Thursday, 24 January 2008

DRIPing ETFs in Canada

One of the unfortunate characteristics of ETFs is that one does not have the option of having the cash distributions automatically reinvested by the ETF provider (iShares Canada explains why in this FAQ), unlike the case with mutual funds. That means an investor must receive cash and decide how long to accumulate before making a trade to buy extra ETF shares. It is an extra cost and extra effort. As Canadian Capitalist recently pointed out, the reinvestment cost, when calculated as a percentage of the total portfolio, may not be very large. However, for passive index investors especially, who just want to let the funds accumulate in the ETF, it is an irritant. Instead of making small purchases oneself, there is another possibility - the broker may offer the free and automatic service of purchasing extra units of the ETF, what is often called a synthetic DRIP (because it is not a genuine, original DRIP as offered by Canadian companies and funds - see the Canadian Dividend Reinvestment Plans blog for much detailed info and listings).

It seems that there is no comprehensive source of info on ETF DRIPing capabilities on the Web, so I offer the results of my researches into the services of Canadian discount brokers. It isn't a complete or comprehensive list - maybe folks could add their knowledge and everyone could convince the DRIP guy to add this info to his blog and maintain it?

Much of the story is pretty sad, and the info hard to extract from brokers, with one outstanding exception and one ok alternative.

#1 - Questrade - leader by the length of a traffic jam on the 401, no one is even close
If you want to DRIP a variety of ETFs, this is your broker. There is no list of ETFs they will DRIP because they will do them all, including all US ETFs. Oh, sorry there are a very few exclusions. Here is a quote from an email Lynn Suderman, Communications manager at Questrade:
"Questrade offers a free DRiP service to its clients. All details are on our site here: http://www.questrade.com/trading/stocks_dividend_plan.aspx. We don’t have a list of ETFs available for DRiPs because almost all Canadian and U.S. ETFs qualify.(note that foreign ETFs – non-U.S., non-Canadian – are not eligible). Here is our rule of thumb for exclusion:

· ETFs that hold stocks and bonds;

· ETF listed as an ADR

· It’s a short ETF.

At the moment, 16 ETFs are excluded due to the above criteria:

ABERDEEN ASIA-PACIFIC

ACS MEDIA INCOME FUNDS

ANGLO AMER PLC ADR

ATLANTIC POWER

ASSOCIATED BRANDS

CUSTOM DIRECT INCM

FMF CAP GRP LTD

FORT CHICAGO ENGY

HARDWOODS DIST INC

KEYSTONE NORTH AMER

MEDICAL FACILITIES

PRIMARY ENGY RECYCLNG-EIG

STUDENT TRANS OF AMER

TELESYSTEM INLT WIRLS-NEW

UNITS-TIMBERWEST FOREST

UNITS-TAIGA BLDGS PRODS



Add this to the recent announcement that Questrade now offers the ability to hold USD cash within a registered account, unique among Canadian brokers, the company begins to look pretty darn good. Now maybe it's because I am big shot blogger (har, har) but I liked the complete within-the-day responses to my email enquiry to Lynn. It's still not perfect though, because they will only buy whole shares with the distribution, so the remainder of the cash will still accumulate in your account. The higher the price of the ETF, the more cash will be left over; in a worst case, there may not even be enough to buy one share - e.g. AGG, a US bond index fund, has a market price of about US$100 per share; it pays out monthly distributions, which means you must have a holding of about $27,000 to buy one share each month.

#2 Canadian ShareOwner Investments Inc - a fair second place
This smaller broker has a fair selection of ETFs that it will DRIP, including all the Canadian iShares ETFs. The list is actually published here - quite an non-obvious place for it to be in the website but a rep guided me quickly and without hesitation to the right place when I phoned. It enables the reinvestment of every penny of distributions by buying fractional shares, something even Questrade doesn't do. Nevertheless, the list is constrained to more popular ETFs and only a few US ETFs (including the AGG example I used above) and none of those from Vanguard, for example. If they have the ETFs you want, this is your best DRIP broker.

#3-5 blank, as none of the other brokers I looked at deserve to be anywhere near the top for the pathetic coverage, the terrible lack of information on websites, the ignorance of front-line telephone customer service staff in knowing what an ETF is, let alone a DRIP, the slow and time-consuming method of looking it up (most seemed to need to look up from some sort of internal computerized list where it took minutes for each named ETF, some wanted CUSIP numbers not just the trading symbol and one even said I would have to buy the ETF first before they could tell whether it could be DRIPed). Below is a partial list I got of which can be done and which not.

#6 - TD Waterhouse - no on-line list, Yes = XIU, XIC, XSB, XBB, XTR, VTI; No = CPD, XSP, VEU

#7 - RBC Direct Investing - no list, Yes = XIU, XSP, XIN; No = CPD, VEU, VTI, EFA

#8 - E*Trade Canada - no list, Yes = XIU, XIC, XSP; email response a day after telephone contact included no further info as to which ETFs in general could be DRIPed

No Ranking (how can they deserve a ranking if they don't do any ETF DRIPing?)
BMOInvestorline - list at http://www.bmoinvestorline.com/FAQs/FAQ_DRIP.html# but it includes no ETFs; called them to check since the list is dated March 2007 but they said they don't do any US ETFs

CIBC Investor's Edge - no list; still waiting for an email answer four days later since rep could not find answer while I was waiting; a post of Jan.29, 2007 (is this still accurate?) on this Canadian Business.com forum by bindexit says CIBC will DRIP Canadian iShares but no US ETFs.

For others like ScotiaMcLeod, National Bank, QTrade etc listed on Rob Carrick's Globe review and ranking of discount brokers, I have no information.

Those interested can also read the informed discussion on this Financial Webring Forum thread "DRIP through RBC".

Update Jan.27 - I posted a note on the Financial Webring about the lack of info about ETF DRIPing and a certain Operabob has created a thread on the DRIP Investing Resource Center to collect any info people might have on what various brokers will do. So I invite you to contribute to that discussion with your info.

16 comments:

Canadian Capitalist said...

Thanks for your extensive research. Good to know this list exists even though I don't plan on DRIPping myself.

One Man Rodeo said...

Thank you for your research. I am considering at looking at opening an online brokerage account this winter for etf's but I would be a passive investor.

I found your article very useful!

CanadianInvestor said...

One man, good luck with the account, though of course there is a lot more to consider than just ETF DRIPing. Basic trading fees, customer service, FX fees in registered accounts, research tools etc

CanadianRetiredGuy said...

My wife and I have all our investments (registered and non-registered) with RBC Direct Investing. We have three RSP accounts and a Cdn$ and a US$ investment account.

Each account can be set to either payout or reinvest dividends for stocks and either payout or reinvest dividends for mutual funds; two settings per account for each of the two classes of assets. Mutual fund dividends are fully reinvested for ALL the proceeds while stock dividend payouts are used to buy full shares and the balance ends up as cash in the account. (I hate loose cash in my accounts due to the lousy interest rates and am contemplating holding $50 or so of Royal Banks Money market fund which I could use to sweep up this excess cash.)

I believe it is also possible to set an individual stock or mutual fund to be opposite to the account setting, but am unclear on that. When I buy something new in an account I let it settle and then call to ensure dividends will be treated as I expect.

For new account openers, it would be prudent to ensure you determine the default setting, as I know there is one, but I don't know which way it defaults.

I do relatively few trades with RBC DI but have been very happy with them for a significant number of years and would be happy to answer any and all questions to the best of my ability. (I do find their strip bond offerings to be less than TD Waterhouse's which would be my only real complaint.)

CanadianRetiredGuy said...
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CanadianRetiredGuy said...
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Four Pillars said...

Great post - I'm a pretty big Questrade fan mainly because of the low costs - considering the other brokerages over the exact same product if you don't include the US$ rrsp thing + reinvest divs from ETFs.

To me it's a no-brainer.

Mike

CanadianInvestor said...

Thanks CdnRetired for all that detail about RBC. So far as I know, BMOIL will do regular DRIPs for stocks account by account - every stock in an account or none. Not sure about mutual funds since I haven't owned any for a while.

FourP, any comments about Questrade? I'd read some disappointments at CanadianCapitalist.

onarock said...

Why does everybody always leave out Qtrade??

They synthetically DRIP almost everything too.

for free

and u can buy and sell mutual funds for free, as long as u hold them for at least 90 days.

k

onarock said...

the link didn't show up.

www.qtrade.ca

k

CanadianInvestor said...

Thanks onarock, I just ran out of time contacting brokers, no slight to Qtrade intended. Is there a page within their site that says what they do? I looked and couldn't find one. That's why the combined efforts of everyone to compile this info at the linked DRIP Resource page will be so helpful to all. The more choices there are and the more people know about the choices the more competition there will be and the better off we will all be.

I notice you have already done that, so well done.

Ranv said...

I think you may have a link error in this article. In the paragraph:

"#1 - Questrade - leader by the length of a traffic jam on the 401 ... "

You have Questrade linked to the Qtrade brokerage. Just thought you'd like to know.

CanadianInvestor said...

Gads! Yes, thanks I do like to know. Much appreciated. Fixed now. Why couldn't these two companies find more dissimilar names? Who is riding on whose coat-tails?

Lucas said...

Questrade is very good, low fees etc. However if you want to really DRIP a security they charge a whopping 400 certificate fee!!

Of note too is that TD waterhouse will drip XTR

CanadianInvestor said...

Thanks for the update, Lucas

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