The TD e-Series index mutual funds remain a useful alternative to the asset allocation ETFs that take centre stage in my model portfolios. Following on the heels of our detailed look at the performance of the Vanguard and iShares portfolios in 2020, let’s look at what the e-Series funds delivered last year.
Here’s how the four individual building blocks performed in 2020. Remember, as always, that published mutual fund returns are net of all fees, and assume all distributions are reinvested.
Fund name | Fund code | 2020 return |
---|---|---|
TD Canadian Index Fund - e | TDB900 | 5.77% |
TD U.S. Index Fund - e | TDB902 | 18.12% |
TD International Index Fund - e | TDB911 | 5.48% |
TD Canadian Bond Index Fund - e | TDB909 | 7.56% |
Source: TD Asset Management
My model portfolios suggest five possible allocations of these funds, ranging from conservative (70% bonds and 30% stocks) to aggressive (10% bonds and 90% stocks). Assuming your portfolio had the following asset mixes at the beginning of the year, and that you never rebalanced, here’s what your performance would have looked like in 2020:
Asset allocation | 2020 return |
---|---|
70% bonds / 30% stocks | 8.44% |
55% bonds / 45% stocks | 8.73% |
40% bonds / 60% stocks | 9.02% |
25% bonds / 75% stocks | 9.31% |
10% bonds / 90% stocks | 9.60% |
Source: TD Asset Management, DFA Returns 2.0
A fairer comparison
In the past, I reported the model portfolio returns assuming you started the year with the target asset mix and then rebalanced at the start of the following calendar year. However, starting last year, when I adopted the Vanguard and iShares asset allocation ETFs for my model portfolios, we changed the methodology for reporting historical returns in order to provide a better apples-to-apples comparison of the different options. All of the model portfolio returns now assume monthly rebalancing.
Remember, in practice the Vanguard and iShares asset allocation ETFs are likely to stay close to their strategic asset allocations at all times. Although they will stray from their targets during a large swift move in the markets, they enjoy large and frequent cash flows that allow them to rebalance almost continuously. So to make fairer comparisons, we’ve assumed the other options in the model portfolios—those using two ETFs, as well those built from e-Series funds—are more frequently rebalanced, too.
Over the long term, the differences in rebalancing strategies will not be dramatic: there’s plenty of research showing that the specific interval is not that important, so long as you do it with some regularity. The timing may not even make a significant difference during most calendar years.
However, 2020 was anything but typical: it included the fastest bear market in history, followed by a remarkably swift recovery. Last year, if you rebalanced monthly—selling bonds and buying stocks in the spring, and then doing the opposite later in the year—you would have enjoyed a significant bump in returns, compared with an investor who simply stayed the course for the full 12 months.
Here’s what the e-Series portfolio returns would have looked like with monthly rebalancing. These are the numbers you will see in the just-posted edition of the historical model portfolio returns:
Asset allocation | 2020 return (monthly rebalancing) | Difference vs. annual rebalance |
---|---|---|
70% bonds / 30% stocks | 8.82% | +0.38% |
55% bonds / 45% stocks | 9.19% | +0.46% |
40% bonds / 60% stocks | 9.48% | +0.46% |
25% bonds / 75% stocks | 9.68% | +0.37% |
10% bonds / 90% stocks | 9.81% | +0.21% |
Source: TD Asset Management, DFA Returns 2.0
More isn’t better
Be careful before you infer anything from these short-term results. There’s no reason to expect more frequent rebalancing to improve your results. This is especially true when you consider transaction costs and taxes, which are assumed to be zero in the model portfolios.
Indeed, it’s a common misunderstanding that rebalancing is a reliable way of boosting returns: it’s not. On the contrary, because the expected return on stocks is significantly higher than that of bonds, most of the time rebalancing will consist of selling equities and buying more fixed income. Over the long term, you should expect that to lower returns, not increase them.
Rebalancing is primarily a risk-management tool: it’s designed to make sure your equity allocation never strays too far from what you’ve deemed appropriate for your time horizon and temperament. It’s also a way of enforcing discipline in portfolio management: any time you add new money you can consistently top up whatever asset classes are furthest below the target, rather than relying on guesswork—or worse, simply chasing whatever asset class has been the hottest.
There is no optimal rebalancing strategy, so it’s not something you need to obsess about. You can rebalance at regular intervals (once a year is fine), by thresholds (for example, whenever an asset class drifts off target by five percentage points), or using cash flows (any time you add or withdraw funds). Most people will probably use some combination of all three.
So don’t conclude from 2020 that tweaking your portfolio every month will reliably juice your returns if you’re using the e-Series funds. You could have only known that with the benefit of hindsight. It’s far more important to add new money with discipline, rebalance when the opportunities present themselves, and keep your focus on the long term.
Hi Dan,
Quick question regarding the e-Series MER fees.
I see currently the breakdown is as follows:
CDN Index – 0.32%
US Index – 0.34%
CDN Bond – 0.51%
Int’l Index – 0.49%
Is this a weighted average to get the total MER I am paying? Or is it totaled up?
Just a bit unclear on this, thank you for all the hard work you put in for us! Long time follower/CCP investor.
@Sawyer: Yes, you would take a weighted average of these to get the total cost for the portfolio.
Hi Dan,
Could you help me to understand the reason behind investing a significant % into the Canadian market, when it represents a relatively smaller portion of the world market size? Is there a tax benefit for investing in the local market?
Some examples:
XEQT – Canada 23%, US 46%
TD e-series model 90% equity – Canada 30%, US 30%
World market size – Canada ~2.5%, US ~50%
Thanks.
Hi Dan,
Thank you so much for all of your advice. Similar to many people it seems, I am starting off my investment journey and am confused as to whether to go through the TD e-series approach or an ETF approach on wealthsimple trade for example.
I am currently with Scotiabank but as I would like to make monthly contributions, would not want a Scotia iTrade account from what I have read. So I am thinking of either opening a TFSA through TD Direct investment and following the e-series index approach OR investing in ETF’s through wealthsimple trade or Questrade. I am still young (25) so am looking at a long time horizon and although the account will start off around 30-40K, will increase overtime. I am also willing to switch banks or an open another account at TD if this makes most sense ?
What are the benefits/disadvantages of investing through the TD e-series approach or an ETF approach? I’ve read it has to do with different in account size? If so, how much and why?
Thanks so much!
@Dom: https://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/
@Ilke: Please see my model portfolios page for a table outlining the benefits of ETFs vs. e-Series funds.
What’s happening to the Bond index fund this year? Should we expect it to keep dropping like it has?
@Tim St Jacques: Interest rates have risen quite sharply since the begging of the year. Can we expect this to continue? No one can answer that question reliably.
https://canadiancouchpotato.com/2017/04/13/bond-basics-1-why-bond-prices-fall-when-rates-rise/
With the TDB 909 fund showing losses of over 3% right now, is it right to sell and take the loss and purchase something else, or wait to see some recovery
@Marcel: Selling a core asset class after it it has fallen in value is the exact opposite of what long-term investors should do. If your portfolio is now underweight in bonds it would make more sense to trim the stock holdings and rebalance by buying more bonds.
Hi Dan,
I have been promoting the strategy of helping young investors get started by using the trust account and buying Eseries funds at TD.
Seems that has come to an end now that TD only offers Eseries at TD waterhouse. That is so unfortunate. Are you aware of any other strategy we can use to promote investing for young investors?
Thanks Dan
@Ajb: Why not hold the e-Series funds at TD Direct or any of the other online brokerages that offer them? This was always my recommendation: the option of buying them through a TD branch was actually a huge nuisance for most people.
Other options include robo-advisors or using a one-ETF portfolio at a brokerage that charges no commissions:
https://canadiancouchpotato.com/2020/01/28/how-to-set-up-a-hands-off-etf-portfolio/
Hi again Dan,
Thank you for the reply. The young investors I am referring to are in two categories. The first are in the 15-18 years of age and invest through a trust managed by their parents. The amounts are low so to keep the fees down, a TD mutual fund account was favored.
The second group are new university students. I have a small company and hire a few every summer. During the summer, I initiate them to investments by lending them each $500 so they can place it in the market and watch it grow. Its amazing how better they understand if they have money in the market. Even if I never see that money again, I consider it as a good investment. To keep fees low, again we favored the mutual fund account. For these new investors, I will now turn to Questrade and go the ETF route since they are commission free. Thank you Dan for all the great work you have done and continue to do.
I downloaded your excel sheet to help me with rebalancing, but I didn’t see the TD e-series listed on the sheet (TDB 909, TDB 911, TDB 900, TDB 902). Any chance there is a resource on how to rebalance for the TD e-series funds?
@Nick_in_toronto: The spreadsheet allows you to enter any fund you want, so you can just add the TD e-Series funds in the appropriate section, e.g. add TDB 909 under Fixed Income, TDB900 under Canadian Equities, and so on.
Squawkfox has created a simpler spreadsheet for the e-Series funds that’s more practical if you have just one account:
http://www.squawkfox.com/wp-content/uploads/2012/02/Canadian-Global-Couch-Potato-TD-eSeries-Funds-Rebalance.xls
Hi, if you make the same automatic monthly contributions, aren’t you essentially rebalancing by buying more or less units as prices change?
Hello Dan, I’m just learning about index funds and am getting ready to make the switch from my current TD mutual fund valued at around $50,000 to the TD E-Series couch potato strategy that you discuss. My question is, although I know that you can’t really time the market, is it generally a bad time to transfer my $50,000 to the TD e-series (about $10,250 into each of the 4 funds) when it seems like the funds are currently at a high and that I would be “buying high”? I will also be setting up automatic deposits into the funds from here on out and am looking at about a 15 year investing horizon. What are your thoughts on this? Thank you!
@Christina: Whenever you are simply switching from an expensive fund to a cheaper one (as opposed to investing new cash), the timing makes no difference. If you are “buying high” with the new fund, you are also selling high with the existing one.
@Cus: You’re definitely taking advantage of dollar-cost averaging when you make regular contributions, i.e. buying more shares when prices are lower. However, you will probably still need to rebalance from time to time.
Thank you for your reply, Dan. Another question I have is, when I max out my TFSA in about 2 years, how do I keep the benefits going of index investing following the Cdn. Couch Potato E-Series model, when I now have to start at $0 with contributions to an RRSP. How do you continue to gain the maximum compound interest effect when you are now having to spread out contributions to about $6000/year to the TFSA and about $6000/year to an RRSP which is starting with a balance of $0 with a limited 10-15 year retirement timeline. I would rather keep $12,000/year going into one Couch Potato Portfolio, or is it possible to get the same effect by dividing it over two accounts (TFSA and RRSP starting with $0). Thank you in advance for your expertise!
@Christina: This is a common question, but rest assured that compounding is not diminished if you spread your assets across more than one account. Two contributions of $6,000 compound at the same rate as as a single contribution of $12,000.
Thank you, but wouldn’t the account that already has, for example, $100,000 accumulated, compound more with additional contributions being added into it over a 15 year period than the account that is starting at $0 over the same 15 year period?
@Christina: Nope.
Account A has $100,000 and compounds at 5% for 15 years and grows to $207,893.
Account B has $6,000 and compounds at 5% for 15 years and grows to $12,474.
Add the two together and you have $220,367 after 15 years.
Account C has $106,000 and compounds at 5% for 15 years and grows to $220,367.
The same amount of money compounds at the same rate whether it’s in one account or multiple accounts.
Wow! Thank you for doing the math for me (not my strongest point) and explaining this in such simple terms! I really appreciate you responding to my question and all of the information found on your blog.
Hi Dan. Who can i meet with in order to get a thorough ananysis of my couch potato portfolio ?
I’m in the Montreal QC area. Thanks
@Francois: If you’re looking for someone to review a portfolio you manage on your own on a fee-for-service basis, this is almost impossible to find. There are many fee-for-service financial planners, but most are not licensed to offer investment advice. And licensed investment advisors generally do not work with DIY clients. Being a Quebec resident may further complicate things, as licensing requirements may be different in that province.
Hello Dan
I looked at your model portfolios. Would it be redundant to invest in both ETFs and TD e-series with the same account? I was thinking of having 4 ETFs and 4 e-series to cover the 4 allocation categories (bond, Canadian, international, US). And I will choose the percentage based on my risk and age. I also have 3 account types, TFSA, RRSP, and a non registered. Again, would it be redundant to use a different ETF company in each account, eg Vanguard in one, iShares in another, etc.
Lastly, is there any advantage of where you place the fund? For example, I read somewhere that HGRO should be in a non registered account. But if I look at the 4 allocation categories, can you recommend which type of account would be best for each category?
In one of the comments above, someone asked if you offer a fee for service. What about recommending a start up plan for a fee. If rebalancing can be done yearly, I think investors may just need help with the initial allocation and contributing to the same funds from there on wouldn’t really require an advisor.
@Betty: In my opinion you’re making the process much too complicated. It’s absolutely redundant to hold e-Series funds and ETFs in the same account. You can choose a single asset allocation and use it in all of your accounts. This solution may not be “optimal” (whatever that might mean), but it is an excellent solution. And you will never need to rebalance.
There is no service in Canada (that I am aware of) that will help you set up an ETF portfolio that you manage on your own. This is mostly for regulatory reasons. The good news is that if you are willing to embrace the simple solution of using an asset allocation ETF, then you don’t need a service like this. My book describes the whole process and should help.