Claymore PACC DRIP SWP - Beware of the Broker

One of the valuable features of Claymore Canada's ETFs is that the company offers investors three automatic programs, all on a voluntary basis without commissions or fees:

• PACC - Pre-Authorized Chequing Contributions - owners of ETFs can make regular monthly, quarterly or annual purchases of additional units
  
• DRIP - Dividend Re-Investment Plan - ETF distributions received are used to buy more units
• SWP - Systematic Withdrawal Plan - ETF units held may be sold on a regular monthly, quarterly or annual schedule

However, there is a catch. The broker at which the ETF units are held must cooperate with Claymore to make it happen. Not all brokers do and some only participate in one or two of the programs. The PACC is the one with the most brokers missing. Unfortunately, it is also the case that the major bank brokers are least on board - none supports all three programs. To check your own broker, here is the list posted by Claymore of which broker supports what.

Thanks to Larry MacDonald at Canadian Business for asking the question that prompted me to look into this. You learn something every day.

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.