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.