Switching from Index Mutual Funds to ETFs

The following question is from Ed, who wants to switch from index mutual funds to ETFs:

Many years ago I set up my RRSP using TD’s low MER e-Series index mutual funds. I learned quite awhile ago that most actively managed funds cannot beat the indexes over the long haul. I’m now thinking of moving from index funds to ETFs. Is there a website(s) somewhere with a good list of available ETF’s? I currently have a TD trading account so flipping over from TD index funds to ETF’s should easily be done not forgetting penalties for redeeming within 90 days.

While index mutual funds are a great option for small portfolios, ETFs could be an even cheaper option for larger portfolios. Though hundreds of ETFs are available, most investors need to be aware of only a handful. You can obtain the list of ETFs that track broad indices under the ETF category on this website or the websites of the major purveyors - Vanguard and iShares (Canada and US). I use the ETF Connect website for looking up more obscure ETFs.

The following table lists the TD e-Series Index Fund and the equivalent ETF:

TD e-Series Fund	ETF
TD Canadian Bond Index (TDB909)	iShares CDN Bond Index (TSX: XBB)
TD Canadian Index (TDB900)	iShares CDN Composite Index (TSX:XIC)
TD US Index (TDB902)	iShares S&P Index (IVV)
TD US Index Currency Neutral (TDB904)	iShares CDN S&P 500 Index (TSX: XSP)
TD International Index (TDB911)	Vanguard Europe Pacific ETF (VEA) or iShares MSCI EAFE Index Fund (EFA)
TD International Index Currency Neutral (TDB905)	iShares CDN MSCI EAFE Index (TSX: XIN)

Note that a better substitution for the TD US Index (TDB902) could be the Vanguard Total Stock Market ETF (VTI). Also, an initial currency conversion charge will be incurred when buying ETFs that are listed on US exchanges. Throw in an emerging market ETF and REITs into the mix and you’ll end up with a well-diversified portfolio.

Best Canadian Online Brokerages

The weekend edition of Report on Business ranked twelve Canadian online brokerages on ten different criteria. BMO InvestorLine took the top honours closely followed by E*Trade Canada and TD Waterhouse.

RBC ActionDirect, which I use exclusively for our retirement accounts and trading Canadian equities, received poor marks and ended up in the bottom of the pack. It is easy to see why: the webpage is clunky (in my opinion), accounts are updated only once every day (really, how hard is it to have this feature?) and I’ve never been able to locate their equity research.

For US equities, Ameritrade Canada is the clear winner. I care most about equity research, ease of use and low commissions (in that order) and Ameritrade is a clear winner in those categories. It would be interesting to see what happens when TD Waterhouse acquires Ameritrade Canada.

How to Open a RRSP Account?

I received a query from a reader about how to open a no-fee (or low-cost) RRSP account that provides a good selection of mutual funds. I thought I would expand my answer into a blog post.

If you want the flexibility to trade stocks and bonds, a RRSP account can be opened with any of the discount brokerages (Check out an earlier post on Best Canadian Online Brokerages for some options). They typically charge an annual fee for smaller portfolios (for example: RBC Action Direct charges a $50 fee for accounts less than $25,000). Opening an online RRSP account is as simple as visiting the brokerage webpage and clicking on the Open an account link.

If you want to buy mutual funds from various fund companies, you might want to consider ING Direct Funds. Please note that actively managed funds charge high fees that would make administration fees seem very small by comparison. (Example: on a $10,000 account, a $50 administration fee translates into an annual expense of 0.5%. On the other hand, the average mutual fund in Canada charges a fee of 2.1% and the vast majority of them have also underperformed their benchmark indices).

You can also open a RRSP account at your local bank branch or with an independent mutual fund company like Investors Group. But, your options will usually be limited to the in-house mutual funds. Note, that these mutual funds also have a high MER and you might have to pay a fee to move the RRSP account to another institution.

In my opinion, the best choice for small portfolios is TD eFunds. The index funds offered have a MER ranging from just 0.31% to just 0.48%. You would be able to quickly create a fairly diversified portfolio like I described in an earlier post. Opening an account is a fairly easy process and can be done online.