# Canadian Index vs. Bank Stocks



## realist (Apr 8, 2011)

I am basically following the Canadian Couch potato model using TD e-series funds and I am pretty happy with that but I would eventually like to get into some dividend paying stocks. With that in mind I have been pondering the merits of buying some Canadian bank stocks, but the TD Canadian index already holds a relatively significant amount of Canadian banks within it. 

Obviously buying stocks lets me focus on a specific bank, but a friend pointed out that that is sort of contrary to the Couch Potato philosophies of passive investing and diversification. It's sort of a moot point since I am still at a point financially where the amount I'm investing probably doesn't justify the trading fees on stocks vs. the MFs but I am still curious. 

What are the pros and cons of adding a bank stock to the mix? Would I be better to look to another sector?


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## richard (Jun 20, 2013)

The cons are that a significant part of your portfolio depends on a few companies. That's a pretty big one for most people. If you're ok with the risks that involves then it's not necessarily a bad thing. Just remember that 5 businesses can have a much worse time than the index as a whole. If you're looking at dividend investing you'll probably want to evaluate whether the stocks you're buying are cheap and I'm not sure where banks stand with that. They seem very popular right now.


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## wendi1 (Oct 2, 2013)

For instance, if you are using TD Canadian Index -e as your Cdn Equity portion, the top three holdings are banks. 35% of the total holdings are financial services (including life insurance and the like).

But only 4% of the total holdings are utilities! 2% are income trusts! Surely you could find some dividend-producing utilities or income trusts that would diversify your portfolio?

I would not add banks to a couch potato mix right now, either.


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## Killer Z (Oct 25, 2013)

Hi realist -

My largest holding is the CIBC Monthly Income Fund. It's top equity holdings are the 5 big banks, Suncor, Telus, Canadian Natural Resources and Bell. It's a mix of Cdn Equity (approx. 60%) and Fixed Income (approx. 40%), so I use it to not only satisfy my exposure to some of my favorite Canadian stocks, but also my fixed income allocation for my portfolio. It does a good job of both, and pays a nice monthly dividend, so I am comfortable with the MER of 1.48%.

One thing to note about this fund, and several index ETFs or Funds of a similar nature, is its minimal exposure to REITs and utiltities (as mentioned above by wendi1), thus I have added positions in my portfolio to accommodate the same (i.e. FTS, EMA, VRE), however I am careful to not overlap the existing positions in the Fund (i.e. the 5 big banks). 

Best of luck to you!


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## Eder (Feb 16, 2011)

If you are paying an MER of 1.5% you are setting on fire about 40% of your profits after inflation long term.


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## richard (Jun 20, 2013)

Eder said:


> If you are paying an MER of 1.5% you are setting on fire about 40% of your profits after inflation long term.


Not to mention that many people buy into it on a false basis... an "income fund" that pays a lot of ROC distributions might looks like it's worth a high MER but they're really just shuffling your money around. You need to know exactly what's going on and compare to the right benchmark to know if you should be paying for it.


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## realist (Apr 8, 2011)

Resurrecting this thread as I am thinking about it again. I am considering opening a new TFSA account for investments. (My current TFSA is just a PC Financial HISA TFSA and is okay for short term savings/emergency fund). I was going to just use a TD e-series fund and copy the Couch Potatoe strategy there but I am again thinking about increasing exposure to dividends. 

I agree with the advice above that it would need to increase my portfolio diversity. Any tips for the best way to do that? I would like to buy in ~$1000 increments but could also buy annually in larger chunks if it makes more sense fees-wise. Any tips on what ETFs I should look at? VRE seems like a reasonable option. SHould I go with a TD Waterhouse account or look into someone like Questrade?


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## fatcat (Nov 11, 2009)

richard said:


> Not to mention that many people buy into it on a false basis... an "income fund" that pays a lot of ROC distributions might looks like it's worth a high MER but they're really just shuffling your money around. You need to know exactly what's going on and compare to the right benchmark to know if you should be paying for it.


exactly, i would build this myself from individual stocks and have the control and complete elimination of the mer ... just about any 3 canadian banks over time will give you the return of that sector, add in the telcos some oil and pipelines ...once you get it set up you will return a lot more money going forward ... 1.48 is $1500 on 100K .... too much in todays world


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## My Own Advisor (Sep 24, 2012)

I see little problem realist in owning individual bank stocks along side your indexed products.

If you own 90% indexed products, such as TD e-series products, XIU, XIC, VCN for your CDN content and U.S. products like VTI/VUN and VXUS, if you want to dabble 10% into individual stocks, _Millionaire Teacher _Andrew Hallam says it's still a good strategy "if you really can't help yourself".
http://www.myownadvisor.ca/my-favou...naire-teacher-and-free-book-giveaway-part-33/

The reality is, there are only about 20-30 blue-chip stocks to own in Canada, the ones that have paid dividends for generations and many decades.


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## 30seconds (Jan 11, 2014)

I have the TD e-series and add in weekly because I am comfortable with it, I have under 50K in it and indexing makes sense to me. Once I have over 50K I am switching to ETF's.

In the mean time I am learning, reading and researching. I've started dabbling with purchasing individual companies because eventually I would like to do as others have said and take the top companies from each sector and build my portfolio that way. My approach though is to get into this slowly and when it make sense. IMO now and the next coming months would be a good time to add to oil stocks. Banks have taking a small hit so thinking getting into that. Google and apple are still chugging along so I will be patient and get into those when I feel its a better fit. In it for the long haul.


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