# ETF vs TD e-series



## slacker (Mar 8, 2010)

Hi,

I'm trying to figure out if using iShares, and Vanguard ETF's are really more economical than TD e-series for my situation.

I generally save about $20,000 CAD per year. My portfolio currently contains 6 ETF's from iShares and Vanguard with MER from 0.10% to 0.50%.

Assuming I rebalance and buy once per quarter, that's 6 trades, and $5000 a quarter. I have the discount TD trading fee of $9.99.

In summary, that's about $240 in trading fees per year for $20000 of investments. Works out to be an overhead of 1.2%.

Can someone spot an error in my math? or is TD e-series really cheaper in my case?

Slacker

PS: how much should one have to save per year before ETF's become truely economical than TD e-series?


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## andrewf (Mar 1, 2010)

Keep in mind that rigid rebalancing every quarter is not necessary. It's better to rebalance when your actual portfolio deviates more than a tolerance from your policy/target portfolio. Thus, you could, for instance, make regular contributions to your portfolio, and only use one transaction to top up the most underweight asset class. If your portfolio is already within target allocation, then split the new funds over two or three of the securities. It's generally not necessary to trade every one at every contribution/rebalance point.

As far as the difference in fees, compare the blended MERs for each portfolio. If the spread is say 0.35 for the ETFs and 0.85 for the mutual funds, and I assume you trade half of the securities any given quarter, than's 12 trades or ~$120. Divide that amount by the spread in MER (0.005 in my example, for $24,000), and you get your indifference point. An investment higher than this, and ETFs are cheaper. An investment lower than this, and the mutual funds are cheaper. Ultimately, I'd say if you have less than $50,000 invested, do what you prefer. Both are pretty low-fee alternatives.


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## Y&T2010 (Dec 29, 2009)

I find TD E-series cheaper because their MER's are about 0.55% max (averaging between 0.31 to 0.48%).

I like how to restrict yourself from dollar cost averaging regularly because there are no trading commissions.

That being said, ETF's are great too!


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## CanadianCapitalist (Mar 31, 2009)

slacker said:


> Hi,
> 
> I'm trying to figure out if using iShares, and Vanguard ETF's are really more economical than TD e-series for my situation.
> 
> ...


I compute the trading costs over the entire portfolio, not just the new savings. That's because I'm holding ETFs for a long time and the trading costs will be amortized over the entire holding period, not just the first year. My thumb rule is to pay no more than 1% of the purchase in commissions. With $9.99 trade, that means a minimum investment of $1,000.

http://www.canadiancapitalist.com/portfolio-size-for-choosing-etfs-over-index-funds/


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## brad (May 22, 2009)

Be sure you understand the true MERs of your ETFs so you can compare them to the MERs of the eFunds. It's not as simple as it sounds.

See the excellent four-part series on this posted last month by Canadian Couch Potato for an explanation:

http://canadiancouchpotato.com/2010/02/25/unpacking-etf-fees-part-4-ishares/

I think some people give the impression that the only expense associated with an ETF is the one-time transaction fee, but that's not true. You also pay an MER. It's usually low, but the eSeries funds' MERs are low too and they have no transaction fees.


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## andrewf (Mar 1, 2010)

I don't think anyone here suggested ETFs did not have MERs. It sounds like the spread (based on what was quoted here) might be more like 0.25%. So, the break-even point on ETFs vs mutual funds is in the neighbourhood of $48,000.


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## brad (May 22, 2009)

andrewf said:


> I don't think anyone here suggested ETFs did not have MERs.


Sorry, I didn't mean here -- I meant in general. I think it's easy for a casual reader to get the impression that the only "cost" associated with ETFs is their transaction fees, which would automatically make them a better deal than low-MER funds once your portfolio reaches a certain dollar amount. I had that impression myself, in fact!


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## Four Pillars (Apr 5, 2009)

I think for a smaller portfolio and quarterly balancing - TD e-funds will be the best.

The lowest cost solution (but not the easiest) is to accumulate money in a TD account and then transfer to an ETF account when it reaches a high enough amount ie $100k. 

Then you accumulate another $100k in the TD account and repeat.


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## slacker (Mar 8, 2010)

CanadianCapitalist said:


> I compute the trading costs over the entire portfolio, not just the new savings. That's because I'm holding ETFs for a long time and the trading costs will be amortized over the entire holding period, not just the first year...
> 
> http://www.canadiancapitalist.com/portfolio-size-for-choosing-etfs-over-index-funds/


Ah ok, I get it now. The MER applies to the entire principal. So in a couple of years, the cheaper MER advantage will dominate the disadvantage of higher trading cost.

Thanks CC !!


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## andrewf (Mar 1, 2010)

The only problem with accumulating $100k in mutual funds then transferring to ETFs is that in a non-registered account it would trigger capital gains. It could result in a tax liability of several thousand dollars.


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## Four Pillars (Apr 5, 2009)

andrewf said:


> The only problem with accumulating $100k in mutual funds then transferring to ETFs is that in a non-registered account it would trigger capital gains. It could result in a tax liability of several thousand dollars.


That's a good point.

I think most people would do this in a rrsp and possibly a tfsa so it wouldn't matter. But for an open account then it probably wouldn't be worthwhile.


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