For DIY investors, asset allocation ETFs may be the greatest gift to come along in decades. It’s never been easier or cheaper to build a globally diversified portfolio that needs almost no maintenance. But compared with a balanced mutual fund, even one-ETF portfolios have a few potential drawbacks.
First, at most brokerages you still need to pay a commission of up to $9.99 any time you buy or sell ETF shares. If you’re making smallish monthly contributions, that’s a major obstacle. It simply isn’t cost-efficient to trade unless you’re investing at least a couple of thousand dollars each time.
Moreover, mutual funds give you the opportunity to automate your purchases. With the money taken from your chequing account every month, your savings become more consistent, and soon you may not even notice them. Unfortunately, when you use ETFs, you don’t get that benefit.
Finally, mutual funds make it easy to reinvest all distributions (dividends and interest payments), which means there’s no cash sitting idly in your accounts.
Of course, index mutual funds have their own drawbacks. The Tangerine Investment Funds, for example, offer all the benefits mentioned above, but carry a fee of 1.07%, which is no longer competitive. The TD e-Series funds offer these three benefits at about one-third the cost of Tangerine, but you need four funds to build a globally diversified portfolio, and you need to rebalance these yourself from time to time.
You can argue that robo-advisors combine many of the benefits of mutual funds and ETFs. It’s easy to set up automatic contributions from your bank account, and any time dividends or new contributions land in the account, the cash is quickly reinvested in new ETF shares. And most robos don’t charge commissions for trades. Problem is, these services aren’t free: robo-advisors typically charge about 0.50% annually (less on large accounts), which is $250 a year on a modest $50,000 portfolio, and that’s in addition to the management fees on the ETFs themselves.
What if you were able to combine the useful features of a mutual fund or robo-advisor with the lower fees of an asset allocation ETF? If you’re willing to put in a little effort at the beginning, it turns out you can create a DIY portfolio with the ideal mix of low cost and hands-off convenience. Here’s how.
1. Choose a brokerage with zero commissions
While most online brokerages charge between $4.95 and $9.99 per trade, there are a few options for trading asset allocation ETFs with zero commissions. These brokerages are ideal for investors who are regularly adding small amounts of money to their portfolio.
- Questrade offers all ETF purchases for free. (The normal commission of one cent per share—minimum $4.95, maximum $9.95—applies when selling ETFs.). While this presents an opportunity to build a portfolio of multiple funds, using an asset allocation ETF means you never need to rebalance, which has behavioural benefits even if you’re not paying commissions.
. - Scotia iTRADE offers a selection of ETFs with no commissions to buy or sell. While most of these ETFs are not useful for traditional index portfolios, the menu does include the iShares Core Balanced ETF Portfolio (XBAL) and the iShares Core Growth ETF Portfolio (XGRO). However, this is not obvious from the iTRADE website, which still uses the old names and tickers for these two funds: CBN and CBD. (Come on, Scotia, time to update your site.
. - Qtrade also offers a selection of commission-free ETFs, and the list includes both XBAL and XGRO.
A note for investors who are starting from zero: all three brokerages charge a quarterly $25 inactivity fee on small accounts. The minimum balance to avoid these charges is $1,000 at Questrade, $10,000 at Scotia iTRADE, and $25,000 at Qtrade. Read the fine print before you open your account.
2. Automate your deposits
In general, you can’t set up an automatic purchase plan for ETFs the way you can with mutual funds. But every brokerage allows to you set up regular deposits of new cash to your accounts. Even if that cash doesn’t get invested immediately, there’s value in automating your savings rather than relying on ad hoc contributions that can easily get forgotten—or spent.
Automating cash deposits is particularly easy if your online brokerage is associated with the bank where you hold your chequing account. But even if you’re using Questrade or Qtrade to take advantage of commission-free trades, you can arrange an automatic transfer of, say, $500 per month to your TFSA from your third-party chequing account. If you can’t find the forms on your brokerage’s website, call them and ask for instructions.
You’ll still need to log in to your investment account to make a trade and invest that cash. But if you forget from time to time, it won’t make much difference: you can just make a larger trade next month. The important thing is that you won’t neglect to save.
3. Set up a dividend reinvestment plan (DRIP)
Robo-advisors automatically reinvest the cash when ETFs pay dividends or interest, which allows you take full advantage of compounding. For small portfolios, this is a pretty minor benefit, especially if you’re able to reinvest that cash with commission-free trades. But, hey, every little bit helps.
If you’re using an asset allocation ETF in a self-directed account, you can get the same advantage by enrolling in a dividend reinvestment program (DRIP). All discount brokerages offer these plans, and you can usually enroll easily online. Unfortunately, not every ETF is eligible at every brokerage, so it’s worth a call to the customer service desk if you’re not sure whether your asset allocation ETF is on the list.
When you’re enrolled in a DRIP, you’ll receive your dividend and interest payments in the form of new ETF units rather than cash—with the caveat that only whole units can pe purchased. For example, if the ETF is currently trading at $25 per unit and your holding pays a $127 dividend, you’ll receive five new units plus $2 in cash. (No commissions are ever charged on DRIPs.)
DRIPs are a great way to way to keep your investments compounding in a TFSA, RRSP or other tax-sheltered account. But I generally don’t recommend them in non-registered accounts, as they can complicate your recordkeeping. If you’re making a few commission-free trades every year anyway, it’s easier to just mop up the idle cash in your taxable account at that time.
The (minimal) effort is worth it
If you’ve put the above three steps in place, then you’ve ticked the important boxes for a solid investment plan: you’ve got a broadly diversified portfolio that requires no rebalancing, your annual fees are super-low, you’ve got a regular savings plan, and your transaction costs are close to zero.
The investment plan I’ve suggested here isn’t entirely hands-off compared with, say, the Tangerine Investment Funds or a robo-advisor. With those options, once you’ve opened your account and set up your regular contributions, you could safely lapse into a coma for a few years and your portfolio would likely be in great shape when you woke up. But you do pay a significant amount for that benefit.
I’ve long argued that paying a little more for convenience is well worth it: that’s the reason I recommend asset allocation ETFs rather than assembling a portfolio from three or four funds, which would have a lower MER. What I’ve outlined above, in my view, strikes the right balance: it’s not the absolute cheapest option, and it’s not the absolute easiest, but it scores very high in both categories. If you can muster the energy to log into your accounts a few times a year and make a single ETF trade each time, then you’ll be well on your way to long-term success as a DIY investor.
Is there an equivalent recommended portfolio for US dollars? Using the Norbet Gambit, I have converted about 40% of my investments to US$. These funds are invested in SPY and a few individual stocks (Paypal, Apple, Johnson & Johnson). I would prefer a Vanguard Balanced fund but US.
I am getting tired of paying high fees to my financial planner and am wondered if it would be smart to move a couple of my larger accounts (both taxable) to my action direct accounts and put them in all in one funds like VBAL, XBAL or VCNS? I am retired and currently run an overall mix of 50/50 Equities/Fixed so again if I keep this same mix would it be smart to use a combination of VBAL and VCNS as an example here to do this or should I get more aggressive and stay with VBAL (60/40 mix) and just use one fund for each account?
In addition how many funds do I need or should I use for each portfolio? Should I divide the money up between a couple of different players (like Vanguard, I-shares or BMO) or just stick with one companies fund in each account?
I’ve thought about “upgrading” to ETFs, and even tried Scotia’s commission-free ETFs (albeit with a fringe ETF, not one of the ones you recommended). In the end, it felt like a big hassle – at least for me and how my head/heart works. I’m sticking with the TD e-Series model portfolio, which gives me the most peace of mind. I only revisit my account during tax season to see if I need to rebalance. That’s typically a 1hr/year commitment.
Nice blog post! By the way, Virtual Brokers also offers free ETF trades…
How about a global portfolio of VCE,VEE, VA, VUN, VFV AND VE vs single new VEQT all stock global portfolio?
Great post thanks. Only suggestion is to add the Wealthsimple Trade app for free ETFs buying and selling. Only downside is that you can only manage your funds via a mobile app.
@Dave: I don’t think getting more aggressive makes sense unless there is a very specific reason for wanting to make that move in retirement. But a couple of other things to consider. In a large non-registered account, a bond-heavy asset allocation ETF is probably not ideal because of the tax inefficiency. For a 50/50 mix, a tax-efficient bond ETF such as ZDB could be combined with VEQT/XEQT in equal amounts for more tax efficiency and only a little additional work (two ETFs to manage instead of one).
You may also want to be careful not to hold the same ETF in more than one taxable account or you will make your bookkeeping difficult (adjusted cost base for the same security needs to be calculated across all accounts). So while there is no diversification benefit to using ETFs from different providers (Vanguard, iShares, BMO), using more than one can sometimes be useful if you two or more taxable accounts. (Using the same funds in RRSPs and TFSAs is totally fine.)
The concern I have ETF’s right now is the bubble that has formed over the last 10 years. ETF’s are extremely over valued. Stock price growth has far outpaced earnings growth. Asset allocation strategies are also risking at this point due to the high valuations of bonds. Generally, ETF’s could be an effective strategy, however right now is not a good time to buy
@Brad: https://awealthofcommonsense.com/2019/09/debunking-the-silly-passive-is-a-bubble-myth/
You mention automating deposits, but no mention of automating deposits AND purchases through the use of a PACC with XBAL or XGRO. Any particular problems you know of with the PACC program?
@Mark H: It’s not that I know of problems with the iShares PACC program: it’s more that I know almost nothing about it at all. It was something Claymore ETFs launched back in 2009, and when iShares bought Claymore they grandfathered it. But I suspect they did so reluctantly, because they have never promoted it, and you have to dig for it on their website. It’s not clear (at least to me) which brokerages support it, as brokerages have no incentive to support a program that creates administrative hassles for no benefit to them.
If anyone has first-hand experience to share, please do so!
Would you still recommend an asset allocation ETF for a large portfolio (over 1 million)? There’s something disconcerting about putting that much money in one fund.
@Christine: Asset allocation ETFs are certainly appropriate for seven-figure portfolios. Why would it be less risky to buy the underlying funds individually?
Another very useful post. Thank you, Dan. The CIBC Balanced Index Fund (Premium Class) would be another hands-off one ticket solution. There is a $50,000 minimum and the Canadian content is greater than in the CCP model portfolios, but the MER (0.41%) is similar to what the e-series funds offer, with the added benefit of automatic rebalancing. Do you have an opinion on that fund?
@Sebastian: The CIBC Balanced Index Fund seems like a reasonable choice, though the target asset mix is not really ideal (35% Canadian equity, 15% US, 7% EAFE), and it looks like they use a sampling approach for Canadian equities and bonds rather than replicating the full index. At $50K, I might start to nudge an investor toward the ETF solution outlined here.
Hi Dan,
I was motivated to start passively investing back in 2012 thanks to your excellent articles… and I’ve never looked back!
Quick question: some of these all-in-one products like Vanguard’s offerings include global bonds, but others like iShares do not. Is the extra diversification due to global bonds worthwhile for the average portfolio? Are there any circumstances where those with global bonds might come out ahead?
Finally thank you for demystifying investing for so many Canadians like myself. We are much better off because of your work.
Adam
@att0m: Thanks for the comment. The inclusion of global bonds, in my opinion, is not very significant. They provide a small amount of added diversification, but over the long term (and even year to year) the expected return should not be meaningfully different. This is especially true for the more aggressive options, VGRO and XGRO, which only have 20% bonds to begin with. If you were using the 60% bond option, then perhaps there’s a stronger argument for including foreign bonds as well as Canadian.
Dan, I’m about to transfer a good part of my RRSP that I have with a Broker (400,000$) for the eSeries with TD Bank. I would like to hear from you how you would re-enter the market and start to buy the eSeries in a portfolio with TD? Once with the entire amount or spread the purchase over the next year? Great article!
@Jean: As you can appreciate, I cannot advise you on what to buy or when. However, remember that if your RRSP is currently invested, or was until recently (as opposed to sitting in cash for years), then you are not really “re-entering the market.” If you are simply switching to a cheaper and/or less active strategy, then there is no reason to see this an entry point. Your market exposure may not be changing much at all.
Hi Dan, I’m struggling with my taxable account. I’ve got the bulk of my savings going into one (ZDB/VCN/XAW) (my registered accounts are maxed). My main problem is ACB – I haven’t sold in the taxable account yet so haven’t had to track it, but the idea is holding me up (I’ve tried to keep the account simple – no drips, >10 buys/year). I know there are pros to my current the approach (low MER, reduced tax drag on the bond portion) but I’m wondering if the e-Series ease of record-keeping trumps all that? I’ve got a couple more decades of saving ahead of me – does ACB tracking become a huge snarl over time? I’m about to invest a chunk so wanted to ask if I should move to e-Series now, or stay the ETF course (given I’ll have to track ACB on what I’ve bought already anyways). Apologies if this is this a ridiculous Q and a *huge* thank you for providing this insanely amazing resource.
@Laura: I have a similar situation, couch potato-ing in a taxable account, and I’ve held both e-Series funds and ETFs. I don’t think the mutual funds would save you much effort; you do still need to track the ACB for either product (assuming you don’t just rely on your broker’s “book cost”.) If anything, mutual funds lend themselves to reinvesting distributions, and each of those DRIPs is indeed a transaction to track in the ACB, I found that churn to be slightly more annoying, especially for funds that DRIP monthly like the e-Series bond fund.
As for whether it’s a snarl, well, I’ve found it to be pretty mechanical once I created a spreadsheet for it. I modeled it after the CRA’s own example, (here: https://bit.ly/314NQuZ ) I just rearranged mine so each transaction lies on one row. Once it’s set up each transaction is just adding a new row to the table.
There are couple other things to know to do, too. I’d say ACB tracking is not very hard in most cases but I haven’t run into any blogger that’s done a good “ACB for couch potatoes”-style guide to it. I suspect that the basics would be easy to cover but no one wants to wade into the potential complexities of taxable account investing for fear of misleading anyone.
@Laura: This is a great question, and I am going to disagree somewhat with Mike’s reply.
ACB tracking is significantly more difficult with ETFs than it is with mutual funds. In my experience, mutual fund book values are very reliable: no matter how many purchases and sales you make, the book values are almost always accurate. When mutual funds distribute capital gains at the end of the year, they automatically adjust the book value for you, so you don’t need to do anything manually.
This is not the case with ETFs. Many ETFs distribute return of capital and/or reinvested capital gains, which require you to adjust the book value of your holding manually. These days it seems more and more brokerages are doing this for you, but it’s very inconsistent. Doing it yourself is not terribly difficult, and services like AdjustedCostBase.ca can help a lot. But it’s certainly more work than using mutual funds.
A compromise might be to use an asset allocation ETF in your taxable account: at least you simplify the process by limiting your bookkeeping to a single fund.
As for an “ACB for couch potatoes style guide,” my colleague Justin Bender and I created a detailed white paper that walks you through the process for ETFs:
https://www.pwlcapital.com/resources/as-easy-as-acb-understanding-and-tracking-your-adjusted-cost-base-with-etfs/?ext=.pdf
Since that paper was written, AdjustedCostBase.ca has started offering a service that automatically imports the distribution data for Canadian ETFs so you don’t have to painstakingly look it up. It’s a great service that is well worth the $49, especially during a year where you sold significant holdings and need to report a capital gain or loss:
https://www.adjustedcostbase.ca/blog/streamlined-import-of-return-of-capital-and-phantom-distributions-and-for-exchange-traded-funds-etfs-publicly-traded-mutual-funds-and-trusts/
https://www.canadianportfoliomanagerblog.com/easier-than-acb/
Hi Dan, Great post as always! I’m surprised there isn’t anything about automating the initial savings into Mutual Funds such as TD E Series, and then once a year transferring into an ETF with a DRIP. Would that not simplify the process? A couple ETF trades a year (depending on the total number of ETFs you own), while everything else runs like clockwork. Plus, if you forget your once-a-year trades, you’d only miss out on the small difference in MER between the ETF and the Mutual Fund. I may be missing something important though?
@Ted: Thanks for the comment. I have heard this suggestion many times, but it strikes me as a lot of nuisance for very little (if any) benefit. I am a big fan of using the e-Series funds with monthly contributions, or using the ETF strategy I’ve outlined here, but combining both seems unnecessary and clunky.
@Dan and @Mike, thanks so much for the helpful info – I’ve bookmarked all the links. I like the sounds of “not terribly difficult” even if manual and painstaking so I’ll stay the course and give ACB tracking a whirl (and cross my fingers Questrade starts doing this reliably one day). Thanks again for the thoughtful advice!
Hi Dan
I wanna transfer my RRSP and TFSA from Tangerine to one of your model portfolio (Ishare, Vanguard or e series) through a free trade broker. I want automatic rebalancing for the moment. Does this mean that I will be charged only the ETFs MER? I don’t understand how these free trade brokers can live without charging a commission? Any suggestion for a broker ? Also, does the broker provide a regular tax slip at the end of the year?
Thanks
Hi.
I have a small amount to invest now $6000 and want to make ongoing weekly contributions $150.
The online brokerage doesn’t charge for buying ETFs.
If I understand correctly I would still be charged a small fee for each purchase because I’m not buying shares in multiples of 100 but it only adds up to a few dollars per year. Is that right?
Also I could buy the sub funds instead of the all in one and just use my weekly purchases to balance without having to sell anything. That would save me a bit of mer.
Is that worth it?
Am I missing anything?
Thanks.
@Alex: You’re right to wonder how brokerages make money when they don’t charge commissions. Part of the answer is that most investors will not limit themselves to buying commission-free ETFs only: they will likely dabble in stocks and other activities that do generate revenue.
All brokerages provide the necessary tax slips.
@John: At $6,000 with regular contributions of $150, it does not makes sense to hold more than one ETF or incur any trading commissions. This is a classic example of a situation where e-Series funds or a commission-free brokerage are the only cost-effective options.
Doesn’t iShares offer a PACC for its “X-series” funds (among others) in addition to the DRIP?
* https://www.blackrock.com/ca/intermediaries/en/literature/brochure/drip-pac-swp-eligibility-en-ca.pdf
* https://www.blackrock.com/ca/individual/en/literature/forms/drip-pacc-swp-plan-document-en-ca.pdf
Wouldn’t this help with Step 2?
@DM: In theory, yes, but it has never been clear how many brokerages support this program, nor what administrative obstacles are involved in setting it up. It certainly is not actively promoted by iShares.
Hi Dan,
I am still currently using the previous CCP etf portfolio. I have been reading a bit more about tax efficiencies of holding ITOT instead of my current XUU in my Questrade RRSP account due to the withholding tax. Is this true and how do i know if i’m being deducted this withholding tax? When taking a look at my questrade account history for my rrsp account (currently hold XUU) i don’d see any additional deductions. In comparing my actual dividend payouts to the ones posted on ishares website i don’t see any difference, that is i do not see any deductions for the withholding tax. Am i over simplifying this check? Is there a better way to see how much i’ve been paying / losing in withholding taxes? I just wanted to double check before making any drastic changes to my current portfolio.
Also relating to this post, if i completely switch over my portfolio to the iShares Core Equity ETF Portfolio should i be worried about the additional withholding tax held in my RRSP or TFSA?
Thank you!
Hello Dan,
Thanks for all the helpful information. I’ve sat on the sidelines for roughly the last year (concerned about how stretched the market was, and the volatility we were seeing from late 2018 to early 2019). I played the contrary view, and felt that I would buy back at a cheaper price. However, my money has sat for the last year, which has a cost of course, and now with the republican party seeming to be making a bigger push, and generally having them in being tied to a stronger financial market, I’m considering now re-entering the market. As in, almost all of my $400k is sitting in cash. I’m strongly considering using asset allocation funds like VBAL, VGRO, XBAL and or XGRO but wanted to get your thoughts on how you might deploy that capital? Should that capital be spread out over time (like say six months) to leverage against a wrong market entry, or is there a feeling that these funds are diversified enough, that I should be comfortable deploying the capital at once?
Thanks.
Bruce.
@Larry: If you are holding XUU in an RRSP, then you are definitely paying the withholding tax on the dividends. The tax is with