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.
I have been investing in TD e-series for many years now. I make regular monthly contributions and re balance once a year. Does it make sense at any point to make re balancing a bit more straight forward, and to reduce MER, to move out of the funds and into one of the asset allocation ETFs? I would continue making monthly contributions to the e-series funds so would not be moving away completely.
Thanks again for a great assessment, and letting us know that we don’t need to rebalance eSeries funds monthly. That’d be a lot of work if we did.
I’ve implemented a set-it-and-forget-it plan of regular contributions and purchases, plus DRIPs, of eSeries funds, then once per year trade them in for VBAL
It’s the best of both, and a very liveable way of being “disciplined” with very little work and worry…
What are your thoughts on the new Tangerine ETFs in comparison to the TD e-series, Vanguard and iShares ETFs?
Thanks for making this blog and sharing/helping everyone. I am kind of new in Canada (4 Years). I have 20K saved which I want to invest. I was thinking 20K in VGRO (one time TD DI $9.99 fee) and then put like $1000 every month into e-series for year. After a year move everything from e-series to VGRO as one transaction and repeat. Do you think this is a good strategy. BTW, I want to put this in RRSP account. or open account with Wealthsimple and do ETF purchase everyone month as no fee. (is it ok to trust on sites like WalthSimple – again new in Canada so I don’t know regulations for such websites)?
Really appreciate your help.
I’m invested in TD e-Series (25% bonds and 75% stocks) and had a return of 13.13% in 2020. In hindsight, I got lucky as I re-balanced in early February 2020 (sold my overweight US holdings and redistributed to weaker holdings). In mid March, I ended up re-balancing again (sold my bond holdings and bought Canada, US and Intl holdings). I have a monthly PPP but in March, I decided to make an additional purchase equivalent to my monthly PPP. I know it’s hard to time the market but by a stroke of luck was able to make it worth and get a higher return.
I’ve started to put some into TDB908 (Nasdaq one) since NASDAQ has outperformed by a wide margin recently
smoked the SPY or TSX so much and probably more so in future with the paradiam shift to Technology/WFM
Wonder what your thoughts are?
In general, I’m avoiding TSX/Int’l e-funds (still regular contribution), but for large one-off sums, I only buy TDB902/TDB908 now
@Kevin check out https://canadiancouchpotato.com/2016/05/02/ask-the-spud-switching-from-e-series-funds-to-etfs/ for a long answer. Personally I switched over to VGRO at $50k.
@Steven Thanks! That post was very informative.
@Roy: Welcome! In my opinion, I don’t think it is necessary to keep selling e-Series and moving the proceeds into an ETF, especially with a smallish portfolio. The MER savings would be very small. I think you can set up an e-Series portfolio with monthly contributions and just leave it at that.
Wealthsimple might also be a good option, although an e-Series portfolio is cheaper. Like all investment dealers in Canada, Wealthsimple is highly regulated, so you should feel confident using their services.
@Aaron Jones: The first point is that, despite their name, the new Tangerine funds are not ETFs: they’re mutual funds that use ETFs as underlying holdings. I’ll be looking at these in more detail soon.
Thanks for your reply. What should be the portfolio value to switch to ETF? Also returns on ETF is better as compared to index? I am 40 and want save for my retirement at 65.
Thanks in advance.
Also, do you think calculator on this website https://larrybates.ca/t-rex-score/ is good to calculate how much we can lost in (MER) fees or is it about something else?
“the new Tangerine funds are not ETFs: they’re mutual funds that use ETFs as underlying holdings. I’ll be looking at these in more detail soon.”
Thanks that is interesting. Looking forward to it.
I’m one year in and quite happy with this method. Thanks for the advice. I’m able to contribute enough each month to rebalance by purchasing which makes everything quite simple. I had a slightly different asset mix (I split my U.S. holdings between two e-Series funds, one being Nasdaq) and was able to earn about 10.2% over twelve months. I compared my returns with the mutual fund I was previously using at the recommendation of my advisor (RBF459) which saw about a 8.7% return. Thanks again for your work and this review.
When rebalancing, I usually rebalance by buying more and buying less of an equity/fixed income. I do not rebalance by selling equity/fixed income. Does this method avoids paying transaction costs and taxes like you said on this article since I am not selling any equity/fixed income?
@Olivier: Yes, rebalancing with cash flows is an excellent strategy, especially in a taxable account. However, it isn’t always possible. If the portfolio is large, the regular contributions may not be enough to allow this.
@Roy: I don’t think there is any specific portfolio value that should trigger a switch from e-Series funds to ETFs. I think the e-Series funds are entirely appropriate for larger portfolios if the investor is comfortable with them.
Regarding the T-REX score, this provides a dramatic illustration about the effects of fees. But we need to remember that it assumes all else is equal. For example, just because two funds differ by, say, 0.25% in MER, it by no means guarantees that the lower-cost fund will outperform by that much.
Thanks for your reply. I was just checking T-Rex site assuming that if I invest 10,000 for 25 years and rate of interest is same for both 0.25 VGRO and 0.41 TD E-series then lost in fees seems quite high. I will be putting more money every year and then this lost in fees will grow. I was not sure if t-rex calculator is doing right calculation as I always see people just say (10,000 * 0.41(MER) )/100 = $41 is not a huge amount and just multiply 41 * 25 (years) = $1025 this should be the fee but t-rex calculate something else.
Thanks in advance
First of all thank you for keeping this blog up to date with a wealth of knowledge for individual investors.
I came across Ben Flexi model portfolio, this there a certain advantage to use DFA Canada securities ?
I was wondering about TDB909 being all Canadian Bonds. Is there any real concern in having one’s entire fixed income portion Canadian and not further diversified into US/Global bonds? Or in practicality, it doesn’t make much real difference to either risk or return?
Thanks as always for the couch potato blog posts! I read every single one.
Any thoughts on the new TD one-click ETFs? They are relatively new and have about 15% that is actively managed vs passive. Tickers TOCC, TOCM and TOCA – for safe, moderate, aggressive investing styles.
I was looking at TD’s index ETFs and was wondering if there is any advantage to creating a TD ETF portfolio consisting of:
I noticed their MERs are very low, and was wondering if creating a portfolio with a targeted asset allocation could be comparable to the e series MFs or the all in one ETFs.
Thanks for your insights.
@Roy: The T-REX calculator includes the compounding effects of fees. If you keep $41 more this year because of lower fees, and then you assume (for example) a 5% return next year, too, than becomes $43 next year, and so on. Over 25 years it adds up. But in your specific example, the difference is not worth worrying about. You are not committing yourself to e-Series funds for a lifetime.
@Gautam: DFA funds are not available to DIY investors, only though advisors. They use several embedded strategies and their returns can differ dramatically from traditional index ETFs.
@Jim: I don’t feel it’s necessary to use foreign bonds. The diversification benefit is small and it usually just adds cost and complexity, This may help:
@Matt: Stay tuned, Justin and I will be looking at the TD One-Click ETFs soon.
@Shane: I have no issue with the these TD ETFs, which are simply low-cost traditional index funds. However, the best feature of the e-Series funds is that they’re an option for investors who don’t want to use ETFs, and the best feature of the asset allocation ETFs is they allow you to build a portfolio with a single fund. So in that sense, the TD ETFs offer no advantage compared with these alternatives.
Thanks for your reply.
Would a balanced portfolio with RBC be expected to do about the same performance? I started applying a couch potato approach using RBC Index Funds (using the balanced mix recommended in your article) in Feb last year, switching out balanced mutual funds, with much lower returns. I’m not sure if it’s because of the timing or due to poor relative performance of those funds, but would have thought they were more or less tracking the same benchmarks.
@Dom: The RBC index funds are similar, but there are some differences that could have affected what you’re seeing (other than the higher MER, which is also significant).
The RBC U.S. Index Fund (RBC557) tracked the S&P 500 well last year (15%), but the TD fund tracks a total-market index that happened to outperform significantly last year (18%).
The RBC International Index Fund (RBC559) uses currency hedging, while the TD fund does. That also made a huge difference last year (about 5%).
Remember, too, that performance comparisons need to be made using the exact same start and end dates or they mean nothing. That would have been especially true in 2020. I would revisit the comparison when you have at least 12 full months of history and you’re careful to compare the same periods.
I guess I was looking at the e series funds which state they invest in the underlying index ETF, which lead me to look up those ETFs. The ETFs have MERs of 0.06-0.20%. Could you model the e series using ETFs (assuming no commissions on ETFs) and get the same results with a much lower MER? I understand this will require more work and you lose the benefit of auto contributions.
Thanks for your reply,
@Shane: In theory, yes, buying the underlying ETFs will always be cheaper than using the mutual fund versions. Assuming zero transaction costs, and assuming you are comfortable trading ETFs, then that would usually be the better choice.
Cheers for the great article once again! I have a couple questions if you can provide your insight.
1) Is there any away to convert TD e-series portfolio to ETFs in a taxable account without creating a taxable event?
2) TDB911 did not pay out a dividend in December 2020 (last payout was in Sept. 2020), any idea why this might be? I believe this fund has historically paid out quarterly dividends, including a December payout.
@Al: Thanks for the comment.
1) No, unfortunately the only way to switch is to sell your existing e-Series funds, which is a taxable event.
2) I’ll be writing about this shortly. The short answer is that I don’t know why they decided not to pay the distribution in cash for December. I asked them, but they were extremely vague, as fund companies tend to be. However, if you hold the fund in a taxable account you should understand that you will still be responsible for paying tax on the dividends that were reinvested. These will be reflected on your T3 slip at tax time.
I’m brand new to investing and despite all the reading I’ve been doing trying to get an understanding of what direction to go, I still feel overwhelmed by all the choices. I’m currently making monthly contributions to an RRSP and TFSA through a wealth management firm and I’d like to take that into my own hands while saving their fees for myself. I ultimately feel split between TD e-Series and ETFs (something like VGRO or VEQT). I get the feeling I can’t go wrong with either but I want to be sure I get started on the right foot. Perhaps there is a better alternative route instead? I’m not sure what information is pertinent to make a good decision, but I currently do my personal banking with TD and I’d be looking to transfer roughly 40k from the management film and adding another 25k one time plus monthly contributions.
@Bradyn: Thanks for the comment. From what you’ve described it sounds like the e-Series funds would be a better choice for a few reasons. First, you’re already at TD, so you can integrate your banking and investing on the same site. The portfolio is five figures now, so the savings in MER would be very modest. And if you plan to set up monthly contributions this is much easier with e-Series funds. At some point in the future you can always switch to ETFs without having to switch brokerages.
I am waiting for my TD direct investing setup but in the meantime I noticed VGRO is trading higher than it’s previous day NAV, e.g. today at 30+ so shall I wait to invest 10,000$ to get it’s nav low or how this thing work.sorry for such a dumb question. Nav going up everyday is good sign or bad? How it affects returns?
Thanks for your help
Thanks for your post. I hope I didn’t miss the answer to this in the thread. I’m 33, have about 10k in e-series funds at TD, 3 years into a huge mortgage in the GTA, and will soon begin contributing $500/month once my student loans are paid off. I’d like to think that although I don’t have much into my portfolio, I’m off to a good start. But I haven’t the slightest clue of what I’m doing and therefore hold true to the term “passive investing”.
1) I noticed there are new E-series index funds available. Wondering if anyone has switched from the couch potato model or even added to them. I currently have the TDB900/909/992/911. 25% each. Would you recommend I just keep throwing money into them? Or are there other index to add or substitute?
2) Ive finally convinced my wife to contribute to her RRSP’s. Fortunately I have an govt pension, but she does not. She’s at CIBC. I’m wondering if there are comparable index funds she could invest in through their investing platform? She will prob not want to leave CIBC due to convenience.
@Giuseppe: The model portfolios remain my recommendation for the vast majority of investors. I’d resist the urge to tinker with them.
If your wife uses CIBC Investor’s Edge she should be possible to purchase the e-Series funds. If not, she can certainly use one of the asset allocation ETFs. If she just has a mutual funds account at CIBC the pickings are slimmer. CIBC does have a family of index funds, but they’re not especially cheap and not recommended.
First, thank you so much for the time and effort you spend creating these articles and responding to questions/ comments – I’ve learned a lot!
I have a question regarding RRSPs and TFSAs. Apart from my work RRSP (I contribute 4%, employer matches up to 4% and I’m enrolled in Fidelity Clear Path 2055), should my RRSP and TFSA allocation be the same? I have a TFSA through TD DI using the 75/25 split and I am looking to open RRSP through TD DI to use up my remaining contribution room. My thought right now is use the same allocation and rebalance both at the same time. Is this wise or should I be using different allocations in the different accounts?
Again, thanks for all the time and effort you spend helping others!
@Elisa: There’s nothing at all wrong with holding the same asset mix in both an RRSP and a TFSA. You could certainly make an argument for filling the TFSA with equities first and then holding a mix of bonds and equities in the RRSP, and this would be fine, but it will make the rebalancing process a little more complicated.
Hi Dan, I want to invest in RRSP/TFSA accounts. This will be my first investment in Canada and looking to invest in TD e-series funds, so if you can guide me where to open RRSP/TFSA account and do regular investments in these funds. I am just confused with every financial institution offering these accounts. Any guidance will be appreciated.
@Achin: You can buy the e-Series funds at most online brokerages, so you might want to start your search at the brokerage associated with your bank. All of the bog banks have decent online brokerages, and it can be very convenient to do your investing and banking on the same web platform. Good luck!
Im concerned about the tdb909 bond index fund. With bond yields rising I suspect we will see a significant drop. Do you think liquidating tdb909 to cash and holding cash instead of the bond index fund for the next little while is a good idea?
@Dariuss: This blog is almost six years old but still relevant:
Thank you for your work on the TD e-Funds. Have you done any calculations to determine the hidden foreign withholding tax ratio in TDB902 & TDB 911? The FWT does not appear on the T3s for these funds as it is treated as an expense of the funds along with other expenses such as management fees.
Hi Dan, Thanks for your response. I have my checking accounts with TD bank, so would you suggest to open RRSP/TFSA accounts with TD only? Do I need to open DI account with them to invest RRSP/TFSA contributions in eseries fund or normal mutual fund account will allow me to invest RRSP/TFSA contributions in eseries fund? OR shall I open a robo advisor account with Wealthsimple, since I have little knowledge about investing currently and later move to eseries or ETFs? sorry for asking such basic questions.
I have been index investing for close to 15 years now starting with TD I series funds and eventually switching to E series funds. I have become comfortable with this method of investing and as a result of weekly and monthly contributions, I have built a portfolio well in excess of $50k. The problem is that I’m seeing advice to switch to Vanguard or Ishares ETFs, but at the same time E series is a great alternative. So now I’m confused about staying with e series or switching to ETFs. What do I have to do to make the right decision. Also if I wanted to go to ETFs couldn’t I buy the underlying ETFs that the e series are based on right from TD?
@Robert Hamilton: Thanks for the comment. I would not be in a hurry to abandon the e-Series funds if you have grown comfortable with them. They are an excellent choice. If you do decide at some point that you would like to use ETFs, I would not suggest using the underlying TD ETFs. I’d only make the change only if you switch to a one-ETF solution (i.e. an asset allocation ETF). That will at least have the benefit of being easy to manage, with no rebalancing.
@Achin: It’s up to you whether you would like to use TD Direct Investing or Wealthsimple, but I definitely would not open a TD Mutual Funds Account. If you want to use the e-Series funds, you can buy these through TD Direct.