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.
This is great news – now I don’t need to open a TD account of any sort to benefit from the Canadian fund, when our RRSPs and TFSAs max out with ETF holdings. I want something simpler for the non-sheltered account (re: ACB/taxes, etc.)
Since ETF wrapper mutual funds are going full-steam ahead now that eSeries is converting, I wonder if Vanguard will package up some ETFs in a mutual fund structure as well. HSBC launched a family of Wealth Compass funds that offer a very similar service to Vanguard’s all-in-one funds and while they’re still pretty expensive (~0.75 Management fee), they look quite convenient for investors looking to invest in a single fund with all the advantages of mutual funds.
Too bad the fees for their managed balanced funds are so expensive. These could be a competitor to balanced etfs.
Just to clarify, i am referring to their managed e series funds which are a fund of eseries funds.
Why has nobody thought about wrapping an asset allocation etf like XGRO or VGRO inside a fund yet ?
I would buy that
It use to be you could buy the e series in small increments (lets say a few hundred dollars every month and there was no $ 10.00 trading fee. It was free. Will this still be the case??
@Luc: Vanguard and iShares (and most other large ETF providers) are not much interested in bringing out low-cost balanced mutual funds for DIY investors, as there is very little profit to be made from them. ETFs are a growth industry, while mutual funds are not.
@danny: Yes, the TD e-Series are still mutual funds: they are not being converted to ETFs. So all of the usual mutual funds conventions will continue to apply.
Will I be able to do pre authorized purchase plans with the ETF index funds? Will there be a fee when purchasing them?
Thank you
Hi Dan,
Thanks for the update! I just transferred my investments from Tangerine into my TD direct investing account last week.
In my TFSA, I currently have around $28,000 in XGRO and $2600 in TD E Series and in my RRSP, I have $35,000 in XGRO and $3300 in TD E series.
I plan to do the hybrid approach where I purchase e-series every month, sell them once or twice a year, and use the lumpsum cash to buy XGRO.
Once I max out my contribution room for both my RRSP and TFSA accounts, would you recommend this hybrid approach for my regular taxable account as well or should I just keep XGRO in there and make lump-sum purchases a few times a year?
I would prefer to keep it simple. Plus I heard that we would be taxed for selling our mutual funds in a regular taxable account?
@John The TD ETFs have been around since 2016 and all the information about them is on the TD website: https://www.td.com/ca/en/asset-management/funds/solutions/etfs/ I don’t believe there is any systematic contribution plan in place for TD ETFs. They’ll cost what TD DI currently charges for ETF purchases, which is $9.99.
@Kris W: I don’t recommend this kind of hybrid approach in a taxable account: as you note, every sale in a taxable account triggers a capital gain or loss that must be tracked and reported. It’s not worth it to save the off $10 commission, in my opinion.
@John and Ian: The key point here is that the e-Series funds are not converting to ETFs. They are still mutual funds, with all of the same characteristics they have always had, i.e. no commissions to buy or sell, ability to set up preauthorized contributions. You will not notice any changes in this respect. The funds will simply use the ETFs as their underlying holdings, instead of holding the stocks and bonds directly.
Thanks for the reply, Dan!
I’m assuming since I plan to sell my e series shares once or twice a year to purchase XGRO in my RRSP and TFSA accounts, there’s no need to rebalance the e series funds, correct?
Also, can you elaborate on what you mean by “they will become a mutual fund “wrapper” for the ETFs”?
My understanding is that they are still four separate index funds. It would have been perfect if TD offered one low-cost balanced mutual fund similar to Tangerine.
@Kris W: It probably is not necessary to rebalance your e-Series funds if the majority of your portfolio will be in XGRO.
When I say “wrapper” I just mean that each new e-Series mutual fund will have just one underlying holding: the corresponding ETF. It’s a bit like having the option of buying an object (the ETF) directly, or buying a box (a mutual fund) that holds the object.
You’re correct, there is still going to be separate e-Series funds for each asset class. TD actually does have a family of balanced funds that use their index ETFs as their components. They are cheaper than Tangerine, but they’re quite a bit more costly than buying the individual components:
https://www.td.com/ca/en/asset-management/funds/solutions/mutual-funds/FundCard/?fundId=6944
Hello Dan,
Can you please explain the large difference in performance YTD with TTP and XIC? I am a bit concerned with if I stick with the e-series moving forward. Thanks in advance
@Azul: The difference seems to be due to some variations in the benchmark indexes, which use different criteria for screening and weighting stocks. Normally these differences are trivial, but sometimes they can have a material effect over short periods: for example, TTP does not hold Shopify, which has happened to be one of the better performers recently. We have seen similar differences between VCN and XIC as well for these reasons.
Over longer periods, these differences generally even out:
https://canadiancouchpotato.com/2013/06/24/is-one-index-really-better-than-another/
QTrade now offers TD e-series mutual funds; at least the three I was interested in: TDB900 (Canadian), .TDB902 (US), and TDB911 (Int’l).
Hi Dan,
So for someone that typically buys once per year in an TFSA is there any reason not to ditch the e-series funds and just buy the etf direct? Seems like it will be lower fees even with the 9.99 trade price factored in.
Any idea if the eSeries will pay compensation to discount brokerages like Qtrade/iTrade that provide free mutual fund trading? At TD, it was a vertical integration play, but I’m curious how this model is sustainable in the longterm for other brokerages.
@Ian: Generally mutual funds pay a small trailing commission to discount brokerages, and this is included in the MER. The issue in the past has been that this commission was often as much as 1%, the same as was paid to advisors providing full service, which clearly makes no sense.
A few mutual fund companies do not pay any trailing commissions to brokerages (such as Steadyhand and Mawer), and as a result, some brokerages chose not to include these fund companies in their offerings. So far this does not seem to be the case with e-Series funds.
Thanks for the update!
If you buy the TD funds through TD direct investing there aren’t any fees over a small minimum (I think $25). TD’s e-series are my top choice for reliable low cost easy to use investments
What would you suggest for using the Couch Potato strategy in a taxable account? My current approach in my registered accounts has been to buy amounts of the e-Series funds when I make deposits (usually biweekly with my pay periods) and then once a year, selling those off to buy the corresponding ETFs to achieve the right asset allocation. Do the capital gains implications with this method in a taxable account outweigh the cost of sales commissions, up to $780 (3 transactions each 26 pay period)? Am I better off keeping the money in cash and buy the ETFs less frequently, ie quarterly or semi-annually?
@Peter: I definitely would not plan on buying and selling e-Series funds in a taxable account: as you note, this would bring tax consequences and a lot of unnecessary bookkeeping. The fact is, ETFs are just not well-suited for small regular contributions. e-Series funds are, and it is probably worth accepting the slightly higher MER to use these in a taxable account. If the amounts are too small to make $10 trading commissions inefficient, then they are probably also too small to sweat about an extra 0.15% or so in MER. (Remember, that works out to barely $1 a month on every $10,000 in assets.)
hi guys, just an update. in order to add td e-series funds in itrade. the minimum purchase price is 1000 cad plus a minimum of 100 cad subsequently. if you do it through td di. its 100 +25. also, something interesting, itrade, in its fee structure says that there is a 50 cad per quarter charge for non scotia distributed mutual funds. will it apply in case of holding td e-series inside itrade tfsa?
I am using CIBC Investor’s Edge and was able to buy 3 of the 4 TD e-series mutual funds. The only one that doesn’t seem to be available is TDB900 (not sure why). So, I found an RBC Canadian index that is similar (RBF556). It has a slightly higher MER at 0.66. You have to purchase them at $100 a pop if you want to do a regular investment plan.
Actually, just went back on and found TDB900 is listed on CIBC now.
This was sort of asked above but not answered. What is the advantage of buying the e-funds rather than the underlying etfs directly if you are not making frequent contributions?
@Khaleesi: https://canadiancouchpotato.com/2013/02/19/why-index-mutual-funds-still-have-a-place/
Hi Dan – I have held RBF556 (Canadian), RBF557 (US) and RBF559 (International) in equal weights in my RBC Direct Investing RESP for the last few years. Should I be offloading these and switching into TDB900, TDB902 and TDB911 respectively? Is it worth the effort?
@Jeff: It’s really not much effort and probably worth it unless the account is very small or very close to being used for withdrawals.
Would you comment on why the TDB price plummeted at the end of 2018? This price drop now causes the yield of this ETF to appear a lot larger than its counterparts. What’s going on here? Could you shed some light? Thank you.
@Matt: Which specific fund are you referring to? The markets declined sharply in late 2018, so index funds generally fell accordingly.
Thank you for coming back to me so promptly. I am referring to TDB TD Canadian Aggregate Bond Index ETF. If you compare that to, say, BMO’s ZAG ETF, you will notice a sharp decline in TDB’s price, but not in ZAG’s. Please compare the two over three years, one year and year-to-date, and you will see, which seems to me, a strange anomaly in TDB’s price and as a result an increase in its yield. Any explanation is greatly appreciated. Thank you.
@Matt: These funds have performed as expected. If you send me the data you’re looking at, I might be able to figure out the source of the confusion.
On Dec 27, 2018 TDB and ZAG closed at $14.43 and $15.27 respectively. On Dec 28, 2018 TDB closed at $14.23 while ZAG kept its value. It is difficult to explain it through this interface, and I don’t want to take too much of your time with this. But it seems whatever happened that day changes how TDB compares to other funds in terms of its returns as well as its yield while all these funds follow similar indices (TDB yields now around 3.51% while ZAG around 2.97%). Their returns go hand-in-hand until Dec 27, 2018 and then they are off-set because of this price drop. I simply used Morningstar and similar platforms to compare these. If you do a return comparison since Dec 28, 2018 excluding the price drop from Dec 27 to Dec 28, you will notice that their returns still go hand-in-hand, as long as you exclude what happens form Dec. 27 to Dec. 28. So, was there anything special that day that caused this? I will leave it here. Thank you very much for your time and your website. Kind regards.
@Matt: Thanks for clarifying. These are all good questions.
The first point to clarify is that the stated yield on a bond fund can be very misleading. Yields can be measured in different ways: it is always some version of “distribution/price,” but mutual funds tend to make one annual distribution, while bond ETFs make monthly distributions, so there can be distortions. The bottom line is that you can’t make a useful comparison of yields from bond funds from different providers.
Another factor is the amount of premium bonds in the fund. Some funds hold a lot of bonds that trade at a premium, which means their coupon rates (interest payments) are higher than prevailing rates. In the short term, a fund with lots of premium bonds will have a higher yield. But these will be offset by capital losses when the bonds mature, so it all comes out in the wash when you measure the total return of the fund. (That’s why a much more useful measure is “yield to maturity,” which factors in both interest payments and expect price changes.)
Finally, mutual funds see their NAV (price) drop after they make a distribution. If they make only one distribution annually (as many mutual funds do), this price drop can be significant. This is true of ETFs, too, but if they make 12 monthly distributions each year it’s more gradual.
Bottom line, although this is confusing, I don’t think there is anything to be concerned about if you hold either of these funds. Their total returns over the last 12 months ending October 31 (which of course includes the end of 2018) suggests they line up as expected. For TDB909, the one-year return was 9.57% and two-year return was 4.10%. For ZAG the figures were 9.55% and 4.38%.
Hello,
For someone who hasn’t started with TD e-series investing yet, how do these changes affect the starting process? Will I be purchasing the new e-series funds instead of the old ones or can I still purchase them under their old names? Will you be posting an updated model portfolio based on these new changes? I hope my questions aren’t too confusing, I just don’t want to purchase the wrong funds. Thank you.
@Hen: You will not experience any changes in your experience with these funds: they still have the same names and the same fund codes. The differences are all “under the hood” and will be invisible to most investors. So the model portfolios remain unchanged.
Hi Dan, Thanks for this article–very helpful. The International and the US e-series funds are now large/mid cap and large cap, respectively. No small cap in either fund any more. Do you feel that in order to fully diversify, holders of these funds should now consider investing in a small- cap international index fund and a small/mid cap US index fund? Or do you feel that these two e-series funds are still well enough diversified that we don’t need to worry about adding small caps back into our portfolios? Thank you.
@Fiona: None of the original indexes included small-cap stocks, so nothing significant has changed here. While I do like total-market indexes (which include large, mid and small cap) when they are available, you’re not missing out on much by using these large and mid indexes. In any case, there are no index mutual fund options for small caps, so it’s something of a moot point anyway.
What exactly does Solactive do?
Dr Mike: An index provider is responsible for creating the methodology for determining which stocks and bonds are included in the index (and therefore any fund tracking that index), the weight of each security, the frequency for rebalancing, and for calculating and reporting performance. These blogs may shed some light on the process of building an index tracked by an ETF:
https://canadiancouchpotato.com/2012/10/15/barry-gordon-on-building-an-index/
https://canadiancouchpotato.com/2012/10/18/barry-gordon-on-building-an-index-part-2/
I’m sorry, doesnt S & P decide what is in the S & P 500
Trying to find TBD900 on CIBC Investors Edge….. not showing up. All the other TD e-series are there, but not the Canadian Equity.
Anyone know about this? Up above there was a comment that this didn’t show up for someone else, but then it showed up.
Anyone on CIBC Investor’s Edge here?
Hi Dan,
I would like to hear your recommendation for these 2 situations:
Background:
I’m using TD Direct Investing and a hybrid model which was mentioned above. I’m piling my monthly savings in my TFSA TD e-series and once I get to a threshold, sell and buy 2 ETF’s.
–Situation A TFSA is not maxed up
In this case how much should be cost trade/invested amount. I was reading somewhere that the cost trade should be around 0.1% from the amount invested.
–Situation B TFSA is maxed up
In this case, once the TFSA room gets renewed in the new year and the individual has enough cas=TFSA room, I guess the lump sump can be invested directly in ETF as there will not be any other contributions during the year – except ETF dividend distribution which can be reinvested in e-series.
Thanks
@Ale: From what you have described, the e-Series funds are likely to be the best choice, without switching to ETFs when you have saved a certain amount. Any savings you get from the lower MER (which is small to begin with) is likely to get eaten up by trading commissions.
I just want to comment saying Canadian Couch Potato you are amazing. The fact you are replying to comments after this article is 5 months old makes you a great person!
I have my kids RESPs with TD and am using the eSeries portfolio. Now that the balance has exceeded $15,000, I’m looking at moving them over to Qtrade and buying all market funds (XGRO as they aged 2 and 1) and setting up a systematic investment plan. I use this in my TFSA and although it’s a little annoying to set up initially, the nice thing is you don’t have to manually rebalance, a low MER, and no fees for purchasing units. Do you think it’s worth it to do the same with my RESP, or is the benefit lost due to the bid/ask spread or anything else I haven’t considered?
Thanks!
@David: RESPs rarely get very large because of the contribution limits, and they are medium-term investments, so the cost benefit of ETFs versus e-Series funds is minimal. Assuming a 0.20% difference in fees, it’s $30 annually on a $15,000 account. I think you will agree that’s not worth the hassle (and cost) of switching brokerages.
I’ve just found out that TD Mutual funds no longer support the e-series as of January 2020. They can only be purchased through TD Direct Investing. I called to move my index funds back over to the mutual fund side of the business because of the restrictions my new employer has on self-directed brokerage accounts and discovered this new piece of information. Thought it might be useful.