Tag: ETF

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Investing

Questrade Mutual Fund Fee Rebate And Free Transfer Offer

Questrade discount brokerage has just come out with a great way for retail mutual  fund owners to save on high management fees by offering to rebate up to 1% of those  fees.

What’s the deal with the Questrade mutual fund rebate?

Questrade will rebate up to 1% of the management fee for any mutual funds  held at Questrade.  This amount has to exceed $29.95 per month for the  investor to get any rebate.  This means that you need to have more than $36,000 in mutual funds before the rebate kicks in.

How is this possible?

When an investor buys a mutual fund from an advisor then the advisor is paid  a “trailer” each year which is based on the amount of the investment.   Typical trailers for equity mutual funds are 1%.  Bond and money market funds  will be lower.  The amount Questrade will rebate will be equal to the trailer  paid on the funds you owned.

The problem is for a do-it-yourself investor who wants to buy retail mutual  funds is that they can only buy them through an advisor or a discount  brokerage and they are charged for the trailer even if they don’t have an  advisor.  With this new program the investor will be able to save most of the trailer amount.

How much will it cost to transfer my mutual funds to Questrade?

If you transfer before March 2, 2009 from a different financial institution and transfer at least $25,000 then it will be  free of charge.

How much are mutual fund trading fees?

Questrade charges $9.95 per mutual fund trade.

I don’t have $36,000 – is it still worthwhile?

Depends on the situation – if you are close enough to $36k (ie $30k or more)  and will be buying more mutual funds then it might be worth doing even though  you won’t get the rebate for a while.  At the very least it won’t cost you  anything.

Another situation might be if you have some back-end funds that you don’t want to pay commissions on.  If you are planning to just buy low cost ETFs then you might consider moving the mutual funds to the same institution.

Where do I sign up?

Click on the banner below or on any of the links you see in the article.

I demand more information!

Check out my Questrade discount brokerage review and my Questrade referral promotion articles for more information.

Is it really cheaper to pay $10 per trade rather than get my advisor to do it for me?

Let’s look at an example – say you have $100k in mutual funds with an average mer of 2.5% and the only service you get from your “advisor” is he completes 12 trades per year for you “free of charge”.

With the advisor you will pay a total of $2,500 per year for the fund management, the advisor’s services and the 12 trades.

With Questrade you will get a rebate of $1,000 (approx) and you will pay $120 for the trading fees for a grand total of $1620 for the fund management and the 12 trades.

$2,500 (current fees) – $1620 (Questrade fees) = a savings of $880 per year.

Personally, I’d rather invest in passive index funds and ETFs which are way cheaper (also available at Questrade) but for anyone who wants to own retail mutual funds – this is a great deal.

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Investing

Comparing Market Cap ETF vs Dividend ETF – How Much Duplication?

I had a reader question the other day where they mentioned buying both XIU (iShares Cdn Large Cap 60 ETF) and XDV (iShares Cdn Dividend Index Fund ETF) for their portfolio.  I had responded that although I wasn’t sure, I suspected that might be a lot of duplication in the two funds since XIU has all the biggest public Canadian companies – a lot of which are good dividend stocks and would probably also be in XDV.

Duplicate holdings is a common problem in mutual funds – especially in a market like Canada where there are not a lot of different companies to buy for the larger funds.

I decided to do a bit research and find out if there was as much duplication as I suspected in the two funds.  The question I want to answer is if it is worthwhile to own both funds for diversification purposes or will just one do.

Number of companies in common

The first and simplest criteria was how many companies are in both ETFs.  This isn’t necessarily all that meaningful since one ETF might have a lot of XYZ company whereas the other might only have a small holding.

XIU 60 has 61 holdings (can’t they count?), XDV dividend has 31 holdings, there are 15 companies that they have in common.  This seems like quite a bit since it means that half of the companies in the dividend ETF are also in the XIU ETF.

Amount of market cap in common

What I did here is take the companies that are in both ETFs and compare the percentage holdings and add up the smaller number.  For example if CIBC was 9% of the dividend fund and 5% of the XIU then I counted that as 5% in common (by market cap).   This totalled up to 31%.  This was a smaller number than I expected which means that a good portion of the dividend ETF is not represented in the XIU 60.

Measuring correlation between the ETFs

The next test I did, which should have been the first and only test since it is the only one that has any real meaning is to measure the amount of correlation between the two ETFs.   Correlation is a measure of the relationship between the prices of the two ETFs.

A measure of 1 means that they always move in price exactly the same way, a measure of 0 means they are completely uncorrelated and a measure of -1 means they always move in price in exactly the opposite direction.  One of the main concepts behind building a portfolio is to try to find different assets that are not correlated with each other.

To accomplish this I needed some historical price data which I managed to find at Yahoo Finance.  To figure out the correlation I used the Excel correl function (is there anything Excel can’t do?).  XDV dividend has only been around since the end of 2005 so the data is only for a bit less than 4 years.  Not being a stats guy I’m not sure if this is a long enough period to be meaningful but it’s all I’ve got.  Regardless, the correlation “r” number was 0.72 which implies some benefit for diversification but not a whole lot.

Performance

The last thing I looked at was performance.  Since the time period is fairly short I’m not looking to see which ETF did better but rather to look at the difference in performance.  Ishares.ca website has a handy calculator just for this purpose.  I choose the last 3 years since the next category was 5 years which wouldn’t work for XDV dividend.

3 year total return

  • XIU Large Cap 60 = -12.98%
  • XDV Dividend = -18.19%

From what I’ve read the XDV dividend has a higher ratio of financials than the XIU 60 which is probably one of the reasons for the big performance difference.  The XDV dividend has a higher mer (0.5%) than XIU 60 (0.17%) which would account for about 1% of the 5% difference.

Conclusion

I looked at 4 categories to see how different XIU and XDV are:

  • Similar companies – half of the XDV dividend companies are in XIU.
  • Similar companies by stock market capitalization – 31% of the companies market cap are in both ETFs.
  • Correlation – over the last 4 years the correlation is 0.72.
  • Performance – the two ETFs were about 5% off in terms of total performance over 3 years.

What does it all mean?   Hard to say – there are much better ways to diversify your portfolio – REITs, small cap, foreign holdings would likely all have correlations that are less than 0.72.  I’m also not crazy about the higher mer of the dividend ETF.

I think if you want to have most of your equity in Canada then buying partially overlapping ETFs might be the only way to diversify without getting into individual stocks.  Personally I like to be diversified over the whole world so for me, the XIU Large Cap 60 by itself is good enough – in my case adding XDV would not increase my diversification enough to make the higher mer worthwhile.  XIC (TSX 300) is also a good choice.

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Investing

Strategies for ETFs and Index Funds

In my last ETF vs Index Funds post I concluded that I really didn’t know what the best way to approach the decision between buying ETFs (exchange traded funds) or index funds.

I was trying to show that some investors with small portfolios would be better off starting out with more expensive (because of trading costs) Exchange Traded Funds because eventually they will save money, rather than go with index funds first and then switch to ETFs because if they don’t switch to ETFs later on then the index funds will eventually be a lot more expensive.

As I wrote the post however it hit home that my approach was somewhat flawed because ETFs are quite a bit more work than index funds so someone who can’t be bothered doing a transfer to a discount brokerage probably isn’t going to be interested in logging into their discount brokerage account every month or two and buying more ETFs.  Figuring out the best solution to index funds vs ETFs is not a simple process.

So to clear up the whole issue once and for all, I have come up with a brand new strategy which actually applies to anyone – lazy or not! Please delete my last post on this subject from your brain and read on….

A bit of background

Buying ETFs is always a manual process – first you have to log into the trading platform of the discount brokerage. Once you check the current price of the ETF (you need to know the symbol) then you enter an order which hopefully gets filled. It’s not a lot of work and I find it quite enjoyable, but for an investor who wants a hands off strategy then it might not be the best approach.

Buying index funds (or any mutual funds for that matter) on a regular basis is sooo easy. This is the big reason why ETFs will never be as popular as mutual funds – most people won’t do the work involved to buy ETFs. With an index fund you can set up a monthly purchase plan (often called a PAC) to take a set amount of money out of your bank account each month and purchase various index funds in the proportion you want. For example if you want to buy $100 each of TD e-fund bond, Canadian equity, US equity funds every month then you set that up once and from that day on, $300 will get taken from your bank account each month and a $100 purchase for each of those funds will get completed. Unless you change bank accounts or want to change something such as asset allocation or portfolio rebalance, you never have to lift a finger. I’ve recently found out that Questrade is planning to allow regular debits from your bank account which will fund your account on a regular basis. You would still have to purchase the ETF manually however since they trade like stocks.

New (and improved) Strategy

What I suggest (until next week when I come up with something better) is do your accumulation of assets at TD using their index funds and automated purchases, and then once you have enough assets to make ETFs worthwhile, transfer those assets over to a discount brokerage (I use Questrade ). Once the assets are at the discount brokerage then you buy ETFs. The trick is to continue to do your accumulation at TD.

What happens if you already have a fair bit in assets? No problem – put the assets you have in the discount brokerage and buy some ETFs. Then set up the TD account and follow the accumulation and eventual transfer procedure as described above.

Variables

One question you might ask is about the transfer fees to move assets from TD to the discount brokerage. I would say that should be factored into the equation but also to try to get the discount brokerage to pay for the transfer. If you are moving big bucks ie $100k then I think your odds are pretty good of getting some or all of a transfer fee paid for – even to an existing account. Keep in mind that transfer fees for rrsps are generally no more than $150.

The next question is – at what point of accumulation do I move the assets to the discount brokerage? $25k, $50k, $14 million?

The answer is a bit tricky. You have to calculate the MER being paid at TD and the MER on the ETFs that you would buy at the discount broker and also include the trading fees that you will probably incur at the discount broker – but since the trades aren’t going to be very frequent they can almost be ignored.

For example in my last post I calculated a potential TD MER of 0.44% and a Questrade MER of 0.19%. If you ignore trading and transfer costs then it makes sense to move assets to Questrade every month. This won’t work of course because of the transfer fees and hassle – plus it’s just dumb.

What I would suggest is to transfer assets to Questrade at a point when you can either get a free transfer or the difference in MER is equal (or close to) the cost of the transfer. Now mathematically this doesn’t really work out since you should really be transferring money as soon as you have enough that the difference in MER for several years is equal to a transfer fee, but the other cost in a transfer is the hassle of actually doing the transfer so it might not be worthwhile to do it too often.

So using my example of TD MER of 0.44% and Questrade MER of 0.19%, the difference in MER reaches $125 (I’ll assume this is the transfer cost) at $50,000. According to my rule, this is when you should transfer the assets to the discount broker. This is a pretty reasonable rule since for most investors it will take quite a while to get a TD account up to $50k so it’s not like they will be transferring every six months.

Other things to think about

Look at the difference in MERs – in my example I used several low cost ETFs from Vanguard – if you choose to use more expensive ETFs from iShares (for example the currency neutral options) then the MER difference between TD e-funds and the ETFs will be much smaller and you might end up transferring assets at a much higher level (ie $100k or more).

Trading costs – I’m assuming that once you transfer the money to the discount broker, you buy your ETFs (not too many), set up dividend reinvestment plans and then don’t do any more trades.

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Investing

Index Funds VS. ETFs

As a low cost investor I like researching different low cost options and trying to decide which is best for my situation. One question that comes up frequently from investors with small portfolios is whether they should buy low cost index fund such as the TD e-series or by ETFs which have lower mers than the index funds but you have to pay a minimum of $4.95 per trade. Other blogs have covered this topic and based their answer mainly on the portfolio size. If your portfolio is significantly less than $25k then start an account at TD and around $25k mark, transfer it to a discount broker like Questrade and buy ETFs. This is definitely the cheapest strategy but it involves setting up two accounts and doing one transfer.

One problem with that method is that I suspect a lot of investors will set up the account at TD but they won’t switch to a discount brokerage at the right time or at all which means in the long run they will end up paying more fees compared to if they had just started buying ETFs even when the account was fairly small.

To avoid this problem I would suggest that another strategy to consider is to pay the higher costs of a discount brokerage right from the beginning because it won’t be long before you will be saving money and can recoup the extra expenses from earlier on. What I did was to set up a model which will tell me if an investor has a small portfolio then how much money per month do they need contribute to make this strategy worthwhile. There is a link to my spreadsheet at the bottom of the post.

Another part of this idea is to start with Questrade because it’s the cheapest discount brokerage available but alter your trading habits – if you contribute monthly then only buy one ETF per month. Another great idea is to only buy an ETF every second or third month, especially in the beginning.

What we are really looking at is the idea of doing either TD or Questrade and seeing how long it takes for the break even point to occur. If the point is fairly soon (ie less than 5 years) then it might be an idea to just go with the ETFs if you don’t think you will make the switch from TD to Questrade down the road.

This chart indicates the final numbers. The second row has the portfolio size, the second column has the monthly contributions and the other numbers are the number of years until the break even point. Keep in mind that the break even point is when all the losses in the early years are made up for.

For example if you have a starting portfolio of $10k and you contribute $250 per month then after eight years the total costs of ETFs (for all eight years) is the same as the cost of index funds.

 

 

Portfolio size

 

 

 

 

$0.00

$10,000

$20,000

Contribution

$100

30

13

4

 

$250

13

8

3

 

$500

8

5

2

 

$750

6

3

1

 

$1000

4

3

1

 

As you can see, the monthly contribution is a big factor in this decision – if you are contributing larger amounts then even if you start with nothing, the Questrade option is better. Another factor of course is the starting portfolio size – if you already have $20k then it’s probably better to start at Questrade . The reverse of course is true – if you are contributing $100 per month then you are probably better off with TD unless you have close to $25k.

This is definitely a personal decision but I would think that unless you are super keen to save every cost possible then consider doing Questrade from the beginning if the break even point is less than about 5-7 years.
Keep in mind as well that a lot of the initial trading costs can be saved by contributing to the Questrade account monthly but only buy ETFs infrequently.

I’m also using a very simplified portfolio that is equally weighted among the securities. If you want more securities that are not equally balanced then that may add to the trading costs with the Questrade option. Even there if you want a small emerging market exposure you can just make one purchase a year for example in that class. You might not have your desired asset allocation at all times, but if you portfolio is very small then that probably doesn’t matter that much.

This analysis assumes that you value low costs above convenience – one big advantage of an index fund is that you can set it up to take the money from your account and make the index fund purchases automatically. This can’t be done with ETFs so you have to login every month and make a purchase.

Conclusion

If you are a big contributor with a small portfolio and are keen (but not superkeen) to save costs then it might make sense to start at a discount brokerage instead of at TD and then switching.

I suspect for a lot of investors however it might make sense to just go with TD and only switch over when they have a significantly large amount say over $50k. Another plan might be to accumulate $50k or $100k at TD and then transfer to Questrade if they will pay for the transfer costs. Meanwhile you keep accumulating at TD.  The choice between index funds vs ETFs is not an easy one.

This is the spreadsheet I used.

More information

Should I Buy ETFs Or Index Funds?

Categories
Investing

Mutual Funds

A while back I was at a dinner with a bunch of people. A fetching young lady and I started talking finances (Mr. Cheap knnoowwwsssss what the ladies like…) and I referred to ETFs as “the thinking man’s mutual fund”. My father, who has been an avid mutual fund investor for decades gave me a bit of a hurt look, and I felt bad (I didn’t think he was listening to me).

I got talking to a buddy who, on the advice of HIS father, was hot-to-trot to invest in a Spectrum mutual fund. I told him to get a diversified group of ETFs instead – pointing him towards Canadian Capitalist’s “Tour of ETFs” and “Sleepy Portfolio” (as well as Money Sense’s couch potato portfolio). When I told him that a diversified ETF portfolio should average a 10% nominal return over the long haul (this is retirement money he’s looking to put away), he asked why he’d settle for 10%, when the Spectrum fund had averaged 36% over the last three years.

One of the best things about teaching someone something is that your fundamental assumptions are occasionally questioned. It can be a great way to expand your understanding in a direction that you didn’t even realize you were deficient in if you’re unable to answer their question (in which case you should probably go educate yourself until you can answer their question).

My response to him started with the idea that past returns don’t guarantee future returns. I talked a bit about mean reversion (the idea that often an area that has been recently hot may go into a slump in the near future, or an area that has been in a slump may take off). He agreed with this in theory, but then asked “isn’t the manager a smart guy who knows how to move in and out of areas to make lots of money, leading to an ongoing above-average market returns?”.

I agreed that this was usually the story mutual fund companies liked to sell, but I talked about how research had shown that mutual funds UNDERPERFORM the market on average. Since people aren’t just randomly chosen to run mutual funds (these are all professional investors), it makes the whole system pretty suspect if the average PROFESSIONAL can’t beat the market.

I followed this up with the problem of popular (high performing) funds attracting lots of money, and how its harder to get high returns once a fund gets too big. The basic idea is that if they find a good deal, they can’t buy as much of it (as a proportion of their portfolio) as a small fund could. It may be worthwhile for an individual to shop at garage sales for bargains, but it doesn’t make sense for Walmart to do this (they wouldn’t be able to find enough bargains to stock their shelves).

Following closely on the idea of big funds having trouble outperforming the market, I talked about how mutual fund companies start a large number of “incubator” funds. They let the managers of these small funds take whatever crazy risks they want. The hope is that some of their funds will wildly outperform the market (and, of course, if you have enough funds doing different things some will), they then promote that fund as their “flagship” product, promote its amazing returns in all the financial papers / magazines, roll over the poorly performing funds into it (and get tons of new investors in it). Since they know at this point they probably won’t keep getting lucky again, they then track the market as much as possible (so they don’t lose tons of money and annoy all the new investors), and prepare the next batch of mutual funds to create the “hot fund” of the future.

For some strange reason, these monsters funds tend to give you a return of [market – expenses]. Isn’t that curious :-).

At this point, ETFs offering [market – small expenses] look appeals, and that’s what I recommended buying. My friend still seemed somewhat hesitant, and I encouraged him to talk to his father further. I offered to buy him a copy of “Four Pillars of Investing” but he immediately told me under no circumstances would he read it. I felt kind of bad that I hadn’t been able to convince him of the value of ETFs, but the next time I saw him I asked him if he’d bought the Spectrum fund and he told me “No, I’m looking into ETFs”.

For those who used to invest in mutual funds and stopped, what convinced you to bail on them? If you’re a fellow ETF / Index Fund evangelist, what do you like to say to people to convince them to consider ETFs? If you’re a mutual fund fan, which parts of this post do you think I’m mistaken about (remember that “you’ve got it ALL wrong, mister!” is often a fair response to Mr. Cheap’s rants).

Categories
Investing

Do You Really “Earn” Your Investment Income?

I met an acquaintance a while back who told me that he was day trading while in between jobs. I was quite curious about his strategies and how much he was making but he wouldn’t give me many details and I didn’t know him well enough to push. He did tell me on several different occasions though that he “was making good money” with the day trading.

The reason I wanted to know what kind of returns he was getting was because I was skeptical that he was doing as well as he said he was, and also because I wanted to point out to him that in a year when the market goes up around 18% as it did that year, it’s not hard to “make good money” by doing pretty much any kind of investing.

Stock markets go up and down over time. The main reason people invest in them is because they believe that over time, the stock market goes up more than it goes down, which has held true since the beginning of time (or stock markets). The reality is that nobody can accurately predict what the market is going to do any given year. It might go up 10%, it might stay flat or there could be a big loss. The phrase “A rising tide floats all boats” applies very well to equities. In years when the market gives double digit returns, everyone looks like a great investor. In years when the markets drop, almost everyone is a loser.

My point is that someone who is invested in equities in a market that goes up 10% and gets 10% on their investments didn’t really “earn” anything because of their investing prowess since they only got the market return which is easily obtainable with a basic ETF or index fund.

I think that all active investors should measure how much value they are adding by choosing their own stocks or mutual funds by comparing their returns to some kind of index or passive alternative based on an index such as an index fund or exchange traded fund. This would apply regardless of if you are trading stocks hourly or buying stocks for the long run (hello Siegel!).

For example if you trade your own stocks or bought active mutual fund and got a 10% return in a year, that sounds pretty good but is it? Did you really “earn” 10% by picking your own investments? What if the index returned 8% that year. Then I would say that your stock picking really only earned 2%, not 10%. Conversely, what if the index returned 12% that year. I would then say that your active management cost you 2% of your potential portfolio that year.

To accomplish this comparison if you trade stocks and/or buy mutual funds is to find an ETF that covers similar stocks. If you are an investor who likes to buy large American companies then you might want to look at an ETF like Vanguard Large-Cap ETF (VV) or even just look at the entire American stock market with Vanguard Total Stock Market Index VTI (the “American” is silent). ETFs and index funds charge a small fee so they will never match the index but should be pretty close.

Another thing to think about is the absolute amount of dollars you are earning from your investments.  If you spend a lot of time trading stocks or planning investments and you are really only earning say a 2% premium return on your investments per year then how does that work out per hour?  If you are investing $10 million dollars then 2% is $200k which is well worth the effort.  But if you only have a couple of hundred thousand then 2% is only $4k which is not a lot of money if you spend a lot of time on your investments.

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RESP

RESP – Asset Allocations

This post is part of the Big RESP Series. See the entire series here.

See the previous post on resp withdrawals here.

When setting up a resp account it’s important to determine and monitor the asset allocation of the account. Typically the asset allocation is determined by the risk profile of the investor and the amount of time remaining until the money is required. Equities are considered risky assets but over a longer term they are fairly reliable. If you are making an investment and you need the money in two years then equities are not advisable because there is too much risk that their value will go down over those two years. Short term bonds or a high interest savings account is a better investment for money that is required in the short term. The idea is not get superior returns but to ensure that the money is there when needed.

So if equities are a good investment over the long term but not the short term, the question has to be asked – how long is the “long” term and how short is the “short” term. I would say that short term is anything less than five years and the long term is 15 years or more. Please note that this is strictly my opinion so don’t write it in stone!

Unlike retirement planning where you don’t know how long the portfolio will be in use for, RESP planning is a bit easier since you can make a pretty good estimate of the start date of withdrawals and the end date of withdrawals.

For this example I’ll assume that the student goes to school starting the year they turn 17 and finish up four years later.
I’ll go through different stages of the resp in terms of how old the student is:

Age range

Equity %

Bonds %

0-5

100

0

6-11

60

40

12-17

40

60

In school

0

100

Once they are starting school all the money will be withdrawn within five years so it should be in very safe securities such as high interest savings accounts, short term bonds or money market funds.

If you are a more conservative investor then you might want to do the following:

Age range

Equity %

Bonds %

0-5

60

40

6-11

50

50

12-17

25

75

In school

0

100

I would invest equally in Canadian, US and EAFE for the equity portion and in short term bonds ETF or a bond index fund for the bond portion. You can add other asset classes to the mix as well. This example is intended to show a simple asset allocation.

I’ve indicated the allocations at five or six year terms. If you are really keen and plan to rebalance every year then you can also adjust the allocation every year.

Obviously none of the above allocations are perfect for every investor so try to keep in mind the idea that money which is required in the short term should be invested in safe investments and try to adapt the above suggestions to your situation.

See the next post on RESP Individual and Family Plans.

Categories
Investing

My Portfolio – An Asset Allocation Decision

Last fall I sat down for the first time ever (after 13 years of owning mutual funds) and looked at all our investments and did an analysis to determine what our asset allocation was. As I recall we had over 90% equity and a good portion of that equity was in Canada. At that time I decided to make the equity/bond split to be 80%/20%. This was chosen somewhat arbitrarily although it seemed to be a good mix for a fairly aggressive portfolio with a long investment time horizon. I also changed the country mix in order to reduce the Canadian holdings down to about 30% of the equity portion.

At this point in time I will be revamping my portfolio once again since I decided to move about two thirds of our rrsp to a broker (Questrade) in order to convert it to ETFs. The remainder will stay in low cost mutual funds and GICs. I’ll be discussing some of the specific investments in future posts but I plan to start with the asset allocation since that’s the most important decision in my opinion.

The first asset allocation decision was to lower the equity portion of the portfolio down to 75% from 80% and to raise the bond portion up to 25%. I decided to do this mainly based on the research of William Bernstein (Four Pillars of Investing) which showed that having an equity portion of a portfolio higher than 25% wasn’t worth the extra risk since it usually didn’t result in a significantly higher return and of course results in more ups and downs with the market.

Interestingly enough Bernstein says that although 75% equity should be the maximum for an investment portfolio, 50% should be the minimum regardless of your age. The reason for this is that if you are retired and have a more conservative portfolio ( less than 50% equity ) then inflation is a bigger risk. Another great point he makes about asset allocation is that you should have a more conservative portfolio if you’re not sure if you can handle the volatility in a downturn. If you sell equities every time the market drops and then wait until it goes up before buying in again, then you are better off in a more conservative portfolio (ie 50/50) if that allows you to stay invested during the downturns.