TD e-funds vs. iShare ETFs

[ig17]

Have you looked at e-fund fees lately?

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Actual Management Fees, Year 2005

TD Canadian Bond Index      0.31%
TD Canadian Index           0.16%

TD U.S. Index               0.11%
TD U.S. RSP Index           0.31%
TD DJIA Index               0.15%
TD Nasdaq RSP Index         0.31%

TD International Index      0.31%
TD International RSP Index  0.31%
TD European Index           0.22%
TD Japanese Index           0.22%


Source: http://www.tdassetmanagement.com/Download/TDMFAR05E.pdf (Page 275)

All e-funds came in a few bps below their maximum allowed MER.

Here is another angle:

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TD Canadian Bond Index-e      0.31%
XBB                           0.30%

TD Canadian Index-e           0.16%
XIC                           0.25%


If TD frugality is not a fluke, I see no reason to use XBB or XIC in my portfolio. Once you factor in the brokerage commissions and the forex spread, even VGK/VPL become less of an obvious choice.

[Shakespeare]

Provided you are with TDWH. But they have some disadvantages, such as fees for PH&N (still useful for high-yield bond and PH&N Dividend).

[Bylo Selhi]

But they have some disadvantages, such as fees for PH&N (still useful for high-yield bond and PH&N Dividend).

Now that the RRSP foreign content restrictions are gone, why do you need to hold PH&N funds with a broker like TD WH?

[Shakespeare]

Some of us have LRSPs that can't be subdivided.

[ward]

I haven't researched these funds recently, but we should keep in mind here that more goes to make up the MER than the barebones management fee.

[pitz]

I own a whole whack of TD Canadian Index e-Series in my RRSP portfolio, all bought approximately 2 years ago.

I track against the TSX Composite Index, and over the past 2 year interval, it has only appreciated by the appreciation of the index + 2.38%.

I was especting roughly (1.7%*2) - (0.31 * 2) = 2.78% + index appreciation. But somehow I only have a return of 2.38% + index appreciation.

So 40bp (20bp per year) of return has magically gone 'missing' versus the index's return + dividends. In my estimation, that means this fund costs closer to 50bp per year to own, versus just the 31bp quoted MER.

[ward]

My wife received today her "2005 Annual Management Report of Fund Perfomance" concerning her e-funds. Concerning her e-version International index fund, the document reports a 2005 MER of 0.48%. For the same fund it reports a "Management Expense Ratio before Waivers or Absorptions" of 0.8%. The practice of waiving or absorbing expenses, a footnote warns, "may be discontinued at any time . . . without prior notice."

[pitz]

http://www.ishares.ca/publish/content/r ... 005_EN.pdf

MER of XIU was only ($11,714,282 - $121,470) /$7,767,371,242 = 0.149%

Since they quote a MER of 0.17%, 0.149% is pretty good.

Of interest is the fact that securities lending income dropped by over 50% in 2005 compared to 2004. Might this mean that the extent of shorting in the Canadian marketplace has dropped?

Another interesting fact is that the number of units of the XIU iUnit/iShare dropped by almost a million units.

Seems to be quite contrary to trends in the overall Canadian markets, which should be punctuated by increasing investment.

[arnyk]

It certainly makes a stronger case for eFunds when comparing the foreign equity:

*runs off the check ishares.ca*

Hmm, that's odd, it seems that iShares has also lowered their MERs accordingly:

TD U.S. Index 0.11%
iShares CDN S&P 500 Index Fund (XSP) 0.15%


TD International Index 0.31%
iShares CDN MSCI EAFE Index Fund (XIN) 0.15%

This is odd since XIN essentially holds EFA + hedging, meaning it *should* have a higher MER. BUT...


MSCI EAFE Index Fund (EFA) 0.35%

So who do you think pulled the trigger first? TD or Barclays?

[Shakespeare]

This is odd since XIN essentially holds EFA + hedging, meaning it *should* have a higher MER.

I think you have to add the 0.35% for EFA back in.

[arnyk]

Right.

Ok so that means the eFunds have a slight edge now using the "effective" MER:

TD U.S. Index 0.11%
iShares CDN S&P 500 Index Fund (XSP) 0.24% (+0.09%)


TD International Index 0.31%
iShares CDN MSCI EAFE Index Fund (XIN) 0.50% (+0.35%)

The only thing holding them back now might be the slightly longer minimum holding periods relative to I-series, as well as any "excess" tracking error like pitz found.

[ig17]

I haven't researched these funds recently, but we should keep in mind here that more goes to make up the MER than the barebones management fee.

You are right. The numbers in my opening post are not full MERs.

My wife received today her "2005 Annual Management Report of Fund Perfomance" concerning her e-funds. Concerning her e-version International index fund, the document reports a 2005 MER of 0.48%. For the same fund it reports a "Management Expense Ratio before Waivers or Absorptions" of 0.8%. The practice of waiving or absorbing expenses, a footnote warns, "may be discontinued at any time . . . without prior notice."

Thanks for reporting this, ward. Here are the numbers for the whole lineup:

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                            MER           MER before Waivers or Absorptions
TD Canadian Bond Index      0.48%         0.51%
TD Canadian Index           0.31%         0.31%

TD U.S. Index               0.33%         0.38%
TD U.S. RSP Index           0.48%         0.52%
TD DJIA Index               0.32%         0.78%
TD Nasdaq RSP Index         0.48%         0.64%

TD International Index      0.48%         0.8%
TD International RSP Index  0.48%         0.62%
TD European Index           0.48%         0.76%
TD Japanese Index           0.48%         0.92%


Source: http://www.tdassetmanagement.com/Conten ... uctType=13

Only one fund out of ten did not require a subsidy. Is that right?

So who do you think pulled the trigger first? TD or Barclays?

No one. I misunderstood the report. Thanks to ward for straightening me out.

[arnyk]

*D'oh!*

Well that goes to show that I shoulda done my own DD before replying (ie: check up the numbers myself). Ah well, whatcha gonna do? 48 beeps for the Int'l eFund is still competitive with the iShares, and is worth considering if you decide not to go the US route (VIPERs).

[optionable68]

The other benefit in using TD e-funds is dollar cost averaging, whereas you need to pay a brokerage commission with every deposit into your i-units.

Even if you only deposit once per year to your XIN, XIU, XSP, and XBB, you are paying over $100 in brokerage that needs to be factored into your calculations.

I personally own a bit of both e-funds and i-units, and appreciate any price competition the two firms wish to wage against each other

[Arby]

A risk with TD-eFunds, as noted above, is that waiving or absorbing of MER expenses "may be discontinued at any time . . . without prior notice." If TD decides at some point to stop absorbing MER expenses, then I would want to switch my money from eFund to an ETF. But I might be stuck with a capital gain when I sell the eFund. So I'd have to choose between realizing a capital gain in order to switch to an ETF, or staying with the non-subsidized eFund with a higher MER. You won't encounter this risk with an ETF.

CIBC index funds also absorb a portion of the MER expenses, so the same risk applies to them. As a comparison, the MER for CIBC Intl Index Fund was 0.98% in 2004, but it would have been 2.67% if CIBC hadn't absorbed a portion of the MER.

[Bylo Selhi]

You won't encounter this risk with an ETF.

Why not? What's to stop BGI from jacking up their MERs (perhaps in reaction to a similar hike by TD eFunds)?

[pitz]

You won't encounter this risk with an ETF.

Why not? What's to stop BGI from jacking up their MERs (perhaps in reaction to a similar hike by TD eFunds)?

The competition offering to do in-kind swaps of large blocks, perhaps?

Remember that with an ETF, you have the right to exchange a prescribed number of ETF units for the underlying shares. Its not unreasonable, for instance, to find that some fee-for-service advisors may even have enough of the underlying ETFs available across all client accounts to perform the swap, and certainly it could be arranged through a full service broker as well.

(the swap I am referring to is...redemption of existing ETF units into shares, and then the delivery of the shares for creation units issued by another ETF provider. of course, all done on an 'in-kind' basis, so no tax hit).

Of course, not possible with traditional mutual funds because there is no such thing as an 'in-kind' redemption of units possible.

[Bylo Selhi]

The competition offering to do in-kind swaps of large blocks, perhaps?...

Dream on.

When TDAM killed their ETFs late last year I sent an e-mail to a senior executive at BGI Canada suggesting that they might want to do a tender offer or similar for TD's ETFs in order to (a) grab the assets and (b) do it in a tax-efficient way for the benefit of TD's ETF shareholders. I saw it as a win-win situation. There was no response and, as we all know, BGI didn't make any effort to go after TD's assets.

[Arby]

You won't encounter this risk with an ETF.

Why not? What's to stop BGI from jacking up their MERs (perhaps in reaction to a similar hike by TD eFunds)?

OK, there will be less chance of encountering this risk with an ETF, primarily because BGI does not subsidize the MER to keep it artificially low. At least I couldn't find any indication in the prospectus that BGI is absorbing or waiving any portion of the MER expense for their ETF's.

If TDeFunds and CIBC Index funds are charging less than their actual MER, then presumably they are money-losing funds for the sponsors, so there is more risk that these funds will increase the MER at some point in the future.

[George$]

If TDeFunds and CIBC Index funds are charging less than their actual MER, then presumably they are money-losing funds for the sponsors, so there is more risk that these funds will increase the MER at some point in the future.

I don't think they are a "money-losing" concern. They simply are not making as much profit as they might wish.

Questions:
(i) Between TDeFunds and CIBC Index funds, is the latter still a lower cost for accounts with $500k or more (where one gets a 0.65% rebate on the MER)?
(ii) Secondly, who tracks their indexes better, TDeFunds or CIBC Index? I think the published returns on the CIBC Index funds are before the MER rebate.

[StripBond2]

"Dream on"

Speaking of dreaming and writing to the powers that be, I e-mailed TDe some time ago suggesting they might intoduce a short-term bond fund, now that they had reduced the options to one. I received a firm, but polite reply saying they were not planning to introduce new product at this time.

Perhaps, if Bylo were to offer to transfer his millions in XSB to TDe, they might grant my wish. Or, if everyone e-mailed them....

[I use e-funds as I drop a few bucks in from time to time.]

Dream on.

[yielder]

If TDeFunds and CIBC Index funds are charging less than their actual MER, then presumably they are money-losing funds for the sponsors, so there is more risk that these funds will increase the MER at some point in the future.

It's possible that they are losing money but they have no choice if they want to be a player: XIC has +$470 mil in assets while TD Cdn-e has ~$88 mil. It's possible that the regular TD Cdn equity index fund which has a management fee of .80 vs an actual of .66 on assets of ~$665 mil, carries the Cdn-e fund.

TD will only charge the full management fee if they think they can get away with it as they did with TD Monthly Income. It makes no sense to increase the fee ratio if the asset base shrinks.

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E-Series Mgtmnt Fees

Fund             Max               Actual   
Bond             .50                 .31       
Cdn              .50                 .16
Dow              .50                 .15
US               .50                 .11
US RSP           .50                 .31
Nasdaq RSP       .50                 .31
Int'l            .50                 .31
Int'l RSP        .50                 .31
Europe           .50                 .22
Japan            .50                 .22
     

(ii) Secondly, who tracks their indexes better, TDeFunds or CIBC Index? I think the published returns on the CIBC Index funds are before the MER rebate.

TD is right on top on the index even with a MER. Even with the MER rebate, CIBC would have a tough time doing that.

[George$]

TD is right on top on the index even with a MER. Even with the MER rebate, CIBC would have a tough time doing that.

Again thanks Mike. Yes, the MER rebate over 6 years is only about 4% compounded, so it does not explain the 10% performance lag since 2000. I wonder what is going on. Is it hidden expenses in the CIBC CDN Index fund? My guess is that it must be expenses of some sort as what else could it be in an index fund? Negative results from the timing in rebalancing to the index? That would take "negative skill".

There's a whole new topic for a new thread: "Why do some index funds lag their index (after their MERs are folded in)?"

Most of our RRSP-dollars at CIBC are in the two Canadian Bond Index funds. Is it easy to generate a similar comparison chart there?

[yielder]

Is it easy to generate a similar comparison chart there?

Go here, find the fund(s) you want, add to your fundlist, update, go to fundlist, chart.

[pitz]

The TD index fund (Cdn Index e-Series) routinely exceeds a 100% allocation of investments, ie: they are slightly leveraged at times, if not only by 0.1%.

Personally I have no problem with this, and it probably assists with the orderly operation of the fund insofar as day-to-day redemptions. But the leverage, in a good bull market, of course, enhances returns, and reduces tracking error. Of course, during a bear market, leverage damages returns and would increase tracking error.