Mutual Fund vs. ETF

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Kevinbaker
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Mutual Fund vs. ETF

Post by Kevinbaker »

Hello all!

Im in the process of putting together my portfolio and am having some difficulty deciding what would be more beneficial for a novice investor that is going to make small monthly contributions between 500-600 dollars, mutual funds, etf's, or a combination of the two.

Since eft's trade like stocks and have a commission every time you want to purchase more shares, would it be more efficient to just own mutual funds since you can add a min. of 100 a month without incurring extra costs?

Thanks for any replies in advance. :)
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LAJ
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Re: Mutual Fund vs. ETF

Post by LAJ »

I use the TD e-Series funds for my orphaned cash. They allow small contribution amounts with no sales fees and reasonable MER IMO. There is a redemption charge if redeemed within 30 days of purchase. Other banks probably have similar but I'm not familiar with them.

Disclaimer: not a sophisticated investor like many here.
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Mordko
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Re: Mutual Fund vs. ETF

Post by Mordko »

Some brokers allow you to buy ETFs for free. Still, for such amounts e-series is going to be almost as efficient and probably a bit easier to manage.

Another thing to check is minimum balance; certain brokers impose charges unless you have a certain amount in your account.
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Re: Mutual Fund vs. ETF

Post by Taggart »

I'm using a mix of TD e-Series and ETF's in the RRSP's. All TD e-Series in the TFSA's.

With TDDI I can add min. $100 at a time to any fund in the e-Series. When purchasing I have the option of either re-investing or else taking distributions in cash. I also find them very convenient to use in a portfolio in order to mop up any distributions from the ETF's. No fee as long as the e-Series is held for a minimum 30 days. Great for the annual portfolio re-balance and when I eventually have to sell in order to abide by the mandated withdrawals in a RRIF, no charge for that either.
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big easy
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Re: Mutual Fund vs. ETF

Post by big easy »

I've got a whack of TD e-series in taxable accounts with big capital gains. I am now stuck paying 0.3-0.5% MERs on them because I don't want to sell and trigger the capital gains tax. That said, I've got big capital gains :D .

Stay the course, don't trade frequently and you'll be fine either way. If it were me, I'd probably go to Questrade and buy ETFs for free.
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Re: Mutual Fund vs. ETF

Post by Spidey »

I use e-funds for smaller dollar amounts to avoid commissions. When the efunds amount to several thousand dollars, I will usually sell them and buy the corresponding ETF, usually during a time when I consider the volatility to be low, such as during the summer time.

There are a few other mutual funds that I own because I believe the performance is equal or superior to the ETFs,

- Mawer Small Cap Global equity fund
- Mawer Global Equity Fund
- PHN bond funds (class D)
- TD US small cap equity fund
- Beutel Goodman small cap Canadian Equity fund D (My first choice would be the Mawer fund but unfortunately it is closed to new investors.)
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Re: Mutual Fund vs. ETF

Post by always_learning »

TD efunds are convenient, relatively low-cost products; they might be perfect for you.
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Re: Mutual Fund vs. ETF

Post by longinvest »

Kevinbaker wrote: 24 Dec 2017 08:36 Im in the process of putting together my portfolio and am having some difficulty deciding what would be more beneficial for a novice investor that is going to make small monthly contributions between 500-600 dollars, mutual funds, etf's, or a combination of the two.

Since eft's trade like stocks and have a commission every time you want to purchase more shares, would it be more efficient to just own mutual funds since you can add a min. of 100 a month without incurring extra costs?
Kevin,

At Virtual Brokers, there's no commission* to buy ETFs on the "Classic" commission structure. This gives me access to the awesome set of 4 ETFs: VCN (total-market Canadian stocks), VXC (total-market ex Canada stocks), VAB (total-market Canadian nominal bonds), ZRR (total-market Federal inflation-indexed bonds). The total asset-weighted Management Expense Ratio (MER) of my portfolio is: (25% X 0.06%) + (25% X 0.27%) + (25% X 0.13%) + (25% X 0.27%) = 0.18%, given its 25%/25%/25%/25% allocation to these four Canadian-based ETFs. This represents a total of $18.25 in annual fees for each $10,000 portfolio slice. (These fees are hidden within the ETFs; they're not taken off the brokerage account).

* Virtual Brokers doesn't charge ECN fees on transactions with the "Classic" commission structure. Some competing discount brokers charge ECN fees even on their "no-commission" transactions.

With discount brokers, it's important to understand the commission and fee structures as well as one's personal needs, to minimize total expenses. My opinion is that Virtual Brokers is currently the cheapest broker for a Canadian-based ETF portfolio. There's National Bank DIrect Brokerage which can be cheaper if one restricts all transactions to 100 or more units, but the 100 unit threshold for free commissions is a pretty big hurdle.
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Re: Mutual Fund vs. ETF

Post by AltaRed »

As a followup to this topic I recently participated in an interesting(?) survey from Scotia iTrade as part of their 'client insight panel'. It was focused on the ETF vs mutual fund debate and was asking for opinions on client habits on buying ETFs vs mutual funds, and further whether clients might be interested in a 0.4% commission on buying mutual funds.

As in any multiple choice questionnaire, there was no room for written feedback on, for example, "depends" which makes the questionnaire somewhat useless. But it may be be some thinking behind the elimination of, or rebate of, trailer fees and charging commissions instead. Easier to eliminate trailer fees by selling F class of course, but it is more complicated than that, e.g. how to cover ongoing administrative costs for reporting, re-invested distributions, tax slips, etc. In any event, I followed that survey up with a long Secure Message online to cover some of the "depends" issues, of which there are many, i.e. the devil is in the details*. So far, all of that has gone into a black hole with no response of any kind. Time will tell.

* For example, is 0.4% commission buy only? Or would it be round trip? Would there be minimum and maximum limits? What is the compensation model for ongoing administrative costs? How are they going to talk MF companies into essentially F class, or perhaps some other class?
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Re: Mutual Fund vs. ETF

Post by Peculiar_Investor »

AltaRed wrote: 31 Oct 2018 15:05 As a followup to this topic I recently participated in an interesting(?) survey from Scotia iTrade as part of their 'client insight panel'. It was focused on the ETF vs mutual fund debate and was asking for opinions on client habits on buying ETFs vs mutual funds, and further whether clients might be interested in a 0.4% commission on buying mutual funds.
Fancy meeting you here. Thanks.

FWIW, the Bogleheads wiki has an article that covers the basic pros/cons, ETFs vs mutual funds - Bogleheads. Depending on the investor's circumstances, a case could be made for either being a better choice, as long as the low-cost structure was maintained for both.

I don't think that I would support any level of commission on buying mutual funds, although I do recognize that purchasing third-party mutual funds do incur costs for the selling organization that should probably be covered in some, transparent, manner. F-class mutual funds might be a good starting point for a model, rather than the high MER model that pervades most of the legacy Canadian mutual fund market.
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Re: Mutual Fund vs. ETF

Post by Taggart »

I've been waiting for nineteen years for TD e-Series to lower their MER's. I'm very patient, but I still invest in them. I literally hate ETF's because of the commissions but I invest in them too. Can't have both without a TD account.
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Re: Mutual Fund vs. ETF

Post by Mordko »

Anyone investing for a long time is likely better of with ETFs. Once you hit 50k or so, commissions should be insignificant compared to MER. Besides, some vendors have zero commission on ETFs.
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Re: Mutual Fund vs. ETF

Post by AltaRed »

A one time $10 commission on a purchase of as little as $10k is not a factor for buy and hold investors. I don't get suckered in by organizations promoting zero commissions on 'buys' but I agree they can be a boon for investors investing small sums, building positions month by month.
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Re: Mutual Fund vs. ETF

Post by Taggart »

TD e-Series are great for re-investing distributions in the portfolio. I do it every month $100+ at a time. For the yearly rebalance.......no charge.
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Re: Mutual Fund vs. ETF

Post by Mordko »

AltaRed wrote: 31 Oct 2018 15:47 A one time $10 commission on a purchase of as little as $10k is not a factor for buy and hold investors. I don't get suckered in by organizations promoting zero commissions on 'buys' but I agree they can be a boon for investors investing small sums, building positions month by month.
True but still adds up. Say you have 4 ETFs in 4 portfolios (4 holdings each), which generate dividends quarterly. Reinvesting dividends will cost one over $500. One could wait and reinvest annually but that has a cost due to having cash which does nothing.
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Re: Mutual Fund vs. ETF

Post by AltaRed »

Sure, I get that for someone in accumulation mode and thus sympathetic to the appeal of zero commissions. I have never re-invested that way, and since I've been retired, all investment income is 'consumed'.
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Re: Mutual Fund vs. ETF

Post by brucecohen »

Mordko wrote: 31 Oct 2018 16:27 True but still adds up. Say you have 4 ETFs in 4 portfolios (4 holdings each), which generate dividends quarterly. Reinvesting dividends will cost one over $500. One could wait and reinvest annually but that has a cost due to having cash which does nothing.
You could put each ETF on a synthetic DRIP in which the broker buys, commission-free, as many shares as the distribution will cover. But there's usually a little cash left over. TD e-funds offer a more efficient though slightly more expensive way to stash distributions but AFAIK e-funds are available no-load only at TDDI.
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Re: Mutual Fund vs. ETF

Post by Mordko »

brucecohen wrote: 31 Oct 2018 16:45
Mordko wrote: 31 Oct 2018 16:27 True but still adds up. Say you have 4 ETFs in 4 portfolios (4 holdings each), which generate dividends quarterly. Reinvesting dividends will cost one over $500. One could wait and reinvest annually but that has a cost due to having cash which does nothing.
You could put each ETF on a synthetic DRIP in which the broker buys, commission-free, as many shares as the distribution will cover. But there's usually a little cash left over. TD e-funds offer a more efficient though slightly more expensive way to stash distributions but AFAIK e-funds are available no-load only at TDDI.
Yes, but I use dividends to rebalance. Also I am with Questrade so buying is free.
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Re: Mutual Fund vs. ETF

Post by Sensei »

Hi,

Just to add a contrarian viewpoint, I'm not allowed to purchase mutual funds in Canada or the US, but of course anything through my TD brokerage account is fair game. Thus I have owned ETFs in the past. In the last 3-4 years, I've shifted to US closed end funds (CEFs).

I know that Canadians are suspicious of CEFs, but with careful research there are some that are worth buying in Canada. That said, of the 134 I've found none that interest me. The US is the place to look IMO.

The contrarian aspects are: higher MERs, use of leverage or options strategies to boost yield, variability of management quality, lack of restrictions on managers. However, if you know what to look for, these are not insurmountable obstacles.

I own 18 CEFs, mostly US based. I've built a diversified portfolio and use a disciplined screening process. It is still a work in progress, but well worth the effort, I think.

If we are comparing funds, we need to give the silent majority of FWFers all the options.
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Re: Mutual Fund vs. ETF

Post by Mordko »

Had one experience with closed funds and it was a good one.

It was a American municipal bonds fund which was severely underpriced vs NAV. The reason was that investors were scared of new taxes and punished the value of the bonds AND stopped buying the fund.

The trick was that no new bonds of this type were being issued so the fund was going to shut down within a couple of years so the price had to align with NAV.

Worked out very well but had to spend time to understand what the hells going on which was kinda boring.

So... Agree that closed funds offer far better opportunities to beat the market than shares if you have time to do the research and attention span to read a lot of boring material.
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