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:
ETF | Ticker | MER |
---|---|---|
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.
Tax consequences
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.
Lower fees
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.
Wider availability
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.
Are the mutual funds going to hold ETFs, or directly hold stocks and bonds? I got confused when you were talking about tax implications, and mentioned there’d be relatively little turnover to shift to the new indices. Wouldn’t a shift to a “wrapper” model necessitate a total sell-off of all directly held securities?
Didn’t know the bmo investor line now offer the e-series. So in theory I can transfer all my td e-series holding over to bmo so I have all my investment in one area? To take advantage of those transfer promotions.
Very informative. We wondered what was going on. You’ve answered our questions. Thank you. One question: You say “You probably shouldn’t be holding a bond index fund in your non-registered account to begin with.” Why not? Correspondence or a new column please.
I just checked on Questrade (which is the online brokerage I use), and the four ETFs (TDB, TTP, TPU, TPE) are available there.
Any idea why iShares and Vanguard don’t offer a low-cost mutual fund wrapper for their ETFs like this?
Can you buy from CIBC Investors Edge? Is there a trading charge when purchasing?
Thanks for the update – much appreciated. If the new versions of the e-Series are each just holding one ETF and that suite of ETFs is available on the stock market, wouldn’t it make sense for investors to directly hold the ETFs in their portfolio instead? Is the main difference with the e-Series index funds that they still act like mutual funds and thus have no trading fees and have minimum holding periods? Are there any other differences between the e-Series and the ETFs they will consist of? Thanks.
I second Brendan’s comment – are the funds going to hold actual stocks and bonds and just use the ETF’s as their benchmarks? Or will the ETF’s be there new underlying holdings?
Thanks as always!
Thanks a lot for putting this together. I was wondering what the changes mean when I got my notices.
Thank you for the great article. Does this mean that in the case I move my portfolio from TD to BMO my TD index funds can be transferred in kind now?
If the e-series funds are just going to hold the underlying ETFs why wouldn’t I just buy those ETFs with (much lower) MERs over buying the e-series funds. Are there advantages of holding a mutual fund over an ETF? Or one one better in a registered and one better in a non-registered account?
Too Bad no emerging market index.
That index has outperformed the USA since its inception, poor decision not to include with its mutual fund line.
Hi Dan, you mention that bonds ideally shouldn’t be held in a non-registered account, and I understand why (interest is 100% taxable like income), but your model portfolios suggest the opposite. Do you have any advice on where and how to effectively allocate bonds instead?
“(You probably shouldn’t be holding a bond index fund in your non-registered account to begin with.)”
Triggered!
As for the e-series availability at other brokerages, I’ve been able to find them at CIBC Investor’s Edge, but not at Questrade (which is fine, as Questrade charges a commission to buy mutual funds but not ETFs). For CIBC, the search seems to be a bit wonky — if you know the symbols (e.g. TDB900) they all come up, but if you search for “TD Canadian Index” you’ll get the Bond e-series fund (among others) but no the Canadian Equity e-series fund. Even just “TD Index” will bring up the other 3 (and many other funds), but not the Canadian equity index fund — you’ll just have to know the symbol.
Qtrade does not seem to have the e-series mutual funds e.g. TDB900.
@Andrew et al: Regarding bonds in a non-registered account. This is a can of worms, but in general:
– The model portfolios, by definition, are designed to be starting place for people who need help building a diversified portfolio and are overwhelmed with product choice. They are not optimized for tax-efficiency and they are not specific to account type, though I assume most investors following the models have not yet maxed out their RRSPs and TFSAs.
– If you have an RRSP, TFSA and a non-registered account, it often makes sense to hold the bonds in the RRSP and just hold equities in the non-registered. This is not always the case, to be sure, but if you hold fixed income in a taxable account it should not be via a traditional bond index fund or ETF, as these are products are quite tax-inefficient:
https://canadiancouchpotato.com/2013/03/06/why-gics-beat-bond-etfs-in-taxable-accounts/
To recap, the point is not that you should never hold fixed income in a taxable account. The point is that if you hold fixed income in a taxable account, you probably should not use a traditional bond fund or ETF. A tax-efficient fund like ZDB is a better choice, as are GICs (if you don;t need liquidity).
@Brendan, Matt R et al: I did not want to include a long and complex explanation of why the e-Series funds will not have to liquidate their whole portfolios, but since this is probably something others will ask, I have updated the post to include this.
@Jimmy and Germack: In theory, if the receiving brokerage (BMO, in this case) can hold the e-Series funds, then an in-kind transfer should be possible. But I cannot confirm this. It would be worth calling TD, or BMO, or finding another reader who has done this successfully.
@Tanya: This simply comes down to the decision of whether you want to use mutual funds for their significant advantages: no trading commissions, the don’t require trading on an exchange, more user-friendly, eligibility for systematic savings plans, and so on.
I bought TD Canadian Bond Index e Series (TDB 909) and TD US Index Funds e series (TDB902) in my TFSA held with CIBC Investor edge. CIBC Investor Edge allows to buy other TD e series funds.
I already voted online against the changes since they mostly benefit TD and not the unit-holders. A 0.05% reduction in fee is not enough. I would have been happy if they had added a sentence in there that they could reduce fees further after they are transitioned to holding the ETFs, but they didn’t.
Thank you so much for posting this, Dan.
I just wanted to make a recommendation: could you design articles like this so they are more printer-friendly.
I can send you an example if you’d prefer.
Thanks for the timely post. So now my question is on how to vote. We are supposed to appoint “Bruce cooper or, failing him, Jason Calvert”… Does this part matter?
Is the MER difference between the bare ETFs and the funds wrappers justified in your opinion ? Are the funds user-friendly advantages worth around 0.3% more ?
@Luc: For some investors, yes:
https://canadiancouchpotato.com/2013/02/19/why-index-mutual-funds-still-have-a-place/
Until TD offers commission free transactions on their ETFs, I’ll stick with the e-Series, thanks very much. Although for the most part, I have always been a satisfied client of Slaughterhouse, with seven figures, there is one thing that has always stuck in my craw. Their American division, TDAmeritrade, offers commission free ETF transactions. I’ve tried for years to get an answer to why this courtesy isn’t extended to their Canadian clients. Still waiting.
And why they are doing it. To save this new td etf line. Three years on market and for example net assets for US or international (TPE / TPU) around 30 mil. Not impressive. After e-series funds packaging and exchanging it to etf units those etf become more competitive with other providers (higher trade volume, no threat that it will be closed due to low net assets)
Sorry for the Noobie question but if I am trying to purchase, say TDB900, and I get a message “The fund you are attempting to buy is closed to new purchases” – what does this mean? Have they shut their doors all of a sudden or is this specific to my brokerage?
@SM: The e-Series funds are not closed to new investors, so I’m not sure what’s going on here. It might be worth a call to your brokerage.
Thanks for the response Dan! You’re the man, love your work.
I was very confused when I got the Notices, and was really hoping you’d have an article on it. Very happy to find you did, thanks for the great explanation!
Er… sorry off topic. I just read your Moneysense article on moving to US. What about the reverse? I lived in US for a year and established a Roth IRA (contains Vanguard SP 500 index) but left 20 years ago to return to Canada. Other than WBEN form every few years I have thought and done nothing about it. Should I repatriate it somehow? Transfer to RRSP maybe? Is that allowed? Sell? Thanks.
Thank you for posting this, greatly appreciated :)
Thanks Dan! Glad to finally see confirmation of availability at other discount brokerages. You will have to update your Model Portfolio landing page to reflect this new information. Might also need a new blog post comparing the various discount brokerages and their respective minimum requirements to avoid account fees.
Good to see the drop in the MER but to be honest I was hoping for more. I wonder if at some point Vanguard or another provider will come into the Canadian market with Index mutual funds for MERs of 5 to 25 basis points
Thanks dan! Glad to see this post. TD should hire you to write their product info as the package they sent went blah blah blah. Very clear description.
I’ve been holding these funds since 2011, us and int in non registered. I have large capital gains. Haven’t added to them in 5 or 6 years. I don’t sell them and replace with etfs because of the tax liability. Any chance these might be switched to the etf version without causing a disposition?
Oh the irony, ha. That a big bank would take a look at cutting fees marginally on products that are already ‘low’. What about taking the knife to the active funds with 2%, 2.5% MERs or more?
They will have to soon enough. ETFs are outselling high fee funds and the trend is likely to accelerate.
Thanks for the great post on TD e-series.
Dale
Thanks, Dan! The notices in the mail sparked some panic, documentation said very little, and even researching online seemed to only confuse things further. I used to get the occasional call from TD and the person would say, “We see you’ve done really well with our index funds over the years and were wondering if you’ve like to come in to talk to a representative about some of other (actively managed) mutual funds”. Nope! While they seem to have knocked that nonsense off lately, my general distrust of banks still lingers. There’s a whole lot of “money managers” out there who’d love to get in and tinker with our index funds.
Thanks again for this–very well researched!
Thank you for the article and the comments everyone. Very helpful indeed.
Hi Dan,
Would you agree that one advantage of holding the TD index funds (new or old structure) vs ETF’s directly in a taxable account is that we would not have to worry about calculating our acb vs when we buy ETF’s directly and have to look at non-cash distributions and return of capital affecting our ACB? Would TD or any other brokerage offering these TD index funds reliably calculate capital gains for us when we sell any units?
Thanks
I just checked with my BMO InverstorLine account, and they are offering TD products.
I picked TD Canadian Equity Index ETF, symbol:TTP, and it was there, ready to be bought!
That’s good news.
Now, how would they compare with low MER products offered by Vanguard (VBAL, etc.) or BMO?
In what situation would I switched to those TD products?
Are there any advantages (or disadvantages) to a fund holding ETFs versus a fund holding stocks? Seems to me that there will be an additional layer of fees to hold ETFs. The 0.05% reduction in fees doesn’t quite cover the difference, assuming all else is equal.
Agree with Charles. I also voted ‘no’ to this. I like my e-series just the way they are. I went through the documentation more than once and got the sense they are not telling us the whole picture. So don’t feel comfortable with their explanation.
Regarding bonds in a non-registered account, I have used the 4 major couch potato TD e-series index funds in my TFSA, my daughter’s RESP and also in my professional corporation. Should I not be using a bond index fund in my professional corporation?
@Steph: Traditional bond index funds are quite tax-inefficient in a corporate account, which is similar to a personal non-registered account owned by someone in the highest tax-bracket. Again, this doesn’t mean you should not hold fixed income there. It just means there are more tax-efficient options, such as specialized ETFs that hold bonds trading at a discount rather than at a premium (including ZDB and BXF) and/or GICs if liquidity is not an issue.
@DL: There is no additional layer of fees when a mutual fund holds an underlying ETF. The fees on the ETFs will be rebated and investors in the e-Series funds will pay only the published management fee. So under the new structure, investors will pay less, not more.
@Jackie: Just to clarify, it is the e-Series mutual funds (not ETFs) that have only recently become available through brokerages other than TD Direct. All ETFs have always been available through all brokerages.
There is noting specifically wrong with the TD lineup of index ETFs, which are similar to those offered by Vanguard, iShares and BMO. But neither is their any compelling reason to use TD’s products instead of the much lager and more well-established ETFs.
Great article! I received a bunch of letters in the mail from TD about changes being made and the proxy votes. They didn’t make it that clear or obvious what the changes or implications would be, so great to see your summary above. I am happy to see that TD is making the e-series more competitive. I think I generally prefer the index ETFs at this point in time, due to to their significantly lower MER. However, you can’t beat the e-series when you have a few spare 100s of dollars kicking around that you just can’t wait to invest. :) What are your thoughts on that? Do you put most of your $ in the lower cost ETFs (VTI, VCN, etc) these days, or do you still buy the e-series?
Cheers,
Mr Fundamental
From circular regarding TD U.S. Index Fund: “allow a change to be made to the investment strategies of TD U.S. Index Fund that would permit TD U.S. Index Fund to invest up to 100% of its assets directly in TD U.S. Equity Index ETF to achieve its investment exposure.”
So if TD U.S. Index Fund will invest 100% of assets to TD U.S. Equity Index ETF what are the advantage of owning TD U.S. Index Fund instead of investing directly TD U.S. Equity Index ETF other than no fee on trading? For that we will be paying 0.30% fee vs 0.11% for TD U.S. Equity Index ETF, seems high….
@Dima: This is the same as the general question, “Why would I use mutual funds instead of ETFs?” There are many reasons one might prefer the former:
https://canadiancouchpotato.com/2013/02/19/why-index-mutual-funds-still-have-a-place/