Index fund vs ETF.

[ace.nimrod]

Does it make much sense to invest in index funds that track the same, or almost the same things? For example, the XIU ETF, or the TD Canadian Index e-fund?

Thanks.

[AltaRed]

No real point in doing both. Duplication does not provide diversification. ETFs are slightly less expensive (lower MERs), but also attract buying and selling commissions. You have to do the math to determine when it is most efficient to do one over the other.

Generally speaking, the TD e-funds are great for small and frequent contributions, e.g. multiple contributions per year. But a $10k purchase of XIU at a discount broker charging $9.99 per trade results in a commission rate of 0.1% - basically nothing.

Some folks may DCA into the Cdn index using the TD e-fund and then when there is substantial money in it, sell it and buy the ETF instead. But of course, there may also be capital gains taxes to be paid on the e-fund sale if in a taxable account.

[IdOp]

I guess another example where it would make sense to hold both, is if you have a large holding of, say, the e-Fund which you don't want to sell because of capital gains tax. Then you might start to put new money into an ETF because of the lower costs (assuming the chunks of new money are large enough).

[Antoni]

Much is made of the convenience of mutual funds for lower amounts, as if it were an established fact that for larger amounts ETF are more appropriate. One has to balance though the various pros and cons on both sides. And it seems to me that one advantage of mutual funds that tends to be neglected is the fact that an investment in mutual funds takes care of itself, by way of the reinvestment of distributions. While in some ETFs you receive a quarterly distribution, a small chunk that you have to reinvest or park somewhere.

But, alas, for us in Canada, ETFs are nearly the only way to have access to MERs that are not predatory. If I were living in the US, I would take the Vanguard mutual funds rather than the Vanguard ETFs. In Canada, I have access only to the latter.

[Bylo Selhi]

A couple more reasons for holding a mix of both ETFs and eFunds in the same asset class...

1. In an RRSP you can use eFunds to accumulate positions in an asset class by making small, regular monthly investments. Then, when you have several $1,000s you can convert to the lower-MER ETF. (This may also apply in a taxable account but then you may have to pay CG tax when you switch.)

2. In a taxable account, if you're in a capital loss position you can "harvest" that loss by selling the fund(ETF) and using the cash to immediately buy back into the equivalent ETF(fund.) That way you don't trigger a superficial loss nor do to you have to be out of that index for 30 days. (Indeed after 30 days you could reverse the transactions to get back to where you were but now with a lower ACB.) You can now apply the harvested capital loss against capital gains on other investments going back up to 3 years or carry it forward indefinitely.

[Operabob]

By,

I agree.

As I found out recently, the vast majority of DRIPpers invest between $200 and $300 a month. I assume many mutual fund investors income average similarly. At least that's what the sales people always try to talk people into doing.

ETFs are more suitable to people investing $thousands at a time to keep frictional costs low.

If you're a small investor that has enough resources to start with ETFs then it makes sense to rebalance with low MER matching Index funds going forward.

The media always seems to focus on the low MERs and ignores the frictional costs that can be devastating to small investors.

OB

A good s

[ace.nimrod]

Thanks for the info.

From the get-go I'll be putting $50k each into a few funds, so it seems that ETF may provide the better deal. After that, I'll probably do monthly investments into an e-Fund, at least while I learn more - and perhaps when those hit a certain amount, reinvest into the ETF.

[pitz]

My advice on this matter is simple; if you expect to accumulate a non-reg portfolio > $40k in the next 5 years or less, then you should go with ETFs. And you should use a deep-discount broker like Interactive Brokers to drive those frictional costs as low as possible through $1 trades and bargain-basement forex.

In the non-reg context, once you buy an investment, and it grows for a few years, you are essentially locked into the cost structure of the fund, for better or worse because, in the accumulation phase, paying the capital gains tax to switch to another product would destroy value.

My logic is simple; you can expect to save 20 basis points between the cost of an index fund, and the cost of an ETF, on average. $40,000 * 20bp = $80. An Interactive Brokers account costs $120/year, and you can deduct any unused commission against your income taxes as an investment expense, giving an actual cost of around $80.

An IB account may very well be more attractive than DRIP'ing due to the forex issue as well. If you DRIP $4k a year into US stocks, once you add up forex costs, and the cost of cheques and stamps, its not too much of a stretch to justify a $120/year IB account on an after-tax basis. Plus DRIP'ed shares might have safekeeping issues, and the trend has been towards more fees on those plans.

[ace.nimrod]

So I just need to make 95 more trades to meet the minimum for an IB account.. Or can I just lie

[pitz]

I bought and sold TD eFunds to meet the 100 trade requirement .

[peter]

So I just need to make 95 more trades to meet the minimum for an IB account.. Or can I just lie

Lying works.

[ace.nimrod]

Is that $120/year fee at IB just the minimum per month costs being applied to your account for not being very active?

I can get $9.99 trades at TD, I wonder if it will be worth.. I'll be active a bit at the start, but then plan to sit back for the most part.

[pitz]

Is that $120/year fee at IB just the minimum per month costs being applied to your account for not being very active?

Its a "minimum commission", and its $10 USD/month.

For example, if you do no trades, you will be billed $10 at the end of the month.

If you do $5 in trades, you will be billed an additional $5 at the end of the month.

If you do $15 in trades, you will not be billed any extra at the end of the month.

Keep in mind that with IB, you still need a source of data to trade with, especially for Canadian stocks. Right now, a fairly robust subset of US data is free of charge, but you will need a Canadian datasource.

So technically you should still maintain an account with a Canadian online broker, perhaps your RRSP account, for instance, to obtain free real-time quotes so you can place accurate orders into the IB interface.

I can get $9.99 trades at TD, I wonder if it will be worth.. I'll be active a bit at the start, but then plan to sit back for the most part.

Well if you are looking for a completely static account, then, by all means, it would probably make sense to transfer your account from IB to TDWH to avoid the maintenance fee.

But if you are making monthly or even semi-monthly purchases, then the IB account is more than likely less expensive.

Another advantage of the IB account is that if you want to go on vacation and need to buy a couple thousand dollars of foreign currency, or want to exchange currency in any way the savings are enormous. Very useful, IMHO, if you are looking at buying a car from the US, or purchasing any other big-ticket item.

[ace.nimrod]

Thanks for the input.

Sounds like my ideal situation will be to keep by TDW account, I'm opening a registered there and have an IB account - besides I want access to the London Stock Exchange, and that gives me that - I'll have to live without real time data for that one I guess.

[pitz]

LSE data at IB will cost you 5 pounds a month if you want it.

Beware of the Stamp Tax!

[Bylo Selhi]

Spicy or Mild? When ETFs Are Better Than Index Funds

Join me on the fence. Investors are voting with their dollars, favoring exchange-traded index funds over index mutual funds. I think they're making a mistake.

My contention: The best strategy is to own both. Use index mutual funds for accounts you're regularly adding to or drawing on, while stashing longer-term money in exchange-traded index funds. That combo should trim your investment costs -- and further boost your fund returns...

[pitz]

Spicy or Mild? When ETFs Are Better Than Index Funds

Join me on the fence. Investors are voting with their dollars, favoring exchange-traded index funds over index mutual funds. I think they're making a mistake.

Must be *really* nice to have Vanguard's products available on a no-fee basis* in the US. The case for ETFs is more compelling in Canada with a deep discount broker.

Every year I marvel at how XIU and the whole iShares family has barely grown its asset base (aside from normal market growth), while the US ETF industry keeps growing by leaps and bounds faster than the market.

Do Canadians just invest less, or are we, in much higher proportions, slaves to traditional mutual funds and active management approaches?


* no-fees at Vanguard if you sign up for electronic recordkeeping, or have greater than, I think $10k per fund.

[Bylo Selhi]

Must be *really* nice to have Vanguard's products available on a no-fee basis* in the US. The case for ETFs is more compelling in Canada with a deep discount broker.
...
* no-fees at Vanguard if you sign up for electronic recordkeeping, or have greater than, I think $10k per fund.

Huh? TANSTAANFMF. By "fee" Vanguard means the $10(IIRC) annual fee that they levy on each mutual fund position that's smaller than $3k(IIRC.) This fee is intended to defray the fixed costs of sending out paper statements and such to shareholders who otherwise wouldn't generate enough MER revenue to enable Vanguard to at least break even.