could not help with the switch. I am stuck with the expensive Fund. Can’t sell and buy the cheaper one (if it is possible) as it will trigger substantial capital gains tax.
Transferring the fund to a TD account and making the switch there looks like the only alternative. Doesn’t make sense paying for non-existent advise/service at the discount brokerage? I think it has to be BMOIL that prevents such switches in order to continue to collect higher fees.
@Dan
Do you beleive tdb3175 that you mentioned here is a good fit in my case?
Following Bettermount recommendation, I would like to boost my emergency fund in 20% and invest the amount in 30%eq and 70%fi instead of having it in cash. I trying to find a single product to avoid complications in case my spouse needs to sell it to cover an emergency. I am TD customer and I am also avoinding to open an account in Tangerine just to have access to their simplified product that you also mentioned in the article.
Thank you!
@Craig and Dan:
Great analysis of 7twelve. I spend a good time analysing this portfolio before choosing CPP, and you guys made cristal clear the benefits in your comments above. o/
Hello Canadian Couch patatoe,
I remember seeinng a ETF portfolio with just Vanguard ETF’s. Is that still available on this website?
@Vee: The older all-Vanguard portfolio consisted of VAB, VCN and VXC.
These seems like a repackaging of the existing TD Managed Index Portfolios e-series, using TD ETFs instead of TD mutual funds as the building blocks. Their mandates seem to be the same, i.e. a target weighting of asset classes with an operating range 10% above or below the target. The Managed Index Portfolios have been around since 1998 so perhaps their track records is a useful proxy for how these Managed ETF portfolios will run. I decided to look at the 60/40 Managed Portfolio and its holdings are almost exactly at the target weights. Perhaps that’s an indication that TD won’t stray too far from the targets, and that these new Managed ETF portfolios might be a good all-in-one solution after all.
Here’s the link to the 60/40 Managed Index portfolio:
https://www.tdassetmanagement.com/fundDetails.form?fundId=4831&prodGroupId=4&lang=en&site=AssetManagement