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.