It’s been a while since our last CCP podcast, but we’re back with an all-new episode. This time I’ve devoted the whole show to answering questions from listeners and readers.
Here are some issues we address on the podcast:
What is the likelihood of an ETF closing down, and what would be the consequences for investors if this happens?
I touched on this issue in a blog post a few years ago. It’s important to understand what happens if an ETF closes its doors, because that can certainly happen.
Usually the reason ETFs shut down is simply that they’re unable to attract enough assets to be profitable. In that case, the provider typically issues a press release announcing that the fund will be closed on a specific date: you can sell your units on the exchange any time before that and receive their fair market value.
Remember, the value of any ETF or mutual fund is determined by its underlying holdings, and the stocks and bonds in the fund won’t be affected by its looming closure. So there is no reason to expect the fund will fall in value after it announces its pending demise.
An ETF may also close down because of a change in investment or tax law. It has occurred before, and it might happen again in the near future with the popular Horizons swap-based ETFs, as the most recent federal budget made it quite clear that it was planning to target these funds, and it is possible their structure may eventually be disallowed. Since these ETFs are so large (HXT and HXS together hold close to $3 billion), it seems likely Horizons would come up with a transition plan than won’t force investors to liquidate all of their assets.
My Couch Potato portfolio also includes a Canadian equity mutual fund that is a leftover from another investment firm. This fund is down 10%. Should I hold onto it for a bit longer, or just sell it and put the proceeds into an ETF?
We have a strong intuition that we should wait for a stock or fund to get back to even before we sell it. But this is almost always a mistake. The decision is even easier if you’re selling an expensive mutual fund and replacing it with a cheap ETF in the same asset class. I like to compare this decision to cancelling an expensive auto insurance policy and replacing it with a cheaper one that offers the same coverage. It’s almost a no-brainer.
Are there times when it doesn’t make sense to immediately sell an expensive fund and replace it with an ETF? Sure. If you hold the fund in a taxable account and it has a very large capital gain, you may not want to realize it all at once and take a huge tax hit. Another exception might be if the mutual fund has a deferred sales charge. In some cases, it could make sense to hold onto the fund a little longer and sell it gradually to keep those deferred sales charges to a minimum. (But even then, making a clean break is often a good idea.)
Through some good fortune, our portfolio will soon be in the seven figures. At what point would you consider a simple DIY index portfolio insufficient?
Those who are fortunate enough to have very large portfolios usually reach a point where they wonder whether a conventional index portfolio is still appropriate. Part of the problem is that index investing and often seem unsophisticated—and I have to admit, terms like “Couch Potato” don’t help the cause.
But just because you can build an index portfolio with just one, two, or three ETFs does not mean the approach is unsophisticated. And it certainly doesn’t mean it’s inadequately diversified. Even the humble Vanguard Balanced ETF Portfolio (VBAL) includes almost 12,000 stocks and bonds from dozens of countries, all wrapped into a single product. Even an investor with a few million dollars does not need more diversification than that.
If a very wealthy investor is bent on branching out from the traditional stock and bond markets, I generally suggest they consider real estate: perhaps a rental property that can generate a reliable stream of income, and that is likely to be uncorrelated with their portfolio. Being a landlord isn’t right for everyone, but if it appeals to you, it’s almost certainly a better bet than hedge funds, or other so-called “alternative strategies” that are touted as a complement to stocks and bonds.
I don’t quite have enough money to make ETFs cost-efficient in my portfolio, so I’m using index mutual funds instead. I’m thinking about selling these once a year and making a single ETF purchase to benefit from the lower fees without paying a lot of trading commissions. What do you think?
Over the years I’ve spent a lot of time laying out the advantages of index mutual funds over ETFs, but most investors are not swayed by these arguments. They can be laser-focused on paying the lowest management fees possible to the exclusion of other concerns. (I also think mutual funds still carry some stigma because of their association with high fees and underperformance.)
I get a lot of questions from investors who want to use a hybrid strategy while their portfolio is too small to make ETFs cost-efficient. Usually this involves making regular contributions to index mutual funds or savings accounts until they have enough to make an ETF trade. If you’ve been doing this successfully for a couple of years, I won’t try to talk you out of it. But if you’re a new investor, I’d suggest something that will require significantly less maintenance.
If you are confident you can manage an ETF portfolio, and you plan on making smallish monthly contributions, then look for a brokerage that offers cheap, or even free ETF trades. I don’t endorse any specific brokerage, but Questrade has become popular with Couch Potato investors because its commission-free ETF purchases. (You still need to maintain a minimum account size or you may pay administrative fees.)
Two less widely known options are Scotia iTRADE and Qtrade. Both have a menu of free-to-trade ETF options that is, shall we say, quirky. But at both brokerages the list includes both the iShares Core Balanced and Core Growth ETFs (XBAL and XGRO). You may not have known this if you’re an iTRADE client, however, as the website still uses their old tickers (CBD and CBN), despite the changes iShares made to these ETFs last December.
Although you cannot set up a traditional automatic purchase plan with ETFs like you can with mutual funds, you can set up regular cash contributions to your brokerage account. Then you’ll need to go in once a month or so and manually place a trade to invest that cash. If you use this strategy along with a one-ETF portfolio, you’ll pay an annual management fee of about 0.20% and incur virtually no transaction costs, and you’ll never have to rebalance. In my opinion, that makes a lot more sense than trying to juggle some combination of index funds and ETFs.
Hi Dan,
Thanks for the latest podcast. You mention Questrade and iShares as having free to purchase ETFs; a third one would be QTrade which also features a menue of free-to-trade ETFs that includes XBAL and XGRO.
XBAL and XGRO are both eligible for Blackrock’s Pre-Authorized Cash Contribution (PACC) plan:
https://www.blackrock.com/ca/individual/en/drip-pacc-swp-investment-programs
Although as noted on the link, “To enroll in the PACC Plan, investors should first contact their brokerage to confirm that participation is supported.” Are you suggesting that although XBAL and XGRO are eligible for PACC, the brokerages Questrade and iTRADE don’t currently support it? If that is true, then perhaps the aforementioned QTrade would be the only brokerage that currently offers both commission free trades and PACC participation for XBAL and XGRO.
@Mark: Thanks for the comment. I did not realize that XBAL/XGRO was on Qtrade’s list of commission-free ETFs as well. Sounds like that would also be a good option: I have updated the post accordingly.
As for the BlackRock PACC plan, do you have first-hand experience with this? I have mentioned this to brokerages in the past and they often have no idea what I’m talking about. A PACC program for ETFs is, as far as I know, something unique that Claymore ETFs created many years ago, before BlackRock bought them out. BlackRock tried to grandfather the plan, but I can’t recall ever hearing from anyone who was using it successfully, and I don’t know which brokerages support it. It’s definitely not very user friendly. If any readers have experiences to share, please do so.
@Dan: Unfortunately I don’t have experience setting up the PACC plan. A quick google search turned up a couple Reddit threads, with users signing up to Questrade after the funds had launched but no one confirming that it has been set up successfully.
https://www.reddit.com/r/PersonalFinanceCanada/comments/an6sf4/has_anyone_set_up_pacc_for_xgro/
Another user suggests that it is eligible through both Questrade and Qtrade:
https://www.reddit.com/r/PersonalFinanceCanada/comments/abaw7r/xgro_or_xbal_on_a_pacc_perfect_automated_monthly/
I hope your other readers can comment on this. It seems like one of those things that might be a bit of a hassle to set up, but should operate smoothly once it is done. In my opinion this could tip the scales towards XGRO/XBAL (vs VGRO/VBAL/ZGRO/ZBAL) due to the automated savings. Someone could set up a $500/month contribution to their TFSA and have it max out automatically every year without thinking about it and without logging in to their brokerage or looking at their balances.
This might also be a way for investors who use other discount brokerages such as their banks’ to avoid commissions (assuming their banks don’t charge commission on each automated purchase – this would need to be confirmed).
Haha…that explains it! I am an Scotia itrade user and recently simplified my portfolio to being ‘all in’ on XGRO. I swear it said my trade confirmation it would cost me 9.99 for each trade across my 5 accounts and then in reviewing my statements I saw no charge. Scotia should be promoting this option. Dan, perhaps a partnership opportunity for you!
“you can sell your units on the exchange any time before that and receive their fair market value.”
But what if you miss the press release? Do they force the sale at less than market value?
So, what to do with swap-based already owned? Bail now or wait and see?
@Sam: This is addressed in the podcast. If you don’t sell your shares before the closure date, they will be redeemed for you at their net asset value.
I contacted TD Direct about the PACC Plan eligibility and they said no.
Hey Dan,
Love your work! I don’t understand though why National Bank Direct, which offers both free ETF purchase and sale trades, never gets a mention in these blog posts? Is there hair on the NB platform that I’m unaware of?
Cheers,
JB
@Jay Bee: ETF trades at National Bank Direct Brokerage are only commission-free with purchases of at least 100 shares. The average ETF price in Canada is roughly $20 to $30, so you’re looking at $2,000 to $3,000 per trade before this kicks in. This is better than nothing, for sure, but it does not allow for small regular purchases of a few hundred dollars.
My colleague Justin Bender has done a video tutorial on buying ETFs at NBDB:
https://www.youtube.com/watch?v=rYfH4I4S6aU
I have no direct experience with National Bank’s brokerage, but the reviews I have seen are generally not great. It’s certainly an option if you are already a customer of the bank, but it’s not likely to be a great choice if the only feature you want is commission-free ETFs, given that there are more attractive competitors.
Hi Dan! My Vanguard VGRO in my TD direct investing account is chugging along doing what it should. Its been generating cash which is great!
My Question : Can I have VGRO in a, or as a DRIP? That way of course I don’t need to Buy and in turn incur The $9.99 trading fee .
Thanks for the Great content you provide!
Scott
@Scott: In theory any ETF can be set up with a DRIP, but it depends on the brokerage. Best to call TD Direct and ask if VGRO is on their eligible list.
@Murray
I have some swap-based Horizons ETFS. FWIW, I plan on waiting to see what happens. No sense in selling now and prematurely creating a tax bill, unless there are other considerations.
Hi Dan, thanks for another amazing podcast!
I’m fortunate enough to have a windfall of roughly $100000, which I will put in my TFSA and a registered account.
After reading/listening all your podcasts I have decided to go with the all-in-one solution from vanguard . VBAL in my case. I was in love with you classic portfolio of 3 ETF, but I think simplicity is gonna be key for myself in the long term.
I was thinking about what you mentioned regarding these new all-in-one ETF no being very tax-efficient, so I thought I could make a few changes to my portfolio, keeping it still very simple. Just adding one more ETF.
These are the possibilities I have found (always keeping 60/40 equities/bonds ), taking into account that I would put 50% of the investment in each account ( with these numbers I would have my TFSA maxed out)
1st: TFSA: VBAL: 50%
Non-reg: VBAL: 50%
couldn’t be simpler
2nd: TFSA: VBAL:50%
Non-reg: VEQT:30%
ZDB: 20%
Same asset allocation, maybe more tax efficient?
3rd: TFSA: VEQT: 50%
Non-reg: VEQT: 10%
ZDB : 40%
The idea here is to seek the more potential growth in the TFSA with just equities
4th: TFSA: ZAG: 40%
VEQT: 10%
Non-reg:. VEQT: 50%
In this case we look for allocating the less tax-efficient asset in the sheltered account.
I hope you can make things more clear for us about this. I’m not looking for an investment advice, but only a theoretical/mathematical reason to go for one solution instead of the other.
Thank you so much!
@Alejandro: I would nudge you toward option 1. Remember that if you split the $100K across both accounts, there would only be about $20K in bonds in the taxable account, which would generate only about $600 in annual interest (assuming a 3% coupon). This is probably not a big enough number to make “optimization” a top priority.
If you really want to use more than one fund, then you can indeed make a good argument for option 3.
Thank you so much for your quick response. I truly appreciate it.
Cheers!
Hi Dan, I am 37 years old and just starting out with couch potato and I am not that knowledgeable in investing but I know enough that I want to do something besides mutual funds. I have an accounting background and I am comfortable on the computer so re balancing should not be too difficult for me.
I have about 50-70k to invest in a tax sheltered account. I plan to do regular contributions – monthly maybe quarterly. It seems like the balanced portfolio suits my needs.
What I am not sure about is which provider to go with. I am looking at your model #2 E-series with TD (all my banking is with TD) or #3 using Questrade since deposits are free.
BUT I also came across robo investing with Wealthsimple and/or Questrade’s managed ETF portfolios. This way I don’t have to do anything but I don’t know if either portfolio is a good option. They don’t seem to follow your models. Any suggestions?
Hi Dan. I was wondering if you have addressed the comment Michael Burry made last week on BNN about index funds being in a bubble and he said the crash is coming and it won’t be pretty. Do you agree? And if so, are there some index funds that are safer than others? perhaps you already have a post on it somewhere. thanks Barb