Category: Investing

Qtrade is an independent discount brokerage which has done extremely well in the annual Globe and Mail brokerage rankings. After calling them a number of times, I can see one of the reasons. They are super quick to answer the phone.

Related:  My Canadian discount brokerage comparison

Overall impressions

Qtrade has competitive fees for investors with at least $50,000 to invest or trade at least 30 times per month.  For smaller, less-active investors, the fees are better than the big banks, but not as good as the smaller discount brokerages such at Questrade.  Their customer service is one of, if not the best in the business.

Related:  See my Questrade discount review

They offer US$ RRSP accounts and is one of only two discount brokerages (Questrade being the other one) to offer RESP additional grants, Canada Learning Bond, and ACES grants (but not QESI grants).

Online trading commissions

• $19.00 – If household assets are less than $50,000 and less than 30 trades executed per quarter.
• $9.99 – If household assets are greater than $50,000 or 30-149 trades per quarter.
• $7.00 – If 150 trades completed or more per quarter.

Phone trading commissions

$40 + cost/share

Annual account fees

• Canadian Registered accounts – Qtrade charges $50 per year on registered accounts (ie RRSP, RRIF etc)  that have a balance less than $15,000.
• US$ RRSP – $50 regardless of account size.
• TFSA – No annual fees.
• Non-registered account – No annual fees.
• US$ RSP is a separate account from the Cdn$ RRSP, so if your balances are less than $15k then the $50/yr annual fee applies

Foreign exchange fees

Trades with a value of:

• Less than $10,000 – 1.67%
• $10,000 to $25,000 – 1.53%
• Greater than $25,000 – 0.96%

These fees are comparable with other brokerages and in fact the ~1% cost for trades greater than $25,000 is pretty good relative to other brokers.

Mutual funds

Full range of mutual funds available.

Free real-time quotes

Yes

Minimum to open account

$1,000 for registered account.  $2,000 for margin (non-registered) account.

Commission-free ETFs

This applies to select ETFs where the purchase amount is greater than $1,000.

Dividend Reinvestment Plans

Yes

Some opinions on Qtrade

I asked a few existing Qtrade clients to share their experience with QTrade:

Anonymous

For background I’ve got accounts at both TD and Qtrade, so can compare:

1. I find the interface very user friendly and easy to navigate. When I compare to TD, QTrade wins hands down. The layout is easy to navigate and use in all areas. The only bad thing I would say is on occasion it seems a little slow, usually in the off hours.
2. Customer service has been very impressive. Phone calls are typically answered in a couple rings, and most of the service reps I’ve spoken to are extremely knowleadgable. They also have a secure email system that is always answered first thing the next day that is very handy. I also find they are willing to give online trading commission when calling in and needing help due to technical issues. EG I had an ETF going through a consolidation and wanted to sell, so they did over the phone for no extra cost.
3. Research tools are adequate for my needs, although I will say TD has more. That being said I find I’m always using the charting and technical analysis tools at Qtrade as they are much easier to use. If your looking for analyst reports then QTrade doesn’t have a great depth on that, but I haven’t found anything else lacking. This might be a good thing knowing how well analysts can predict stock movement anyway lol.
4. I’d consider myself a mostly passive investor, but cannot help being a little active. I sell the odd covered call, and have done a couple trades. I also try to be tactical and smart when putting new money to work.
5. Overall I’ve very happy with QTrade and would highly reccomend it. No company is perfect I guess, a couple nagging things for me though:

The commission free ETF’s switched to a minimum of $1,000 purchase at some point last year. Would have been nice if it stayed at no min, but I understand why they needed to to that.

From a risk management point of view I have 2 thoughts that I probably should clarify with them at some point. 1. Being in Vancouver, I really hope they have a good data backup system in another part of the country in case the big earthquake hits. 2. When calling in I’ve found they don’t ask as many questions as TD to verify the caller is who they say they are, I wonder if they are open to fraudulent action due to this. The secure Email this is not a concern.

ECN fees are also annoying. Good incentive to keep trading to a minimum I guess.

Frase

I switched financial institutions last December and moved from Credential to Qtrade. I don’t trade a lot and find them fine with the only surprise I had was the “per share” cost added to the 9.95 trading fee. One feature I would like to see is a consolidated share report which show the total shares held for my various accounts. My wife and I have several different accounts with, say shares of BCE in several of them. For asset allocation purposes it would be nice to know at a glance my total investment in BCE. I don’t bother with the other features as I am a dividend investor and don’t trade that much.

Feruk

1. Trading platform/interface – I like it. Easy to use, no delay. I’ve got an account with Interactive Brokers as well, and I prefer the Q-Trade display in almost every way.
2. Customer service – Had contact with them 10+ times over the years, top notch.
3. Research reports and tools – Pretty weak. The reports are mostly Morningstar; I don’t rely on them much. My big pet peeve is with their stock screening tool. In theory, you can select from a lot of options. In reality, it must pull from some sort of old data as often the screener results do not reflect the desired search well.
4. What type of investor are you?  I’m a mix. Most of my assets are passive, but I day trade a small part of my portfolio.

Stephen Heath

1) Trading platform/interface – are these ok/good/bad?

Personally, I love it, to me it seems logically presented and without tons of crap on the screen (other than the opening screen), but if you want detail you can drill down and get whatever you want.

2) Customer service – any impressions you might have.

Crazy amazing. You call and get them right away (and this is on the non-vip line… even though I qualify for the vip line, I never bother looking up the number because the non-vip line guys are great.) I’ve never stumped them on anything and they’ve all solved my problems so fast it’s great. They’re also quite empowered… there were a few times when funds transfers were going slow and I would miss an opportunity. I have no margin or lending facilities on the account, but they saw it was on the way and the person answering the phone authorized the advance on funds. No phone monkeys or layered levels of customer service here!

3) Research reports and tools. Do you use these and are they any good?

They mostly have the Morningstar reports, and I’m ambivalent about them because I feel Morningstar does a terrible job at keeping them up to date promptly… once a month updates on their recommendations, and on specific companies it could be months old. That said their technical tools are pretty good, although I don’t use them a lot, mostly as a way to search new areas I want to invest in to come up with names to research.

4) What type of investor are you? (ie active, passive etc)

Well, mix and match, I also invest for work’s treasury using Qtrade, and we have different parameters, so I tend to do more short term purchases and flips… not quite daytrading, but definitely active trading, so there’s a few volatile companies we’ve moved in and out of, but the bulk of the investments are for our family… and there I’m mostly buy and hold, I’ve got the odd “gamble” stock but that’s < 2% of my portfolio. And I tend to basically just buy the stocks that the ETFs hold rather than buying ETF’s, no point paying the MER. I don’t get into anything fancy like options, margins, or the like, so can’t really comment there.

5) Anything else you want to add.

I can’t really think of anything, I don’t have experience with a lot of other brokers so can’t really compare, but there’s never been anything that would make me want to switch, and even though it’s about a decade away, I’m not looking forward to when I start bumping up on the million dollar insurance limit and need to find a secondary broker. I read this year the Globe picked Virtual Brokers as #1, Qtrade sliding to a close second, so I might check that out, but really, for the service I’m getting I’m quite happy with the VIP prices at Qtrade. (Oh, VIP prices apply when you do a lot of trading… I think 200 transactions? Or when you have over $50k in household assets (all the accounts at a single address)… and it gives you cheaper trades than non-vip.). Personally, I don’t mind paying a bit more for the kind of service I get with Qtrade.

 

 

 

The TFSA or Tax Free Savings Account started in the year 2009.  It was announced early in 2008 and financial institutions were allowed to accept account openings in December of 2008, but no contributions could be made until January 1st of 2009.

Calculating your TFSA contribution room

The start year of the TFSA program is important if you are trying to calculate contribution room.  Every eligible Canadian got $5,000 of new contribution room each year from 2009 to 2012.  For the years 2013 and onwards, the amount is $5,500.

For more information on TFSA rules as well as how to calculate your contribution limits please see TFSA rules.

 

When is the RRSP contribution deadline?

The RRSP deadline for 2012 (tax year) contributions is midnight of Friday, March 1, 2013.

60 day RRSP contribution rules

When you file your 2012 tax return, you have the option of claiming any RRSP contributions made during the first 60 days of the current year. In other words – any RRSP contributions made between Jan 1, 2013 and Mar 1, 2013 can be claimed on your 2012 tax return if you wish. These are known as “60 day contributions“.

How can the RRSP deadline be midnight if the stock exchanges are closed at 4:00 pm?

Good question. This deadline is very “soft” – it really represents the day you place your purchase (or at least try to place your purchase). For example if you meet with your financial advisor at 11:30 pm, March 1 in the alley behind your local Tim Hortons, that still counts as a contribution, even if he doesn’t actually buy the investment until the next day or a couple of days later.

RRSP contribution deposit date

But if the deadline is March 1 and the advisor makes your purchase on March 3, how can that be a 60 day contribution? The answer is the “deposit date” of the contribution. If the advisor makes the purchase on March 3, you will get the prices of March 3 (also known as the “trade date”) for your investment purchase but he/she will ensure that the deposit date is set to Feb 29, which means that the institution that is handling the investment (ie brokerage, mutual fund company) will create a 60 day RRSP contribution receipt for you and you can claim it on your 2012 tax return.

Can I just call my financial advisor on Mar 3 and tell him I meant to contribute February 29th?

Yes, you can. Although some advisors might refuse the order, I’d be willing to bet that most of them will still do the purchase for you and backdate the deposit date. Just tell them that you “forgot” or come up with some other lame excuse.   More RRSP contributions mean more money in their pocket. There is a limit however, once you get a week or two past the deadline, it becomes less likely that you will be able to get a contribution receipt. The best thing is to make the contribution on time.

Is the RRSP contribution deadline always March 1st?

No, it isn’t. Here is a table of some future RRSP contribution deadlines:

Year	Contribution Deadline
2013	March 1
2014	March 3
2015	March 2

How is the RRSP contribution deadline calculated?

The deadline is calculated using the following steps:

1. Start with Dec 31 of the previous year.
2. Move forward 60 days ie Jan 1 is 1 day, Jan 2 is 2 days etc.
3. If the 60th day is a weekend, keep going forward in time until the next business day.

The majority of the time, the RRSP contribution deadline is on March 1st, because most years, March 1st is during the week. You’ll notice from the table that in 2014, Mar 1 is a Saturday, so the deadline is the following Monday, March 3.
Leap years can also play a part which is why sometimes the deadline is Feb 29.

2013 RRSP Contribution Limits

Find out your 2013 RRSP contribution limits.

Given that we are approaching the end of RRSP season, I thought it would be fun to dispel the most common RRSP myth that I see repeated over and over again in the media.

Related – 2012 RRSP contributions limit and deadline

Since the invention of the TFSA, there have been many articles written comparing RRSPs and TFSAs.  One typical line of advice about RRSPs is that the RRSP is only advantageous if your marginal tax rate in retirement is lower than your marginal tax rate when contributing.   If the marginal tax rate is the same in retirement as when you are making contributions, then there is no tax saved.

Related:  TFSA vs RRSP – Which is best for your retirement account?

Marginal tax rate is the tax rate charged on the last dollar earned in a year. 

This rule is simple, easy to understand, but it’s just not usually true.

Note that this article really only applies to middle class earners.  If you are in a low income tax bracket, then RRSPs are probably not beneficial and can even be harmful financially compared to alternatives.  If you are going to be getting a very good pension in retirement, then RRSPs have little benefit as well. 

This rules seems to assume that taxes on withdrawals are paid at your marginal rate which is not the case.

When you make a contribution to an RRSP – the tax deferred from RRSP contributions is calculated at your marginal tax rate (or close to it, if your RRSP contributions span more than one tax bracket). 

When you withdraw money from your RRSP or RRIF – the tax is calculated using your average tax rate (after other income sources such as pensions).

This is a bit complicated, so let’s look at this concept in chunks:

RRSP contributions are made at marginal (or close to marginal) rates

If Sue from Ontario makes $100,000 per year and contributes $10,000 to an RRSP, she is able defer taxes of $4,314 (43.14% of $10,000) that would have been owed on her last $10,000 of income.

RRSP or RRIF withdrawals are made at the average tax rate

When you earn income, there are different tax bracket rates that apply to different parts of your income.  Taxtips.ca has all these tax brackets if you are interested.  For example, Sue earns $100,000 per year and her marginal tax rate is 43%.  But she doesn’t pay $43,000 of income tax each year.  In fact, she will only pay about $30,000 in taxes for an average tax rate of 30%.  This is because the tax rates for lower income levels is less than her 43% tax rate on her highest income.

Example

Let’s look at a very simple example where Sue works for 10 years, contributes $10,000 per year to her RRSP (with no taxes being deducted at the source) and then decides to take a year long sabbatical and withdraws all the money from her RRSP in her sabbatical year.  If her savings earns 3% per year, she will have $102,000 in her RRSP to use during her sabbatical.

The amount of tax she will pay on $102,000 of income (we’re going to pretend that there are no changes in tax rates in the 10 years) will be $27,647.

Has she saved any taxes?  Yes – she would have paid $4,314 in taxes for each $10,000 that she saved over the ten years for a total tax bill of $43,140.  In the end she will have saved $15,493 in taxes by using her RRSP  as savings account even though the marginal tax rate on the withdrawal is the same as marginal tax rate when she made her contributions.

Example 2

Ok, that example was pretty simple and leaves out an important fact for someone in retirement – they are very likely to have some sort of base pension income such as OAS and CPP and possibly other pensions as well.

Let’s look at another example which is still pretty simple, but includes some other base income.

Joe earns $82,000 per year in Ontario which puts him at the 39.4% marginal tax rate.  He contributes $12,000 per year for 40 years and earns 5% per year.  When he hits retirement he has $1,453,000 in his RRSP and decides to withdraw $58,000 per year.  Joe is already getting $6,000 per year for OAS and $12,000 from CPP and $12,000 from a trust fund for a total of $88,000 per year.  So he’s making more money in retirement and his marginal tax rate is a bit higher than when he was working (43% vs 39%).

The amount of tax he will be paying on the RRSP withdrawal portion of his income each year will be $17,891 which is an average tax rate of 31%. 

Joe has significant pension income, makes more money in retirement, his marginal tax rate is higher, but the average tax rate on his rrsp withdrawal is still less then the tax rate he saved at when making his contributions.

Summary

In both of these examples, the income in retirement (or sabbatical) is a bit higher than in the earning years.  Even in this case, RRSPs will likely still save you some taxes or at worst – won’t save you any tax, but won’t cost you anything either.

Most people will earn significantly less in their retirement years and the tax differential will be much greater.  A middle class earner who saves regularly and will make less money in retirement cannot lose by using RRSPs.  They can even earn the same income in retirement or a bit more and still come out ahead with RRSPs.

 

 

The maximum RRSP contribution limit for the 2012 tax year is $22,970. There are other factors in calculating the limit, so read on!

Remember that the RRSP contribution limit applies to the previous tax year.

Some rules to calculate your 2012 RRSP contribution limit

Your RRSP contribution limit will be 18% of the previous tax year earned income or the RRSP contribution limit ($22,970), whichever is lower, plus any unused contribution room from previous years.  Earned income basically means income you earn from a job or business (including real estate rental income).  Income or dividends from investments do not create RRSP contribution room. You can find out your current “contribution room” or “deduction room” on your Notice of Assessment which you should have received from the Canada Revenue Agency (CRA) after filing your taxes last year.

Contribution room carry-forward

If you don’t use up all your RRSP contribution room, it will get carried forward forever.

Contribution room is calculated on previous year’s income

One fact which can be confusing is that the RRSP contribution room created by earned income in any given year is applied to the following tax year.  So if you made $50,000 in year 1, you can contribute $9,000 to your RRSP and claim it against your year 2 income (or any subsequent year).  You can’t claim it against the year 1 income.

Maximum age for contributions

You can contribute to an RRSP for any tax years where you turn 18 or older up to a maximum of 71 years of age. You can contribute right up to the end of the year where you turn 71.

What about pension contributions?

Contributions to pension will reduce your eligible RRSP room.

When is the RRSP contribution deadline?

Check this post for RRSP contribution deadline.

 

How ’bout them stock markets?  Hmmmm…not so good?  Well, whatever you do – don’t wimp out and switch your equities to cash, however tempting as it might be.  Why is that you ask?  To answer that I’m going to go into one of the main lessons of the Four Pillars of Investing – know the history of the markets.  This doesn’t mean memorizing any boring dates or who was present at some document signing but rather taking a look at some past market bubbles…and more importantly, some past market crashes.  The idea here is to put that famous expression “those who cannot learn from the past are doomed to repeat it” to rest!

Investing in stock markets has a huge behavioural component to it – balance sheets and price/equity ratios are all fine and dandy, but the real question is – can you avoid pulling the trigger on the ‘sell’ button when the markets take a nose dive?  Some investors talk of buying when stocks are “cheap” – don’t forget that not selling is the same as buying.  If you take a big loss on your investments and sell, then you have locked in your losses and have no chance of profiting from future stock market gains.

William Bernstein, author of The Four Pillars of Investing, has completed a lot of research which show how the stock markets always come back from the depths.  His advice is “when things look bleakest, future returns are highest“.

Let’s take a look at two examples from his book:

1929 stock market crash

This is undoubtedly the most famous stock market crash of all time – over the course of almost 3 years, the Dow Jones Industrial Average lost about 90% of its peak value from Sept 3, 1929 to July 8, 1932.  Needless to say, this event was quite devastating and many former investors swore off equities forever.  Investors who stayed in equities were rewarded however, since the markets returned 15.4% annually for the 20 years following the 1932 bottom.

1973-1974 crash

This market crash followed a period of great market returns due to the phenomenon of the “nifty fifty” companies.  Unfortunately the “fifty” weren’t so “nifty” after all and the Dow Jones lost almost half its value (sound familiar?) from the beginning of 1973 to the end of 1974.  Bernstein introduces an interesting statistic – in the late 1960’s, which was the middle of a huge bull market, 30% of American households owned stocks.  By the late 1970’s and early 1980’s which was after the big crash, only 15% of of households owned any stocks.  It is unfortunate that so many investors chose to leave the market when the going got rough, because the market returned 15.1% annually for the 20 years following the 1974 bottom.

Stock market prediction time

I’m no economist or stock picker but one of the interesting things I recently found out about the 1929 crash was that the Dow Jones had increased approximately 350% (not including dividends) in the 5 years prior to crash.  350% in five years is absolutely amazing and it shouldn’t be a huge surprise that a bubble had formed.  The aftermath of that bubble was that the equity markets lost 90% of their value (from the peak).  Is this happening again?  I doubt it, the returns of the US equity markets have been relatively modest in the past few years so it is hard to believe that a major bubble had formed.  My grand prediction?  The US equity markets will not lose 90% of their peak value, but rather a lesser number – hopefully much less.

Conclusion

Switching your equity investments to cash after they go down is not a good way to invest.  After events like the markets we have suffered through this year, there is nothing wrong with revisiting your asset allocation but the best thing you can do is to learn more about investing.  Study past market history, read investing books, blogs (especially this one) and keep track of your investments.  If you have an advisor, talk to them frequently and make sure you know what you are invested in.  Stock markets go up and down – the more you are prepared for it, the easier it will be to ride out both the good times and the bad times.

Time to take a look at the 2012 investment returns.  You can usually tell the performance by how early in the year this post appears.  When the market has done well, I can’t wait to calculate the return and see how much more money I have.  In bad years, I tend to delay performance calculation.  This year – the numbers look pretty decent.

My portfolio allocation

My portfolio allocation is loosely based on the Canadian Capitalist’s sleepy portfolio. I’ve made a few changes from his portfolio and this is what my desired allocation is:

Asset class	ETF	Target (%)
Bonds	XSB	20
Real return bonds	XRB	5
Canadian equity	XIU	11
US equity	VTI	32
International equity	VEA	32

I’ve been a good little indexer this year (for a change), so my actual allocations were pretty close to those numbers.

Past returns

Here are my returns from the last seven years:

Year	Return(%)
2006	14.7
2007	4.1
2008	-17.0
2009	20.24
2010	7.3
2011	-1.8
2012	13.3

My annualized rate of return over the seven years is 5.16%. At that rate, $100,000 invested seven years ago would now be worth $142,260.

The rate of inflation over the last six years has been pretty low at just under 2%, so my annual real return is about 3%, which is pretty reasonable.

I have a relatively low amount of Canadian equities (11%) which helped this year as the S&P500 (13.5%) and Europe/Pacific (14.8%) handily outpaced the TSX60 (8.1%).  This doesn’t mean anything, as there are other years where the Canadian index is the winner.  My investment philosophy is to keep my investment fees low and diversify.

How did your investments do last year?

 

 

I read an article recently about a formula to calculate the true cost of owning an ETF.  The idea behind this formula was to capture all the costs of an ETF, not just the annual expense ratio or MER.

Related: What are ETFs? – Exchange Traded Funds

If you are trying to add up your costs for something, it makes sense to try to include every single cost involved.  However, from a practical point of view, it might also make sense to just include the significant costs and ignore the insignificant ones if it is too much work and the final result will be similar.

This second approach definitely applies to the cost of ETFs.  For most investors, the MER or expense ration of an ETF is the dominant cost and the main one they have to worry about.

Bid-ask spread costs [explained below] and to a lesser extent, trading fees are mainly relevant for frequent traders.

Related: How to buy an ETF or Stock at a discount brokerage – Step by step directions

The reason this article caught my eye was mainly because of the example given – the “true” annual cost for an ETF that had an expense ratio of 0.10% ended up being 0.76%, which is almost 8 times higher than the original expense ratio or MER.  That seems pretty suspicious to me, so I took a closer look.

In the example, the investor has $10,000 which they use to buy an ETF.  After six months they sell the ETF and the author calculates the “expense ratio” which includes the trading fee and the bid-ask spread.  While their math isn’t wrong, I’m not sure how common that scenario is.

Do most people buy ETFs if they only have $10,000?  I would think that low-cost index funds would be a far better choice.  The author is American and they have access to a lot of very low cost index funds, so in most cases – someone with a smaller portfolio wouldn’t likely be investing in ETFs.

Related:   ETFs or Index funds – the best strategies

The other problem is that someone who changes their entire portfolio every six months is a reasonably active trader in my opinion.  Yes, I realize that investors make changes, but do they sell everything every six months?  Not likely.

Most investors are somewhat passive with a good part of their portfolio.  Even active traders often have a good portion of their money in static investments and just “play” with a smaller amount of money.

The trading fee and bid-ask costs are only relevant for buys and sells, so the annual cost for ETFs that are invested long term will be very close to the MER of the ETF.  If an investor does more frequent trades on a portion of their portfolio, that will increase their expenses, but not by much since the extra costs are spread over the entire portfolio – not just the actively traded portion.

Related: How to sell an ETF or Stock at a discount brokerage – Step by step directions

Trading fees

ETFs are securities traded on public stock exchanges and require a commission to be paid to a broker in order to be bought or sold.  There are some commission-free ETFs, but they are in the minority. 

Common sense is important when it comes to trading fees.  If you are paying $25+ for your fees, then you need to find a cheaper broker – see the Canadian Discount Brokerage comparison for more information.

If you are paying $10 or less per trade, you still need to make sure that it makes sense to be buying ETFs.  If you are buying $100 of an ETF each month and paying a $10 fee, that is not a good idea since your fee is 10% of the transaction.  Way too high!

One rule of thumb which I like, is to not do any stock/ETF transactions where your trading fees are higher than 1% of the trade amount.  So if you are paying $10 per trade, your minimum trade amount should be $1,000.

Here are some other suggestions on how to lower your trading costs when buying ETFs or stocks.

Bid-ask spread

The bid-ask spread is an investment cost which is difficult to understand (for me at least).  The easiest way to think about it is pretend you buy some ETF shares right now for $15 per share. If you are a day trader, you might want to sell those shares in one hour.  Let’s say the share price doesn’t change in that hour.

When you buy, you are paying the ‘ask’ price and when you sell, you receive the “bid” price (in theory at least). Therefore, if you buy and sell an ETF (or any individual stock) and the share price doesn’t change, you won’t get the same price you paid.

This may seem odd – if you buy a stock at $15.00 and sell at $14.97, didn’t the price go down and you lost three cents per share as a result.  In reality, that’s possible, but in my example where the price didn’t change – your loss was a result of the bid-ask spread. 

XIU.TO (my favourite Canadian ETF), for example has a bid of $17.57 and ask of $17.58.  If you put in a market order, it will get filled at the ask price of $17.58. 

The ‘ask’ price is the lowest price that sellers are offering their shares for on orders that are unfilled.

If at that same moment of time, sold the shares at market – you would likely get $17.57 per share for a loss of one cent per share.  This loss is due to the  difference or “spread” between the bid and ask offers for outstanding shares.

In our example, a one cent “commission’ represents 0.057% of our trade.

Related: Stock Purchase – Bid/Ask Prices

Let’s look at another ETF.  VTI (all American stock ETF from Vanguard) which happens to be my favourite American ETF, right now also has a spread of one cent.  The difference with VTI is that the price of each share is $72.53, so a one cent commission is only 0.014% which is about one quarter of the spread ‘commission’ we paid on the XIU share.

Obviously the spread commission as a percentage is not only a function of the difference between the bid and ask price, it’s also a function of the share price.  The higher the share price is, the lower the commission as a percentage.  One cent is a smaller fraction of a $75 stock vs a $18 stock.

The “ETF cost” author’s bid/spread example could be an ETF that has a three cent spread and a sub-$20 share price.  While this isn’t unreasonable, if you stick to the larger ETFs, this shouldn’t happen. 

I decided to check the bid/ask for all the ETFs I have in my portfolio and most of them were one penny:

• XIU – one cent
• VTI – one cent
• VEA – one cent
• XRB – two cents
• XSB – one cent
• BSV – two cents

This isn’t to say that these ETFs never have larger spreads.  It can and does happen, but it’s not likely to get more than a couple of cents.

Both XRB and BSV are not heavily traded compared to the other ETFs which helps explain the larger spread.  Even my most ‘expensive’ spread which occurs on XRB still only results in 0.07% commission which is half of the example in the article.

Let’s do a fun example

Since the author did a fairly arbitrary example which increased the ETF costs dramatically, I will do the same thing to show that the trading fees/spreads are insignificant – at least in my example.

Assumptions:

• Portfolio is $100,000 at the beginning of the year. 
• Portfolio is made up of one ETF.
• ETF share price is $28 and never changes or pays out dividends.
• ETF annual expense is 0.17%.
• Investor purchases $1500 of one ETF at the end of each quarter with a trading cost of $10 and a two cent spread which is 0.07% of the share price.  The trading fee comes out of the account.
• They can buy fractional shares (this makes the example cleaner).
• The time period is five years.

My theory is that the annual expense of 0.17% is the only one that matters. 

After five years, the investor has $129,400 in their account and has paid:

• $954.61 in MER
• $200 in trading fees
• $5.36 due to the spread commission

The total cost over the five years is $1,160.

Now I will admit that in this case, trading fees are more significant than I originally thought, however the spread commission is not.

So depending on what kind of investor you are, the annual MER and to a lesser extent your trading fees will determine your total costs.

Moral of the story

Bottom line is that as long as your transaction fees are low and you don’t trade a lot, the annual ETF expense ratio or MER will be the largest part of your ETF cost.  If you want to be a cost-conscious passive investor, buy broad-based, commonly traded ETFs with low annual expense ratios (or MERs as we like to say in Canada) and make sure you aren’t paying too much for trading fees.

Even if the combination of bid-ask spread and trading fees is high, assuming your transaction amounts are small portion of your portfolio – the MER is the main cost.  Work on minimizing the MER before worrying about the other stuff.

If you don’t have a large portfolio ($100,000+), then I would take a good look to see if ETFs or low cost index funds are more appropriate.