# ETF vs Mutual Fund index funds



## Terry (Apr 4, 2009)

I welcome input from people who have analyzed or experienced the relative merits of mutual fund index funds and ETF index funds.

Currently, I have my RRSP funds in a Manulife group program which makes available to me four mutual fund index funds. IMF is as follows (with a discount for over $60,000 on deposit in the total account):

Bond 1.298
Canadian equity 1.048
US equity 1.323
International equity 1.398

I realize that the IMF will be less in ETFs but there will also be transaction fees and I’m not sure how these might balance out. Currently, I pay no transaction fees for moving money between funds available to me in the package, or for withdrawing (actually one free/year and then $25.00 per withdrawal), or for depositing new funds.

I like the simplicity of online management of our Manulife accounts and I see it as simple enough that my wife would be able to look after it if I die first (which men tend to do) or am disabled. I think she would find the ETF process rather daunting.

Taking all of this into account, I welcome comments and/or advice, particularly from the numerous ETF enthusiasts who populate the financial blogging world. I see their point but I’m not sure that the addition of transaction costs and the complexity of management would actually put me far ahead of index funds in my Manulife accounts.

Thanks for your ideas.


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## CanadianCapitalist (Mar 31, 2009)

Terry said:


> Bond 1.298
> Canadian equity 1.048
> US equity 1.323
> International equity 1.398


Are these MERs? They are pretty high for index mutual funds.


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## CanadianCapitalist (Mar 31, 2009)

I touched upon this topic a bit in this post:

*Reader Query: Should I Choose Index Mutual Funds over ETFs?*

Personally, I'll go with ETFs if I can make back the commissions in MER savings within 2 years.


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## SimpleCanuck (Apr 4, 2009)

If mutual funds are working for you, especially considering your wife, then stick with that. If you wanted to convert a portion of your mutual funds to ETFs you would have some interesting opportunities for those funds.

I think it depends a lot on how comfortable you are with your present situation, and how you want to be managing your money. If you are your own 'active manager' now, more ETFs might be appealing to you.

As long as your moving around reasonable sums of money I think the discount brokerages aim at being competitively priced.

That's my two cents. (3 cents next year!)


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## DrStan (Apr 5, 2009)

Hi Terry,

I can recommend an alternative (I do love indexing!)

TD Bank offerts TD E-Series funds, which are managed online like your current account. They have bond, Canadian, U.S., and International funds. The MERs are very low (from 0.31 to about 0.50%). Since they are indexed instruments, they should be nearly identical to the funds you own. They can be purchased in small instalments (as low as $25 a month I believe). I suggest using these funds, which have lower fees than the ones you have. Look it up on the TD website or just Google it. The E-Series account has no fees.

If you have substantial assets, ETFs become an attractive option. For instance, the TSX 60 ETF (XIU) has a 0.17% annual fee.


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## Preet (Apr 3, 2009)

Listen, I work for an index mutual fund manufacturer and I will be the first to tell you that if you are managing your own money and are able to dedicate time to educate yourself properly (by frequenting and interacting this forum for example), then the ETF option is worth serious consideration. Very serious consideration.

Assume a $100,000 portfolio with an equal weighting to the index fund choices you mention - portfolio MER is 1.27%. Let say you construct an ETF portfolio for 0.40% - you are saving 87bps per year in perpetuity. That is $870 roughly in the first year alone and it will probably only grow from there. In 10 years it would be over $10,000 in savings assuming little market growth.

As for your wife being able to take it over after you pass, you could just arrange for an advisor (fee-only?) ahead of time who will be able to assist with a transition plan.

Bottom line is, I think you have options worth exploring. May not be the above, but it's worth investigating.


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## Terry (Apr 4, 2009)

Thanks to all for your helpful comments.

CanCap: Yes, those are the MERs for index funds so I can see why they look high to you. Thanks for the link to your earlier post. I might have read it a couple of years ago but this was a teachable moment so it was particularly helpful now.

Preet: thanks for that analysis. I can see how transaction fees quickly fade into significance relative to savings on MERs

Dr Stan: I appreciate the mention of TD ESeries funds. I had looked at their site once and found it a bit hard to figure out how I would proceed if moving to them but I’ll keep them in mind.

I will certainly continue to ponder this issue. The major hindrance on a move is likely to be inertia. Right now I have small RRIFs for my wife and me (to get the pension income tax deduction) but most of our money is in RRSPs. It has been very simple to move money from the RRSP to the RRIF within Manulife. The prospect of sorting out how to get two RRSP accounts and two RRIF accounts moved from Manulife to an Etrader site or TD Eseries funds, and then to learn how to get the regular RRIF payments implemented and how to move money from RRSPs periodically, all looks like a big task. On the other hand, not doing so will cost me money and that provides some incentive.

I’ll keep reading, thinking and researching the details of the transfer process. Changes may be coming. The whole conversation has been very helpful.


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## NormR (Apr 8, 2009)

Terry said:


> Bond 1.298
> Canadian equity 1.048
> US equity 1.323
> International equity 1.398


1.3% on a bond index fund. Yuk! 

I'd go cheap with bonds. (Direct/GICs/etc)

For the rest, you could probably hire an index-oriented advisor and pay only a little more all in on a passive portfolio. (1% advice + about 50 bp funds, or about 1.6% for a DFA advisor.)


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## bgc_fan (Apr 5, 2009)

Just a quick question that's been bothering me about the comparison. In ETFs do dividends get re-invested? Or are they dished out as dividends?


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## CanadianCapitalist (Mar 31, 2009)

bgc_fan said:


> Just a quick question that's been bothering me about the comparison. In ETFs do dividends get re-invested? Or are they dished out as dividends?


Distributed as cash dividends. At least for the ones I own: XSB, XIU, VTI, VEA and VWO.


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## bgc_fan (Apr 5, 2009)

CanadianCapitalist said:


> Distributed as cash dividends. At least for the ones I own: XSB, XIU, VTI, VEA and VWO.


If that's the case, doesn't a mutual index fund have a bit of an advantage since you're compounding the redistribution from dividends? Assuming that you're reinvesting it and not taking it out.


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## CanadianCapitalist (Mar 31, 2009)

bgc_fan said:


> If that's the case, doesn't a mutual index fund have a bit of an advantage since you're compounding the redistribution from dividends? Assuming that you're reinvesting it and not taking it out.


There are a couple of ways of reinvesting dividends. You can enrol in a synthetic DRIP offered by most discount brokers. Or you can accumulate the dividends in cash, combine with regular savings and invest periodically. I do the latter all the time.


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## DrStan (Apr 5, 2009)

Just a couple of points :

Discount brokers will allow to do a synthetic DRIP. This is what I do with my iShares and RBC Direct. However, it isn't full reinvestment, only full shares may be bought. There are always a few dollars left over after the reinvestment. For instance: cash dividend $20, share price $9, will allow to buy two shares and leave $2 as cash in the account.

I really think E-Series funds are a nice option for periodic investment. They are a bit complex to open, because you have to open a regular TD Mutual Funds account, and then send in a form to "convert" that account to an E-Series account. This is what I did with my RESPs. I just went to the TD Bank branch, met with an advisor and filled in all the paperwork to open the Mutual Funds account. I didn't mention the E-Series at all at that time. I gave the advisor a check and invested it in the TD Money Market fund, until I sent in my conversion form. Then I purchased the E-Series funds online. There are actually a couple of posts on some blogs about this process. Just Google "converting TD mutual fund account E-Series", or something like that. It works just fine.


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## CanadianCapitalist (Mar 31, 2009)

DrStan said:


> There are actually a couple of posts on some blogs about this process. Just Google "converting TD mutual fund account E-Series", or something like that. It works just fine.


Here's the posts I wrote on this topic:

*Investing in TD e-Series Funds for Your RESP*


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## Four Pillars (Apr 5, 2009)

Those are expensive index funds - I don't think it's hard to lower those fees and stay in index funds. TD efunds (as mentioned) are the cheapest and rival most ETFs. Altimira has a precision series of index funds which had pretty good MERs although not as cheap as TD.

ETFs are more work - simple as that. Just search around for cheaper index funds. Keep in mind that most brokers will pay the transfer fees.


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## hfxtrader (Apr 5, 2009)

Is there a preferred way to manage ETFs (ie. brokerage account, savings account, TFSA, RRSPs, etc..)

I just bought XDV through my Questrade account but I'm wondering whether I should keep it in there or elsewhere. 

Thanks
Stephan


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## FrugalTrader (Oct 13, 2008)

hfxtrader said:


> Is there a preferred way to manage ETFs (ie. brokerage account, savings account, TFSA, RRSPs, etc..)
> 
> I just bought XDV through my Questrade account but I'm wondering whether I should keep it in there or elsewhere.
> 
> ...


It really depends what the ETF is made up of. If it's a bond ETF, it's probably best held in a tax sheltered account. A dividend ETF like XDV may be best in a non-reg account if you would like to take advantage of the dividend tax credit.


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