Why Is There No Competition For the TD E-Series?

Unlike my pal Young and several of my other favorite financial bloggers, I am a 100% advocate of passive investing.  There are just too many factors at work in the markets that I don’t understand and don’t have control of for me to believe I can outsmart people on the other end of active stock management.  I think that the vast majority of people would be better off making sure that their investing costs were kept to a minimum and simply cashing in on the average rate of return that equities produce as a class.

ETFs vs Index Mutual Funds = Everyone Wins

Now as anyone who has read my free ebook knows, investing in broad-based indexes through extremely low-cost ETFs is my preferred way to build an investment portfolio.  That being said, in many cases there are some undeniable advantages to going with extremely low-cost mutual funds that track an index.  In my opinion, the only offering in Canada that meets my “low-cost” criteria is the TD e-series of mutual funds.  I’m sure this doesn’t come as a surprise to many of you, in fact if you’ve been reading this blog for a while, you know that one of our most popular articles is: “How To Open a TD e-series Fund”.  These mutual funds have long been popular because of their low MERs (.32%) and most appealing to many automatic monthly investors – the ability to buy and sell units of the fund without paying any brokerage fees whatsoever.  If you are going to build your index-centric portfolio through ETFs it is worth noting that in order to avoid brokerage fees from eating up more of your portfolio than it’s worth, you need to invest a substantial amount of money each time.  Otherwise, the low-cost TD funds make a lot of sense, and that is why they are so beloved by the personal finance community.

Now one could argue that the lines of ETFs that are coming out that allow commission-free trading are the new copycats of the e-series.  There are definitely some similarities between consumers that would be attracted to these products.  Nonetheless, it isn’t like this is a new product on the market.  The e-series has been around since 1999 and now has total assets of around $600 million.  While I realize that isn’t “big money” in the world of finance, or even just in the world of mutual funds, you’d think that in the competitive space of the big six banks someone would have copied this model and eaten into TD’s market share.

King of the Mountain

From what I could tell there is still nothing on the market that truly compares to the TD online-only mutual fund series.  ING Direct began offering the Streetwise Balanced Fund in 2008, but even that product had an MER of around 1%.  Those seven-tenths of a percent can make a big difference over the long-term, and it makes no sense to me that the brick-and-mortar retail bank was able to offer a superior online product to a bank that was more or less exclusively online!  TD’s biggest competitor for in the overall Canadian market – RBC – has no equivalent from what I can tell.  Their index-based mutual fund comes in at an MER of .71%.  None of the other members of the Canadian banking oligopoly have anything that tops either one of these two giants.

You would think that just from an overall public relations perspective it would make sense for these companies to pursue a low-cost option to compete with TD.  If you do a quick scan of the Canadian personal finance blogs (or maybe I’m the only one that does this?) you’ll see article after article touting the advantages of this fund along with instructions on how to navigate the somewhat quirky process that one has to get through in order to own an e-series fund (TD claims this is not done as a disincentive to its cheapest option, but several of us have our doubts).  You would also think that creating a vanilla mutual fund based off of a simple broad-based index would be extremely easy for any of the big banks to do.  It would require almost no work and I would be willing to bet that a solid amount of profit could be made despite the low MER fee.  Perhaps they don’t want to sacrifice the fat returns of their more traditional offerings?

Have you considered the TD e-series for your portfolio?  I’ll stick to my low-cost Vanguard-loving couch potato portfolio (and am hoping that this commission-free ETFs thing catches on and continues to grow), but I think that this index mutual fund series a great deal for many hands-off investors.


24 Responses to Why Is There No Competition For the TD E-Series?

  1. The TD Ameritrade fund is very good, and TDA customer service is perhaps the best in the industry. While I don’t advocate an indexing approach (at least for myself – it probably makes sense for many people) I think this is one of the best venues to do indexing.

    • Good to hear the customer service is positive in many instances as well. You honestly think you can beat the market W? I’m just curious because so few people actually do.

      • Yes, I do think that. Not trying to be egotistical or anything, but I do have a lot of experience with it and good results. There’s an example market-neutral portfolio (ie it doesn’t really care if the market goes up or down) where you can watch me do it (or fail trying). So far so good.

        • Interesting, I’ll definitely follow your progress from afar. One guy who I have seen have some pretty good success is JT McGee from over at Money Mamba. I get way too nervous when I watch plenty of smart people outsmart themselves and waste a lot of time and money trying to beat the basic indexes I have in my portfolio. There is always that itch though to apply some of the theories I read about.

  2. I think there’s a couple things to keep in mind, 1- TD has created an entire electronic-only “brokerage” to handle e-series mutual funds that other banks may not be willing or able to do; and 2- if a TD advisor pushes a customer into e-series does he still get a commission or do TD advisers have no incentive to sell e-series funds?

    Personally, I had TD e-series mutual funds but switched to RBC’s index funds since the hassle of dealing with TD wasn’t worth the low MER – what I saved in MER I ended up spending double in frustration and anger!!!

    • How hard can it be to create an electronic-only brokereage. Heck Scotia and RBC just bought whole online banks! I would definitely assume that advisers don’t get much if anything for recommending the TD e-series (if recommending any indexing funds, I’m fairly certain they would recommend the plain vanilla ones that are just like RBC’s). It would still make sense for someone else to offer a competing product wouldn’t it?

      I have heard in some circles that the administration in regards to the e-series isn’t ideal. Personally I’ll stick with my ETFs.

      • TD does not sell e-Series in branches… if you ask the advisors questions, they won’t know the answers unless they personally invest in them. e-Series can’t even be set up in branch, they are strictly online only.

        • Yah, this is definitely a drawback K. If you click the link in the article we have detailed instructions on how to apply online to open a TD e-series account. Shouldn’t this questionable level of user-friendliness make them even more ripe for competition though?

          • No, the lack of user-friendliness is part of the agreement you signed up for when you filled out the extra form to convert your mutual fund account. It states that you can only purchase them online and any form of communication with TD related to those funds in branch/phone or email (unless easyweb is down) is a violation of the agreement you signed and they can then sell off all your e-series funds, transfer them to the Investor series and remove your ability to purchase e-series.

            If they allowed you access to advisors or anyone to talk to in that respect, they wouldn’t be able to offer the low fee MER’s that the e-series has. As your typical MER on a regular mutual fund has a trailing % that goes directly to the advisor, with e-series it all goes into funding the online platform and TD’s pocket and in a few e-series funds a manager who actively watches the fund.

            And from talking to an advisor when I initally opened the mutual fund account at a TD branch before mailing in the forms I can confirm that TD advisors are not allowed to sell or discuss e-series funds. Also they are quite opposed to someone self-managing their money, but my opinion is that all non-fee advisors are working in their best interest not yours. Hence my switch from Investors Group when i was young and nieve to this investing world.

            I thank many websites for changing my financial outlook, Young&Thrifty especially, getrichslowly and the wealthy barber books.

          • Thanks for confirming this Chris, I figured as much! Have you checked out our Investor’s Group article? To be mentioned in the same breath as GRS and my man David Chilton? I’ll take that all day!

          • I have opened TD e-series accounts for all my family members without any hassles.

            Initially, I opened them as Regular Mutual Fund and while in the branch also signed the form to convert the Regular MF account to e-Series. The branch person gladly did it.

            Once the account was opened & converted, I went online and added the funds that I wish to purchase.

            The subsequent accounts – TFSA, Non-Registred were opened with much ease.

            I am a very, very happy customer and a big fan of TD e-Series funds.

  3. One of the reasons I believe ING Direct offers a higher MER (1%) is because they handle all the asset allocation decisions and rebalancing for you. All you have to do is contribute a fixed sum of money over regular intervals to do well.

    With the TD e-series you have to determine your own asset allocation and rebalancing…most of which I believe the average retail investor would have significant trouble.

    Just my two cents though.

  4. Why isn’t there any real competition? Why is it so hard to actually buy the E-series, as evidenced by the series of forum threads online with people who have a really hard time taking advantage of the product?

    It’s a wonder that TD still offers the E series, as they don’t seem to even support it themselves. It seems to me that it’s similar to a show like ‘Friday Night Lights’, very few people watch it but the network keeps it on the air because the critics love it so much.

  5. I didn’t find opening an account with TD and buying e-series a big hassle.

    What I would complain about though, is that there are VERY few TD e-funds covering only basal investments. As I wanted to diversify I needed other mutual funds for my portfolio with significantly higher MER. Seems that TD created e-series, but doesn’t care anymore to expand this business…

    • It seems very hit and miss in terms of ease of opening an account from all the testimonials we’ve gotten here. Just out of curiosity, what sort of mutual fund of market were you looking to track that E-Series didn’t cover? I always thought it was pretty comprehensive as far as implementing a basic indexing strategy.

  6. Hi Teacher Man, TD e-series is not included in my portfolio so far. I first time came through this term. However, I am reading more articles about it so that I could final decision to add it in my investment portfolio. I am not sure about ETF but Mutual Fund is always WIN-WIN deal for investors.

      • I have noticed that the 10 year performance of these e series funds are nothing to write home about only 5-7% after fees. This is lower than many many mutual funds 10 year return after fees.

        Where is the long term advantage to these e series? Seems like managed money still wins in the long run.

        Although not all Italian funds are created equal either. There is alot of crap out there.

        • Andrew, that’s just factually not correct. There are few mutual funds right now that beat the 10-year return on the eseries. Here is a great article for the Globe and Mail that compares the TD eSeries to TD’s own actively managed mutual funds. Check out our Free eBoon on the homepage for several long-term studies that explain why active management simply doesn’t beat passive management.

          • This may be true of td mutual funds. But there are lots of good actively managed funds doing 8-12% over the 10 year. I was looking at switching because the low cost is attractive but seems hardly worth it for a 4-7% 10 year return.

          • I don’t think you have researched the math behind passive investing versus active investing Andrew. There are very few mutual funds that trade in the same market as the Eseries that have beaten them. Make sure you’re comparing apples to apples. You can’t compare a TSX 60 index to an internationally managed mutual fund.

            The bottom line is the vast majority of mutual funds do not even come close to beating their benchmark index over the long term. Also, there is absolutely no way to tell which mutual funds will outperform the index before they do. Go ahead and Google what the returns look like for funds that have outperformed the index in the past. You’ll find out that they are great bets to trail the index going forward. In other words they were lucky before and now they return to average before slipping beneath it. That’s why Morningstar’s 3-star funds routinely outperform the 5-star funds.

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