In my last post I reviewed the returns of my model ETF portfolios in 2021. Now let’s take a look at how the TD e-Series index mutual funds performed during the year.
We’ll start with the returns of the four individual building blocks. A reminder that published mutual fund returns are always net of fees, and they assume all distributions are reinvested.
|Fund name||Fund code||2021 return|
|TD Canadian Index Fund - e||TDB900||25.35%|
|TD U.S. Index Fund - e||TDB902||25.25%|
|TD International Index Fund - e||TDB911||9.79%|
|TD Canadian Bond Index Fund - e||TDB909||–2.98%|
Source: TD Asset Management
And now we’ll consider the returns of the five balanced allocations that make up the model portfolios, which span the range from conservative (30% stocks) to aggressive (90% stocks). The returns below assume your portfolio started the year with your target mix and that you never rebalanced:
|Asset allocation||2021 return|
|70% bonds / 30% stocks||3.95%|
|55% bonds / 45% stocks||7.42%|
|40% bonds / 60% stocks||10.89%|
|25% bonds / 75% stocks||14.35%|
|10% bonds / 90% stocks||17.82%|
Source: TD Asset Management, Microsoft Excel
Stacking up against ETFs
As we’ve seen in past years, the e-Series funds generally stack up well against their ETF counterparts: despite their higher fees, the funds occasionally even outperform. In 2021, for example, the TD Canadian Index Fund delivered about 29 basis points more than the iShares Core S&P/TSX Capped Composite Index ETF (XIC). and the TD U.S. Index Fund had a slight edge on the Vanguard U.S. Total Market Index ETF (VUN).
We need to acknowledge the reasons for these differences. In the case of Canadian equities, the TD fund and the iShares ETF track different indexes: although both get exposure to the broad market (large, medium and smaller companies), their methodologies are not identical, so their relative performance will vary from year. Most of these differences are random and will even out over time.
In the US equity category, the differences go a step further. VUN tracks the total US market, with more than 4,000 stocks in its portfolio, while the TD fund tracks a large-cap index that includes only the 500 biggest companies. In any year when large-cap stocks outperform mid and small caps, the TD fund will come out ahead.
Similar caveats apply when you compare the performance of the balanced portfolios. For example, the TD e-Series portfolio with a mix of 40% bonds and 60% stocks returned 10.89% last year, compared with 10.29% for the Vanguard Balanced ETF Portfolio (VBAL), which has the same overall mix of bonds and stocks. But dig deeper and you’ll find that VBAL includes foreign bonds (which lagged Canadian bonds) and a slice of emerging markets stocks, which delivered negative returns in 2021. That explains the slight underperformance, and again, over other periods these differences will swing in the other direction.
That’s all, folks
Although 2021 again proved the TD e-Series funds can (in theory, anyway) be a good alternative to ETFs, recent changes in the industry are making them increasingly unattractive. As a result, the current edition of my model portfolios no longer includes the e-Series. This pains me a little, as these funds have been among my recommendations since 2010.
I’ll anticipate the questions that always follow changes to the model portfolios: no, I’m not suggesting that if you’re using the e-Series funds you should promptly liquidate them and choose one of the ETF options. If you’ve been using these funds successfully for years, then you should continue doing so. But I’m no longer eager to recommend the e-Series funds for new investors for several reasons.
The first is that one of their biggest benefits—the ability to buy and sell them without trading commissions—will soon disappear at several brokerages. Last year the Canadian Securities Administrators announced a ban on discount brokerages collecting trailing commissions from mutual funds, a rule that goes into effect on June 1. This was well-intentioned, as trailing commissions are ostensibly designed to pay for services that discount brokerages don’t offer, such as planning and advice. But the response from many brokerages has been to introduce commissions for buying and/or selling mutual funds, treating them just like stocks and ETFs.
In March, RBC Direct Investing will introduce a 1% commission on fund purchases (maximum $50) and CIBC Investor’s Edge will charge $6.95 per transaction. If you own the e-Series funds at one of these brokerages, they will likely lose any advantage they may have had over ETFs. (BMO InvestorLine and Scotia iTRADE haven’t announced their new policies yet.)
The lone rebel so far has been TD Direct Investing, which announced it would not charge commissions on mutual funds, so if you hold the e-Series funds there, you might be able to continue with no changes. But TD no longer allows you to access the e-Series through a TD Mutual Funds account, which used to be an attractive option for investors who preferred not to open a brokerage account.
Although none of these problems has anything to do with the e-Series funds themselves, the reality is that there are just so many better options now. The brokerage industry is turning the old rules on their head by charging investors to buy mutual funds while at the same time offering zero commissions on ETFs. No-fee trading is now available for at least some ETFs at many brokerages, including Questrade, National Bank Direct, BMO InvestorLine, Scotia iTRADE and Qtrade. Trading commissions, in and of themselves, are no longer an obstacle for investors looking to build an ETF portfolio.
Finally, the introduction of asset allocation ETFs has made the e-Series funds even less appealing. These all-in-one ETF portfolios have the great benefit of maintaining themselves: the e-Series portfolios, by contrast, have four components that need to be regularly rebalanced. The e-Series funds used to be more user-friendly than ETFs, but that’s much harder to argue today.
So again, if you’re a fan of the e-Series funds and you’re able to continue holding them with no trading costs, then don’t let me talk you out of it. But if you’re looking to build a low-cost, low-maintenance index portfolio, then asset allocation ETFs at a zero-commission brokerage are likely to be a better choice.
@Luc: I would not be too quick to make the switch if you feel it is daunting. My book might help, though. :)
The following message was sent to my TD Direct Investing messages on March 3, 2022. At this time nothing has changed with the e-series funds in my unregistered account and I haven’t tried to buy more to see what would happen. I’ll update this post after June 1, 2022 to let you know if the funds have been transferred to the funds Kyle mentioned in his comment.
Changes to Your Mutual Fund Holdings
A Canadian regulatory change, effective June 1, 2022, means only mutual funds without trailer fees will be allowed for purchase in your TD Direct Investing account. You may notice some updates and account activity ahead of this date as we prepare for this change.
What you need to know
As of March 7, 2022, only mutual funds without trailer fees will be available for purchase on TD Direct Investing platforms.
Between March and May, you may notice exchange activity within your account to switch you, where available, to a series of the same or similar mutual fund that is, or will be by June 1, 2022, non-trailer paying. These transactions will show in your history and on your account statement and will cause no tax implications. Where there is Systematic Investment Plan (SIP) set up and a non-trailer paying series available, the SIP will be automatically switched when your mutual funds series is switched.
There is no action needed on your part at this time. We will work with mutual fund companies to support a smooth transition.
Thank you for choosing TD Direct Investing.
Back in April Connie Lam wrote: “I just spoke with someone at TD Direct Investing and they said that these funds don’t have trailing commissions and will not be affected:
TDB900, TDB902, TDB911, TDB909”
I believe she was given inaccurate information. I just double checked to be sure. If you deal with TD Direct you will receive a statement called ‘Your fees and charges report’ at the end of every year. Mine shows a trailing commission associated with an account that holds nothing but the e-series funds.
I’ve been investing in E-Series funds for YEARS AND YEARS, basically following Dan’s advice. I have a TD DI account and use webbroker and reading this article and some of the comments made me have a quick panic attack as I haven’t logged in in ages and everything is set to basically fire and forget every pay period.
Luckily I just checked and it seems that my funds (900, 902, 909, and 911) for my RRSP and my RESP have kept merrily trucking along this year with no issues so I don’t think I need to do anything right now.
The question I have is, should I keep doing what I’m doing OR is it time to switch to something else? The benefit of the e-series funds are that I have 4 SIPs setup every month after my pay period to simply continue buying the funds in my setup allocation with no fees attached. Is there something else I could switch to where this model of investing still works?
@Evan: If the e-Series funds are still available to you and you’re comfortable with the logistics, then I don’t see any compelling reason to make a change. At some point, if you want to switch to a one-ETF portfolio, this may help:
Long time reader. This is a great resource for everyone.
The part I’m most confused about is the TD bond fund you have recommended. It appears to be primarily long bonds. Wouldn’t it make more sense from a diversification perspective to do half long bonds and half short bonds? I feel that long bonds will not be doing very well for quite a while, so I thought getting some short bonds in the mix would be prudent. Thoughts?
@Brent: TD doesn’t seem to publish the breakdown of maturities in its bonds funds, but XBB from iShares tracks a very similar index, so we can use it as a proxy. Broad-market bonds like this are actually almost half short-term bonds (under 5 years to maturity):
5 years or less: 44%
5-10 years: 27%
Over 10 years: 29%
A short-term bond ETF can be a good choice if you have a shorter time horizon or if you are willing to give up a little expected return in order to get less volatility. But be careful about predicting whether short or long term bonds will outperform in the coming years, because this is just guesswork.
I can understand Brent’s point about long bonds. Is it really just guesswork? There are secular long term trends that can’t be ignored. It’s been a 40 year trend of rates coming down. When that reverses, look out! The nominal bond market could be due for some turmoil.
Since TD now charge 9.95$ per transaction and that I am investing regular and small amounts. What do you think of the new TD Easy Trade mobile app which allows to trade ETF commission free? (This is what they advertise)
Per my last comment here is what they advertise.
AIM HIGHER WITH LOWER COSTS:
No monthly fees, 50 commission-free stock trades per year for each client and unlimited commission-free TD ETFs.
Do the eSeries funds automatically adjust the book value for ‘Return of Capital’, or does this need to be tracked annually? Thanks.
@Marco: One of the great features of mutual funds is that the the cost base is adjusted automatically at the fund level, so you do not have to do this yourself, as you sometimes need to with ETFs.
Dan thank you for your information. I have the option to purchase several TD Emerald Index Funds like TDB630. I’m wondering if this would be a suitable alternative to an asset allocation ETF like VBAL/XBAL or e-series portfolio.
So I have the e-series, have had since 2018 and I find them quite easy to use. I was alarmed to come across this post just now, however. I see that you say no need to panic and dump them though, so I think I will carry on for the time being. Mostly I find the thought of transferring each of my TFSA, RRSP and RESP quite daunting.
Interestingly, I am still able to access them through my mutual fund account, no fees for purchases. I do not have a direct investing account. Is the lack of access through mutual fund account only for people who are just opening e-series for the firs time or am I somehow just getting lucky? If I start getting hit with fees I will certainly switch to something else but really hoping that isn’t’ necessary.
99% of the large ETFs contain the same high-quality stocks. In almost any large fund you find the Apple, Johnson & Johnson, PepsiCo, and Procter & Gamble of the world – then why not simply buy the best buy-and-hold-forever stocks without any counter-party risk directly? I started building my All-Weather Portfolio of the best buy and hold forever stocks I can identify, and currently generate about 24,000 USD in passive income. Keep it up, love your blog! Cheers from Singapore, Noah