For almost 20 years, the TD e-Series mutual funds have been one of the cheapest and easiest ways to build a Couch Potato portfolio. For most of that time they’ve gone about their business without much fuss, all the while outperforming the vast majority of their peers. But now there are some changes in the offing for these venerable old funds.
And don’t despair: the changes are mostly for the better.
If you hold any of TD’s e-Series index funds, you may have received a notice of these impending changes, and as a unitholder, you have the right to vote on them. In practice, though, they’re going to be approved whether or not you show up at the unitholder’s meeting in September. So let’s take a look at what’s going on and why.
New structure and new benchmark indexes
Several TD funds are undergoing changes, but we’ll focus on the four e-Series index funds that have long been part of the Couch Potato model portfolios:
|e-Series Fund||Fund Code||MER|
|TD Canadian Bond Index Fund||TDB909||0.50%|
|TD Canadian Index Fund||TDB900||0.33%|
|TD U.S. Index Fund||TDB902||0.35%|
|TD International Index||TDB911||0.50%|
So, what’s new here? Rather than directly holding individual stocks and bonds, as they do now, these e-Series funds will instead use one of TD’s index ETFs as their underlying holdings. In other words, they will become a mutual fund “wrapper” for the ETFs.
Although they’re not well known, TD launched a family of index-tracking ETFs more than three years ago, and there are funds in each of the major asset classes. They’re comparable to the more popular offerings from Vanguard, iShares and BMO in my model portfolios, with competitive fees:
|TD Canadian Aggregate Bond Index ETF||TDB||0.11%|
|TD Canadian Equity Index ETF||TTP||0.07%|
|TD U.S. Equity Index ETF||TPU||0.11%|
|TD International Equity Index ETF||TPE||0.20%|
The above ETFs have very similar mandates to the TD e-Series funds, but they track different benchmark indexes. Since the e-Series funds will soon be using the ETFs as their underlying holdings, their benchmark indexes will change accordingly:
|Asset Class||Current e-Series Benchmark||ETF (and new e-Series) Benchmark|
|Bonds||FTSE Canada Universe Bond||Solactive Broad Canadian Bond Universe|
|Canadian equities||S&P/TSX Composite||Solactive Canada Broad Market|
|US equities||S&P 500||Solactive U.S. Large Cap|
|International equities||MSCI EAFE||Solactive GBS Developed Markets ex North America Large & Mid Cap|
By way of background, fund companies pay licensing fees to their index providers, and the big names like S&P, MSCI and FTSE likely charge more than lesser-known competitors. So when TD launched its ETF lineup, they decided to team up with Solactive, a relatively new German firm that has also provided indexes for Horizons ETFs, Morningstar and other Canadian fund providers, presumably for a lower fee.
Will this make a difference to performance? It’s doubtful. So long as an index is designed to track a broad market using a traditional cap-weighted methodology, any differences are likely to be minimal. ETF investors should already understand this if they’ve chosen between funds in the same asset class from Vanguard, iShares and BMO, which generally use different index providers. Assuming the costs are the same, it’s hard to make a strong argument that any of these is inherently superior or inferior to the others. Have a look at the top holdings and the sector breakdowns in the e-Series funds and the corresponding ETFs and you’ll see they are nearly identical.
Never mind the theory: since we have three full years of performance for TD’s ETFs, we can see how the Solactive indexes have stood up to their competitors in practice. After adjusting for the fee difference between the e-Series and ETF versions, the Solactive indexes outperformed those of the e-Series funds in U.S. equities (+0.18% annualized) and international equities (+0.32%), and underperformed in Canadian equities (–0.35%) and bonds (–0.19%) during the three years ending July 31. So it’s been a coin flip, and the variations are likely random: there’s no reason to expect they’ll persist.
That said, any time a fund switches to a different benchmark index, that counts as “a change to the fundamental investment objectives,” and the fund provider needs to obtain the consent of a majority of unitholders. That’s why TD is reaching out to investors in the e-Series funds, and I’m not sure why anyone would vote against such a proposal.
An important question to consider is whether there will be any tax consequences as a result of these changes. When the e-Series funds begin tracking different benchmarks, they will inevitably need to sell some stocks to bring their holdings in line with the new indexes. That could result in capital gains being realized and then passed along to unitholders using taxable accounts. (This is a non-issue if you use the TD e-Series funds in a TFSA or RRSP.)
But this is unlikely to be a problem. The e-Series funds will not need to liquidate their entire portfolios and then buy ETF units on the exchange. That would be what you or I would have to do, but institutional investors moving millions don’t need to do this. Instead, the mutual funds will package up their existing stocks in the same proportion as in the Solactive indexes. Then they’ll exchange those baskets of stocks for newly created units of the ETF. Perhaps it helps to think of this like exchanging 24 individual bottles of beer for a case of the same beer. No party is gaining or losing on the transaction, so this is not a taxable event.
Now, even after this in-kind exchange takes place, the e-Series portfolios will not precisely match their new benchmarks, so there may need to be some trading on the margins. According to the management circular, the estimated turnover in the four funds will range from 3.2% to 7.9%. In all four cases, the document says these trades “will be done in such a way, while using up any available tax loss carry forwards, to limit the tax impact to unitholders. This may take several years.”
What do they mean by “tax loss carry forwards”? Well-managed funds take advantage of tax-loss harvesting opportunities as they come up, and then carry forward those losses to offset future gains, which is why many index funds distribute almost no taxable gains to their unitholders. The 2018 financial statements for the TD Canadian Index Fund, for example, reveals $111 million in carried-forward losses, which means it’s unlikely to distribute gains any time soon.
For what it’s worth, RBC made a similar move in 2017, when they began using their own ETFs as the underlying holdings for their index mutual funds, switching benchmarks in the process. Their Canadian, US and international equity funds did not distribute any capital gains that year, though surprisingly their bond index fund did. (You probably shouldn’t be holding a traditional bond index fund in your non-registered account to begin with.)
If you’re wondering whether the structural change to the US and international e-Series funds will have an effect on foreign withholding taxes, the answer is no. When a Canadian mutual fund or ETF uses a US-listed ETF as its underlying holding, there can be an additional layer of foreign withholding taxes that applies even in TFSA and RRSP accounts. However, if the underlying holding is a Canadian ETF, this is not an issue: the foreign withholding taxes are the same as if the fund held the underlying stocks directly.
There’s more good news for e-Series unitholders. As part of the proposed changes, the e-Series funds will all enjoy a 0.05% reduction in fees. Note this table includes only the fund’s management fee. The full MER, which includes taxes, will be higher.
|e-Series Fund||Current fee||New fee|
|TD Canadian Bond Index Fund||0.45%||0.40%|
|TD Canadian Index Fund||0.30%||0.25%|
|TD U.S. Index Fund||0.35%||0.30%|
|TD International Index||0.45%||0.40%|
Five basis points isn’t going to allow you to retire earlier (it’s one latte a year on every $10,000 invested), but it’s a move in the right direction. With these fee reductions, a traditional balanced portfolio with 40% bonds and 20% in each of the three equity asset classes will see its MER dip below 0.40%, which is as cheap as an index mutual fund portfolio has ever been in Canada.
Finally, there’s been another big change to the e-Series funds that has gone largely unnoticed—partly because TD has done absolutely nothing to publicize it.
The biggest knock against the e-Series funds has always been that they played hard to get: you could only buy them in a TD Mutual Funds account (which you can open at a bank branch) or through TD Direct Investing, the bank’s online brokerage. Investors using other brokerages could only purchase the Investor Series (I-Series) versions, which have much higher fees.
But no more: the e-Series funds can now be purchased through other online brokerages. I can’t confirm that they’re universally available, but BMO InvestorLine, Scotia iTRADE and RBC Direct Investing have added them to the lineup. (If you’re able to confirm availability at other brokerages, please share this in the comments section.)
A little background on the reasons for this change. If you bought the I-Series funds through an online brokerage other then TD Direct, a significant part of your fee was a “trailing commission” paid to the brokerage. Trailing commissions are designed to compensate advisors for their ongoing advice, and they are still the way most mutual fund advisors are paid. But discount brokerages, by definition, cannot offer financial advice, and investor advocates have been arguing for years that it was unethical for them to collect these fees.
After facing pressure to stop this practice, TD sent a notice to investors who held their I-Series index funds through discount brokerages and told them their units would be automatically switched to the e-Series versions. This represented a significant fee reduction for anyone holding these funds, even if the investors didn’t notice. Going forward, DIY investors will not be able to buy I-Series funds at all: only the e-Series versions will be available.
For those who still appreciate the benefits of index mutual funds over ETFs, the TD e-Series offering just got a little better.
@Tracy: Thanks for sharing the TD info. If you were committed to staying at TD (perhaps because you do all your banking there), then I likely would suggest opening TD Direct accounts and continuing to use the e-Series funds. However, if you already have Questrade accounts, it may be worth moving everything there. You can then build your portfolio with ETFs (ideally, using a single asset-allocation ETF, not TD’s ETFs). Questrade charges no commission for buying ETFs, and while you cannot set up automatic purchases, you can still make monthly contributions and then just make a few manual trades each year: https://canadiancouchpotato.com/2020/01/28/how-to-set-up-a-hands-off-etf-portfolio/
HI Dan, Yes I think that’s the way to go, migrating everything over to Questrade. My hesitancy on that is with regards to my kids RESPS which are currently at TD. I am still making contributions, but in both cases I am doing the slow migration to cash (13 and 16 year olds). With bond prices being what they are, I have been pulling out of the e-series and putting straight into a money market fund….which has zero return. I had intended to look at rolling this cash into GICs. Not to highjack this thread, but I see Questrade does offer GICs. Does anyone have any experience with buying GICs there?
@Tracy: My understanding is that Questrade offers GICs, but you need to place orders by phone rather than online.
Why would one choose to hold the e-series fund instead of the underlying index-tracking ETFs given the significant MER difference? If the e-series fund is just a wrapper for a single corresponding TD indef ETF, why not skip the middle man and simply hold that ETF instead?
I suspect it has something to do with convenience? Is it that it’s comission-free to buy units of e-series in a TD DI account, but that you incur the commission for purchases of units in that family of ETFs?
@Louca: Yes, you’ve hit on the main differences. There’s a list of pros and cons on my Model Portfolios page.
I opened TD e-series years ago in a non-registered fund and have accumulated near $500000 in TDB900 and TDB902. I’d like to move them to an ETF so there are lower fees going forward but to move that now will incur significant tax owing. In the meantime I’ve decided to deposit future savings in an ETF VEQT through QTrade. I am hoping to withdraw from the e-series gradually over time to reduce the taxes owed. I already have RRSP and TFSA in ETFs.
Am I understanding correctly that eventually, the TD e-series MF’s will have a single holding, the corresponding TD ETF? I just checked the fact sheet for TDB900 and under its holdings it currently has 33% of TD’s Can Equity ETF and the balance individual stock holdings. Will the percentage of the ETF increase as time goes on until it’s 100% or will it just be the largest holding, while maintaining individual stocks as well? Given TD’s Goal Assist has commission free ETF purchases, I’m trying to decide between that and going with e-series. The MF’s are more convenient, but the MER’s wouldn’t be worth it to me if it’s just an ETF wrapper.
@Pete: My understanding is that TD is moving toward using the ETF as the only underlying holding, but they would have to do this gradually to avoid distributing large capital gains to unitholders. That said, there is no meaningful difference to the end investor. Why do you feel it would be worth it use the e-Series funds if they held individual stocks but not if they were “just an ETF wrapper”?
Thanks for the reply! My main investments are in ETF’s (a la couch potato) and that’s what I contribute to regularly for my RRSP/TFSA. I was going to set up a separate account to save money for a nice car for when I retire in 10 years or so. I thought the e-series funds would be convenient for that because it’ll be smaller deposits (about $200 per month) and could use the full amount rather than buying ‘shares’ in ETF’s. I was just thinking if the e-series funds are identical to the underlying ETF’s that it isn’t logical for me to pay the additional MER of the MF’s. But as I type this, I see I’m probably over-thinking it. With such a small amount, and relatively short time-frame, the convenience/ease of the MF’s are probably still worth it. Would you agree? Cheers!
@Pete: I’d agree that the MFs are likely to be more convenient for this purpose.
I am probably late to this. I wanted to open td resp and convert to e series. But td says they stopped doing it. Is that right?
@Jennifer: Yes, it would likely to best to open your RESP at TD Direct (or another online brokerage) as this offers far more flexibility. You can still use e-Series mutual funds at TD Direct if you wish.
TD ETFs and a lot of funds are no longer available for TD retail customers. I might as well move everything to my financial advisor that handles my primary portfolio. As a retail client, you can no longer add to the ETFs without moving to a trading platform. You can sell what you have left in those ETF funds and Sector funds but everything else is pretty much decimated under the new regs of third party MFs. Totally opposite effect of SEC rules that were to provide Canadians more options.
I noticed that as of March 14, 2022, RBC Direct Investing will start charging a 1% commission for mutual fund purchases and switches. I have long used TD e-funds in my portfolio for small purchases and was quite happy when they allowed them to be purchased at other brokerages. However the 1% fee now makes their use problematic.
The justification for the change is the end of trailing commissions. Do you think that all the banks will follow this approach?
I can confirm Amir’s observation about RBC DI charging a 1% commission on mutual fund purchases and switches (no commission to sell [for now]) as of March 14, as RBC DI sent out notices/explainers today (https://www.rbcdirectinvesting.com/einserts/202112/DIREDEC2021.pdf) and it is also now on the pricing page of RBC DI (https://www.rbcdirectinvesting.com/pdf/commission-fees-March-14-2022-English.pdf).
I am sure that Amir’s suspicion is spot on that other banks will follow suit, or that at least TD DI will, given how similar RBC and TD have priced their fees, commissions, and rebates already at this time.
So, do mutual funds make sense anymore/have a future in the face of this new commission and the existence of one-fund ETFs such as VBAL? My quick and very indignant napkin calculations come up with a “Maybe” when holding more than one ETF and a “No” when holding a one-fund ETF solution? I just converted all my accounts to the e-Series over the last eighteen months and would hate to have to go back to the drawing board, but this development clearly changes the cost-benefit proposition and has to be accounted for in some way.
@Amir and Sebastian: Many thanks for letting me know about these developments, as it’s hard for me to keep with with changes at individual brokerages. Do you know if the 1% commission applies even to systematic purchase plans (i.e. automatic monthly contributions)?
Everyone will need to make their own decision, but once you start paying a 1% commission on purchases and switches, the benefits of index mutual funds vs. ETFs disappears very quickly.
@Canadian Couch Potato @Amir
I perused the RBC DI documents again and could not find any specific mention regarding systematic purchase plans for MFs. My assumption is that the 1% commission will apply to any purchase, regardless of how it is initiated.
I also did a quick scan of the major banks’ online brokerages and found that CIBC Investor’s Edge will be charging $6.95 per trade effective March 7, 2022. That is the same cost as purchasing stock or an ETF with CIBC IE. Perhaps a better bitter pill to swallow than RBC DI’s approach of the 1% commission. So the writing is definitely on the wall and it would appear it is just a matter of time until all banks will have followed suit with some version of fees for MF purchases.
RBC DI also noted changes to their MF offering effective March 7, so I wonder if there will be a cull of fund available for investors to purchase? I also wonder what changes may be in the works for investors who have investment accounts with MFs at the branch level of the major banks and what fees may be coming their way there.
A couple musings on this.
1. Would you expect that now that mutual funds are forbidden from paying trailer fees that we can see an equal or partial reduction in the MERs ?
2. Would you expect that the brokerages would not charge commissions on their in-house mutual funds e.g. TD Direct Investing wouldn’t charge for TD e-funds ?
I’m sure you’re waiting on Dan’s thoughts on this, but if you don’t mind I would give my thoughts on your musings.
1. I could see a partial reduction coming down the pipe. Perhaps spun as an offset for charging trading fees. On the other hand, my cynical side says no.
2. I had that thought too actually, as otherwise MFs become less competitive compared to some of the available ETFs. However, none of RBC DI’s info thus far indicates any distinction between RBC and non-RBC MFs. And CIBC IE didn’t indicate a distinction either, just $6.95 per trade. This would make some sense, because, as far as I am aware, there is no discount when trading in-house ETFs.
I signed in to my TD Mutual Funds account to contribute to my kids’ RESPs, and when I called TD to update my Investor Profile they told me I can no longer buy e-Series index funds online and I need to open a TD Waterhouse account. Is this true?
I already have a non-registered account at Questrade and am now considering moving all of my registered accounts (RESP, TFSA, RRSP) from TD e-Series to Vanguard ETFs at Questrade. Does this make sense given the new developments with TD e-Series? Is it simple to do and are there any tax consequences to consider? Thanks for any thoughts / guidance!
@Amir and Sebastian: I might be cynical, but I think it’s fair to say that the brokerage and mutual fund industries will not use the new regulations to offer better and less expensive options to their clients. I think the new rules (which may have been well-meaning) were designed to encourage fund companies to create new fund families for DIY investors, with no trailing commissions. But it was naïve to think that brokerages would embrace these, as there is no benefit to them. Recognizing they can no longer earn any revenue from mutual funds, they responded by introducing trading commissions.
@Rashmi: Yes, it seems that TD is phasing out the program that allowed investors to buy the e-Series funds directly, without having to open a brokerage account. If you’ll need to transfer your account to an online brokerage, it might be worth using this as an opportunity to switch to ETFs. I think you may find it is actually easier to manage a one-ETF portfolio than to manage a portfolio of four e-Series mutual funds.
Transferring your account should not be particularly difficult. You would just open an RESP at the new brokerage, and then complete their transfer form, which they will send to TD to initiate the transfer. You would likely need to transfer the funds in cash, i.e. TD would sell the mutual funds first and then transfer the proceeds in cash.
I detail this process in my book, which you may find helpful.
@Canadian Couch Potato
Thanks so much. Is it the same for RRSPs (personal and spousal) and TFSAs?
What is the name of your book? Would love to check it out!
Hi Dan and DIYs:
One of the benefit of the TD E-Series mutual funds is that I am able to automate the purchases every two weeks and Dollar Cost Average over the year. This is the most important benefit for me is that it takes human error and emotion out of the purchases. I tend to forget, put things off, over think things, and end up not making the the purchases and screwing things up. I can set it and forget it as they say. The biggest risk I find is me!
I read that the RBC Automatic Investment Plan (AIP), which I use to buy my mutual funds, will no longer be available. I assume that this will no longer be available at the other discount brokers? I just wonder want my options would be to stay automated, I realize the ETF’s must be manually purchased.
I considered going with one of the robotic-advisor, but I don’t necessary like the make up of their portfolios.
Any advice would be appreciated. Thank you.
Rashmi: Yes, the transfer process is very similar for all account types.
The book is called Reboot Your Portfolio.
@YVR Geoff: This is my suggestion for an ETF alternative to the TD e-Series funds and roboadvisors:
Here is a bit of an update on the MF purchase fees some brokerages will be charging in the near future. This is from a G&M article from Jan. 10, 2022 (you do need to be a subscriber or be just tech savvy enough to get around the subscriber/pay wall).
For the precis:
CIBC Investor’s Edge: $6.95/trade as mentioned previously (starting March 7).
RBC Direct Investing: 1% of the gross trade amount, up to a maximum of $50. No charge for selling (starting March 14).
TD Direct Investing: no charges for MF’s even after June 1.
Scotia iTrade: Declined comment for the article.
National Bank Direct Brokerage: “Further details to come in coming months.”
BMO InvestorLine: “…still evaluating whether there will be any changes to BMO InvestorLine’s fee structure”
Questrade: Currently refunds trailing commissions on MFs that charge them, for a $29.95 fee. This program will run until June.
***”RBC spokesperson Kathy Bevan said in an e-mail that as part of the bank’s move to align with the CSA’s coming changes, it will also stop selling any mutual funds that pay trailing commissions as of March 7.”***
So there you have it for the moment. One of my guesses is that Scotia, National Bank, and BMO will wait and see how RBC and CIBC fare in terms of backlash or investors leaving before deciding on a course of action.
If TD DI actually holds true to its statement from the article and makes no change to its MF purchase/switch/sell fee structure, it may be worth migrating over there. Though I would dread the bloody paperwork involved and that fact that I’ve been generally satisfied with RBC DI’s offering thus far for what I needed.
Possibly a little off topic, but related to the e-series mutual funds… when I get my T3s, it lists the foreign income and taxes paid. When I file my taxes, I’m supposed to enter the country of origin. For the US Index fund I enter USA, but for the International Index fund… any thoughts?
Or is this just one of those things that some tax software requires but CRA actually doesn’t care about? As I think it would be nearly impossible to do correctly in that case since international consists of many countries.
@Scott: My understanding is that you can simply put “Other” for the country of origin. As you note, there’s no practical way of providing a country-by-country breakdown for a global equity fund, and CRA probably doesn’t care about the details as long as they receive all the tax they’re due.