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.
@Leila Anne
Hmm… As of today, I keep buying TD Mutual Funds e-series same as before – both manual orders and pre-authorised. The process has never interrupted or changed.
Also from this TD Mutual Funds page you can click “Filter Funds”, then select “e-Series” and click Go. It shows that all e-series are still available, as they’ve always have been. For example,
https://www.td.com/ca/en/asset-management/funds/solutions/mutual-funds/FundCard/TD%20Canadian%20Index%20Fund%20-%20e/?fundId=3261
https://www.td.com/ca/en/asset-management/funds/solutions/mutual-funds/FundCard/TD%20U.S.%20Index%20Fund%20-%20e?fundId=3270
Hi everyone,
@Leila Anne is totally 100% correct with the fact that TD E-Series Mutual Funds have are now being housed under TD Direct Investing. I can confirm that this week I went into a branch to open TD mutual fund account to buy E-Series funds and the rep told me that they recently changed their process and it will now only be available through TD Direct Investing.
I thought this was unusual because I thought DI was only for buying ETFs, stocks etc, but I was informed this is the way it is, but there is no trading cost to buy the fund in a DI account (have not confirmed this yet).
Anyways, I found this all unusual so I went to another branch and talked to an advisor and she confirmed this information and I asked what will happen to people that have E-Series in their mutual fund account as from the old business rules. She said she doesn’t know what TD is going to do about people holding E-Series in existing mutual fund accounts right now….
Side Question:
Does anyone know if you can buy TD ETFs (TBD, TPU etc) in a DI account without a commission or trading fee? Just wondering, since its a TD ETF if the trading fee is free :)
Thanks
@Bryan: Many thanks for sharing your experience with TD.
You cannot, unfortunately, buy TD ETFs commission-free at TD Direct Investing. But you can purchase the e-Series funds there with no commissions. This is the reason I have always suggested that people use TD Direct Investing to buy the e-Series funds, rather than just opening a TD Mutual Funds account at the branch. A brokerage account allows you to hold mutual funds, ETFs, GICs and high-interest savings products in the same place, so it is much more flexible.
I am confused with the fee comparisons of your 2 E series tables. The MERs of the two don’t match. I understand the table about the current fee and the new fee, but what about the other table (the one with the fund) codes ?.
@Catherine: See the paragraph above the last table in the post: “Note this table includes only the fund’s management fee. The full MER, which includes taxes, will be higher.” The first table in the post (with the fund codes) lists the old MERs.
Looks like TD has stopped option to open a e-series accounts via Mutual funds. e-series account can only be opened via TD-direct investing. As per the customer rep, this is a new change introduced from 21st Jan, 2020.
I bank at TD so purchase is no problem. One thing, do not expect everybody working there to be familiar with their funds or TFSAs, or RESPs. One thing I like about Indexing is that it reduces stress. No longer do I cringe when I hear that the market is having a bad day or bad week, I look at the 5 year chart and remain calm.
The comment Kamal made is true. My boyfriend tried opening up an e-series RRSP and they denied the application since they have stopped offering new e-series accounts. He was told that they now have i-series which is apparently similar. The only thing is, I looks at the MER’s of the i-series counterparts of the e-series and they are pretty much double the cost!
Any other alternatives aside from having to use ETF’s?
@kq: You can still be the e-Series funds, but you need open an online brokerage account. This is really no more difficult than opening a TD Mutual Funds account, so it should not be a barrier to using the e-Series funds.
Thanks for the amazing content Dan.
Couple of questions:
1. Are the e-Series MERs going to be the same regardless of brokerage, in this case RBC Direct Investing?
2. Can I setup automated purchases of these funds through RBC? Any past content/instructions you have on that would be awesome.
@Avi: The MERs on mutual funds are the same no matter what brokerage you use.
To make regular contributions to the e-Series funds, set up an Automatic Investment Plan at RBC Direct:
https://www.rbcdirectinvesting.com/pdf/aip_swp.pdf
So they will still sell as a MF, that is orders made before 3pm (Ithink its 3pm) filled affter the days trading and the actual purchase in the middle of the night.
Hey there, I’m just wondering why the prices on the funds didn’t change from yesterday to today, when, judging by the bounce yesterday, the equity funds at least should have gone up. The prices in my brokerage account are still from Feb 28. Thanks in advance for any guidance.
Really good article, thank you so much. I had a quick question for you if you don’t mind. I was wondering how the introduction of index-tracking ETFs at TD changed your couch potato investment strategy w/ tdb900 901 909 and 911. Regarding that strat, would you recommend keeping what you had already invested in the e-series funds and make the switch to the new, lower-fee ETF funds for your new buy orders (from now on)? I’m kind of unsure as to how to integrate these new funds I did not know about into my RSP investment strategy.
Thanks in advance and thank you so much for all the amazing content over the years! It has always been super on point and helpful.
Cheers from Québec
@CC: Thanks for the comment. The launch of the TD ETFs changed nothing: they offered nothing new that wasn’t already available from iShares, Vanguard and BMO. Investors still need to make a decision between mutual funds and ETFs, and this depends on practical concerns rather than investment strategy. That is, do you pay commissions to buy ETFs, are you comfortable trading on the exchange, do you want to set up automatic monthly contributions, and so on.
Thank you so much for this site and for being available to answer questions!
I am a super duper newbie so please excuse the ignorance of my question. I am investing $4000 initially and then want to add about $200/mth.
I just opened a Questrade account and wanted to follow your advice about the TD-e Series and purchasing the 4 different funds (Bond, CDN, US and INTL). However I was told it would be $9.95 for each one (costing me $40) plus additional fees when wanting to rebalance.
Is this the best strategy for someone like me? And is there a more cost effective way of purchasing the e-series without paying $40 every time I want to rebalance? Or would you recommend something else now (eg. Purchasing an index fund ETF like TPU from TD instead which incurs no cost to buy)?
@Niki: Questrade is unique in that they charge commissions for mutual funds, but not for ETFs. Every other brokerage does the opposite. So if you are already at Questrade you may want to consider just using a one-fund ETF portfolio, which would require no rebalancing and would allow you to avoid commissions:
https://canadiancouchpotato.com/2020/01/28/how-to-set-up-a-hands-off-etf-portfolio/
Just a question, if I put a sell order in for a mutual fund, is the price calculated on the time they are sold , so the price could be higher or lower?
@Marcel: With mutual funds, the price you receive (or pay) is calculated at the end of the trading day. So if the markets move significantly during the day, that price could be higher or lower than you expected.
Hi Dan,
I just ran across this website and I wasn’t clear on a few things. I bank with TD and I have direct investing and TFSA set up and I reviewed the 2020 model portfolios shown.
I wanted to use the 10% bonds and 90% stocks but at the same time should I purchase the more conservative 70% bonds and 30 % stocks to balance out my risk? Let’s say I have $50,000 in total. I was thinking about putting $10,000 in the aggressive growth and the other $40,000 in a more conservative pools (55 bonds-45 stocks or 40 bonds-60 stock). I would end up paying about $80 to do it this way.
In addition, if I am contributing an additional $250 a month, will I have to pay an additional $40 (4 funds x $9.95) to buy into each ETF? Is there a better way to do this?
Thanks
@TG: It does not make sense to combine two different asset targets: just decide what your overall risk tolerance is and choose the most appropriate portfolio. And at $50K, with regular contributions, I would suggest that a multi-ETF portfolio is not appropriate because the commissions will massively outweigh the benefits of the lower MER. Consider the e-Series funds or a one-fund portfolio:
https://canadiancouchpotato.com/2020/01/28/how-to-set-up-a-hands-off-etf-portfolio/
Thanks for the reply Dan.
I was referring to the TD e-Series funds that you had mentioned. I was going to allocate the $50,000 based on the one of risk tolerance options shown below.
https://canadiancouchpotato.com/wp-content/uploads/2020/02/CCP-Model-Portfolios-TD-e-Series-2019.pdf
Under the Option 2: TD e-Series Fund, it states that these are free to buy and sell. On the TD Directing investing shows a charge of $9.99 per trade, my question is has that changed from when the article was written? Have they bumped up the cost for the e-Series to $9.99 or does that just apply to individual stocks?
Thanks
What are you thoughts on rebalancing during the type of market volatility we are seeing? Should one do it more often as allocations can get out of whack real quick. Would require selling a lot of bonds to keep the allocations in check.
@TG: The commissions at TD Direct Investing apply only to stocks and ETFs. Mutual funds trade for free. That’s why they are more appropriate for smaller portfolios and those making regular contributions.
@Canadian Couch Potato
Thanks for taking the time to respond and clarify.
I appreciate it!
I have money invested in the e-Series funds with Scotia iTrade but i just found out this morning that these funds are not available anymore?! It looks like my money is stuck because I can’t buy or sell money with these funds. Also, their symbols have changed in my iTrade account summary:
TDB900 –> T103486
TDB902 –> T105014
TDB909 –> T104287
TDB911 –> T105016
I just sent a secured message to iTrade about that situation. Does someone have any useful information about what could be happening with iTrade and these funds? Thanks!
Hello! I am struggling to choose the best ETF now that the markets are in a slump. I known you mention VGRO and VEQT but I would like to use this opportunity to buy something more high risk. Vanguard has a nice one called VSP which is priced quite well, Invesco has QQC.F which has a 54% distribution on top holdings and then there are Horizons Enhanced Income Equity which is also priced very well right now. Finally, the TD US Equity ETF that is taking over the e series has low fees and also is well priced. Is there a reason not to consider these?
@gtdefender All of the funds are available on CIBC Investor’s Edge. However, TDB900 must be purchased over the phone.
Hi Dan,
I recently opened a TD Direct Investing account so I can follow Couch Potatoes e-series portfolio. I currently have a TFSA mutual fund managed by TD with 2% MER. I wanted to know if I should move that mutual fund to my TD direct investing account to start my e-series portfolio. I am not sure if I am able to do that directly or would I have to close that mutual fund, take the money from it and put it in my direct investing account. Also, do you think it’s a good time to move my mutual fund account right now with the market down, ie I’ve lost a few thousand currently so should I wait to move it until I’ve recovered my money. I do have other funds I could use to invest in the e-series.
@PT: If you decide to open a TD Direct Investing account, you should be able to transfer your existing funds in kind, i.e. without selling them. Once they have arrived in the new account you can sell them and buy your new funds the same day (or the next day) so you will not be out of the market for any significant period. If that’s the case, then the timing doesn’t matter. You may be “selling low,” but you will be buying back equally low.
Hi Dan,
Thanks for the info. When I transfer my existing mutual funds into my TD Direct Investing account, until I sell those funds I’m assuming I will still be bound by the 2% MER fee correct? Then once I’ve sold those funds and use the money to buy the e-series index funds, the MER fee will be different and much lower correct?
Hi Dan,
Sorry, PT here again. I also have an RRSP mutual fund with TD same 2% MER fee. Could I also transfer the funds in kind to my TD Direct Investing and sell those funds, then buy my new funds? I’m wondering if I do that, does it mean that I am taking money out of my RRSP account and will end up being charged the withholding tax?
Just thought of another question. When I transfer my existing mutual funds in kind to my TD Direct Investing account, sell them, then buy new funds (TD e-series), does that count as withdrawing money from my TFSA and RRSP? Does that count towards my contribution limit for 2020 both for TFSA and RRSP, or since my existing funds are from 2019 contribution, would I still have my full 2020 contribution limit? I hope that makes sense, and sorry for the multiple questions.
Hello Dan, would you recommend a hybrid TFSA account following the couch potato e-series model and buying other specific stocks along side it? I would like to purchase the TD index funds, but at the same time also buy individual stocks in the same TFSA account. Say for example I have $40,000 to invest, I want to allocate $20,000 into the e-series index funds, and then use the other $20,000 to buy individual stocks. Would that not work out and end up complicating things when I go to re-balance my portfolio?
@PT: Transferring assets from one RRSP or TFSA to another account of the same type is not considered a withdrawal.
@Charlie H: I don’t recommend buying individual stocks, period.
Hello Dan, oh why not individual stocks as well? Is it because it’s too risky for a investor and adding it along with the e-series would complicate things for me? Just wondering with the stock market down, might be a good time to invest. Thanks for taking the time to reply back.
Hi Dan,
Thanks for the great insights. As a newbie I am looking at the TD Managed Index Portfolio and comparing with the CCP model. The TD Managed Index Maximum Equity Growth Portfolio – e (Ticker TDB854) has a MER of 1.39% however, following the CCP model if I add up all the MERs for TDB909, 900, 911 and 902 they add up to 1.55%. Am I calculating the CCP model incorrectly or would the Managed Index Maximum Equity Growth Portfolio be better for me?
@Conroy: The MER of a portfolio is not determined by adding the MERs of each fund. The weighted MER of a portfolio TD e-Series portfolios can be found on my Model Portfolios page.
For more, see the last section of this blog/podcast:
https://canadiancouchpotato.com/2019/08/28/podcast-26-etf-deep-dive-with-erika-toth/
Hi Dan, I am currently buying the TD e-series index funds (TD Canadian Bond Index Fund, TD Canadian Index Fund, TD U.S. Index Fund & TD International Index) with 25% asset allocation each within my TFSA.
Would TFSA be the appropriate place for these?
@AJ: These funds are perfectly appropriate in a TFSA.
Can I go into my local BMO branch and tell them I want to purchase TD e-series funds and can they set up automatic payments to my BMO account? Or do I need to deal with TD first and have it done on their end?
I tried to purchase e-series funds today through TD direct investing, and my order kept getting rejected.
I called direct investing and they told me “TD no longer offer e-series funds to direct investing clients”, I didn’t believe it so I called back. Another phone representative told me the same thing.
I haven’t heard anything on the news about them ending e-series. What is going on??
I am still a bit confused. I currently hold TSFA with RBC DI account. I am looking to purchase TD e-series mutual funds. If MER is the same with TD DI and RBC DI is there an advantage to switching to a TD DI account? Thanks!
@Brent: Automatic contributions to mutual funds are arranged through your brokerage, which would be BMO in your case. But you would need a BMO InvestorLine account to arrange this. Your local BMO branch will not allow you to set up a mutual funds account with access to funds from other banks.
@Miller: Assuming you can purchase e-Series funds through your current brokerage, there is indeed no advantage to switching to TD DI.
I have TD e-series funds, I would like to convert them into TD ETF funds. Is this the right time to do it ?
Example : TDB902 -> TPU.TO. My broker is TD Webbroker.
Thanks.
@Ethan, after reading this comment is it true that they aren’t offering td e series anymore through direct investing? Was thinking of setting this up soon.
This is a helpful page, thank you. To lower my costs, I am considering swapping an e-series fund for its ETF equivalent. I am wondering if I should consider the price difference between the two, before making the swap.
Should I aim to have at least as many units of the ETF as the e-series fund, that the proceeds of the sale will afford? Is this a factor one should take into consideration? I see in some cases the ETF is priced higher than the e-series fund, and vice versa.
Many thanks,
Steve
@Steven: The unit price of an ETF of mutual fund tells you virtually nothing without context. To use an analogy, imagine this restaurant charges $2 for a slice of pizza and that one charges $3. Unless you know how large the slices are, the comparison is meaningless.
Say an ETF tracking a global equity index has $100 million in assets. It might have 5 million outstanding shares, which would mean a net asset value (NAV) of $20 per share. Now imagine a second ETF tracking the same index has $150 million in assets. It might also slice that pie into 5 million shares, in which case the NAV per share would be $30.
If you had $10,000 to invest, you could buy 500 shares of the first ETF or 333 shares of the second. Both would have an identical value and there is no reason to prefer one over the other.
So unit prices are arbitrary. These days ETF providers in Canada seem to launch new funds with a share price of about $20 to $30. This seems like a reasonable number: if it were much smaller, the cost of transactions would be too high. And if it were much larger, then it would be more difficult to buy modest amounts.