A reader asks this question:
"I am currently setting up an RRSP for my daughter who plans on providing small monthly contributions. ETF's seem out of the question because of the monthly transaction costs associated. Vanguard index mutual fund for american and international exposure seemed like a good idea since their MER's are so much lower than comparable Cdn products. However my broker (TD ) tells me that they don't offer this. Are you aware of anyone in Canada that does? Any suggestions?"
Maybe your broker should have said instead that it is illegal for US funds to be sold in Canada. All funds must be licensed / registered with the provincial securities commission, e.g. the Ontario Securities Commission, and file a prospectus with it. So I believe Vanguard could theoretically be sold in Canada if it went through all the legal rigmarole of registration and licensing but it hasn't so far. I tried quickly without success to find a link to the actual regulation on the OSC website, though I came across this snippet from another document that confirms the situation:
"Policies that prevent US mutual fund companies from soliciting business in Canada, forbid advisors to recommend US funds to Canadian clients, and prevent the distribution of US mutual funds without filing a prospectus in Canada, all serve to protect the Canadian mutual fund industry. Severe tax consequences also deter Canadian investors from investing in US mutual funds." Source: letter to OSC, Re: An Alternative Trading System, Oct.13, 1999 (I believe the last sentence may refer to the fact that income received from US funds would lose their tax-advantaged character as dividends, or capital gains)
The other alternative of opening an account with a US broker used to be possible years ago but has been shut down by the US authorities - see this (justified) rant by ByloSehi. Sadly, you must forget those great Vanguard mutual funds.
You are aware of the Vanguard ETF option and its limitations for your situation. Perhaps you could accumulate the cash in the TD RRSP in a money market mutual fund to gain a little interest and get the RRSP deduction as well as the regular savings in operation. Once or twice a year you could buy the ETF to minimize the trading fees. I'd also check out brokers like Questrade that offer lower trading fees even for small accounts.
Another option would be to buy TD e-Series (Internet only) mutual funds for a few years. Their fees aren't great but at around 0.48% are not nearly as high as most Canadian mutual funds. After accumulating $20-25k, you could then switch to ETFs. Who knows, by then Vanguard may have expanded to Canada or the Canadian funds may have substantially lowered their fees (both of which are likely to occur at the same time ... call it the Walmart effect)?
I leave you with this statement from the same letter (see p.3) linked to above:
"The result of Canadians being denied access to the US mutual fund industry is the existence of a healthy and productive mutual fund industry in Canada that benefits the Canadian economy." ... but not the Canadian consumer / investor!
Sunday 27 January 2008
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5 comments:
I think the TD e-Series is a great alternative. Yes, the fees are higher than ETFs but not by a lot when compared to normal Cdn mutual funds.
Mike
To me the difference between buying an ETF or TD's equivalent eFunds (assuming one is with TD Waterhouse) is straight math.
I built a spreadsheet that assumed monthly purchases at $9.95 brokerage cost for ETF's and $0.00 for eFunds and a 0.17% MER for the ETF and a 0.50% MER for the eFund, and that the MER is calculated on the month end balance. This sheet shows the break even point is about $306.40 per month for it to be a wash.
Buy less than $306.40 and eFunds win. Buy more and ETF's win.
This calculation assumes no change is asset value and so is wrong -- but allows one to make a more rational decision based on math rather than emotion.
I currently have several Vanguard ETFs in my RRSP portfolio. Their ticker symbols are VWO, VTV, and VISVX. I also have some iShares US (IVE) and iShares CDN (XMD, etc). My account is a CIBC Investors Edge account and I can buy and sell the ETFs like any other article.
Some of the US ETFs offer great returns, and I especially like the VWO, however it is high risk, and has recently suffered with the rest of the market.
Cdnretguy, or another way of looking at it: if you take the difference in MER of 0.33%
buying monthly = 12x$10 = $120
that equates to a portfolio of $36,363
(i.e. 0.0033x$36363 = $120) above that monthly ETF buys are cheaper
buying twice a year = 2x$10 = $20, which gives a portfolio of $6060 ... but then one is not invested (maybe miss some market upswing) but one may get some interest income from a money market fund. Bottom line, the bigger the accumulated investment in the portfolio the better looking are ETFs.
There may not be a single, deterministic solution but, as you say, crunching a few numbers helps one decide.
Alberta, VISVX? really? that's the mutual fund version of VBR, the US small cap value ETF. Canadians aren't supposed to be able to buy those US mutual funds.
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