Are ETFs getting a free ride in cost comparisons with mutual funds?
A reader believes this to be the case. “I think the [cost] comparison is not fair if annual trade fees for ETFs are not included in the equation,” he wrote in a recent e-mail.
Exchange-traded funds cost much less than mutual funds to own, but there are stock-trading commissions to be paid when you buy and sell them. These commissions are rarely factored into cost considerations for ETFs, but they can add up. You might even be better off with a mutual fund instead of an ETF in some cases.
The reader based his case on the TD e-series of low-cost index mutual funds. So let’s compare the TD Canadian Index Fund e-series, with a management expense ratio of 0.32 per cent, against the TD Canadian Index ETF (TTP), with an MER of 0.08 per cent.
On an MER basis alone, TTP outclasses its mutual-fund sibling. But what if you make contributions to your investment account on a monthly basis?
It’s easiest to buy TD’s e-series of index funds if you have an account at online brokerage TD Direct Investing. TD Direct charges zero to buy and sell e-series products, and it charges just about $10 to buy and sell stocks and ETFs. If you bought some TTP shares on a monthly basis, that’s $120 a year or so in total commissions. On a $50,000 account, that’s the equivalent of a fee of 0.24 per cent over a year. Add that to the 0.08-per-cent MER and you have a cost identical to the e-series mutual fund.
Let’s factor in five more trades a year for random extra contributions to your investment account and to rebalance your holdings once or twice a year (rebalancing means selling a bit of your winning investments to buy a bit more of your losers). Those five extra trades ($50 a year) add an additional cost of 0.1 per cent to your ETF annually, for a total cost of 0.42 per cent. We’re now at a point where the TD Canadian Index Fund e-series is cheaper than TTP, even though the latter has a considerably lower MER.
There are at least a couple of competitors to TTP with MERs as low as 0.06 per cent. Also, some online brokers charge in the $5 to $9 range for trades. A few charge nothing to buy, though in some cases they apply commissions when you sell. Still, there’s a lesson here for cost-conscious investors who think ETFs are the one and only choice for cheap index investing. When you factor in trading costs, a mutual fund might be the cheaper choice.
-- Rob Carrick, Globe personal finance columnist
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Stocks to ponder
Bank of Montreal (BMO-T). Right now, BMO is an overbought technically vulnerable stock, according to the Relative Strength Index (RSI) reading this week. BMO’s RSI level is just above the RSI sell signal of 70. Sell signals have been largely unreliable in identifying price corrections for BMO stock – rallies continued after sell signals in December 2016, October 2017 and May 2018 - but it’s different now because of the 200-day moving average trend line. Scott Barlow takes a look at the charts for the most oversold and overbought stocks on the TSX. (for subscribers)
SilverCrest Metals Inc. (SIL-X). This stock is on the positive breakouts list (stocks with positive price momentum). In 2018, the share price more than doubled in value and the stock price continues to climb higher, rising 6 per cent year-to-date. This stock has 10 buy calls - a unanimous recommendation - with a 23-per-cent return forecast over the next 12 months. Given the company is currently not generating any earnings with production several years out, this stock may be best suited for consideration by investors with a high risk tolerance. Headquartered in Vancouver, SilverCrest Metals is a gold and silver exploration company with all of its properties located in Mexico. SilverCrest Metals is a relatively newly formed company. It was formed in late-2015, spun off from SilverCrest Mines Inc., which was acquired by First Majestic Silver Corp. Jennifer Dowty reports (for subscribers).
InterRent Real Estate Investment Trust (IIP.UN-T). This stock remains in an uptrend, closing at an all-time high on Thursday and appearing on the positive breakouts list. Long-term investors have enjoyed price appreciation in combination with a rising distribution. The security that has increased its distributions annually by 5 per cent or more for the past seven consecutive years. Industry fundamentals remain supportive for continued growth. InterRent holds a portfolio of mid-sized, multi-family residential properties located primarily in Ontario. Jennifer Dowty reports (for subscribers).
Digging for cheaper, fast growing stocks
Domestic investors have every right to be nervous about the approaching TSX profit-reporting season as U.S. earnings results pour in at mediocre levels. In an effort to help investors hoping to sidestep the American profit slowdown, Scott Barlow went hunting for Canadian stocks with the strongest earnings trends and attractive valuations. Here’s what he found (for subscribers).
How much your TFSA could be worth: the 2019 edition
One of the most notable personal-finance changes for 2019 is the increase in the annual contribution limit for tax-free savings accounts to $6,000 from $5,500. The Globe and Mail’s TFSA calculator has been updated accordingly. The calculator is designed to show how much money you’re on track to make in your TFSA over time, based on how much you have in your account now and how much you plan to contribute in the future. If you’re not contributing the maximum every year, it shows how much extra you could make if you did reach the yearly contribution limit. Rob Carrick reports.
This mindset may prevent you from having a financially comfortable retirement
To retire better, toughen up as an investor. With the deadline for contributing to a registered retirement savings plan for the 2018 tax year coming up on March 1, Canadians will be thinking about buying investments in the weeks ahead. The results of a B.C. Securities Commission survey suggest that most will be too retiring in how they go about it. Just 30 per cent of the 2,915 people surveyed last month thought the term “investor” described them well. More people thought the term saver described them well, which isn’t a bad thing. But saving for retirement won’t cut it – you have to think like an investor. Rob Carrick explains (for subscribers).
Others (for subscribers)
Ask Globe Investor
Question: I want to get some more international exposure for my portfolio. Two stocks I’m researching are GlaxoSmithKline PLC and LyondellBasell Industries NV (LYB-NYSE). How can I determine if their dividends are subject to withholding tax?
Answer: Companies based in the United Kingdom do not withhold tax on their dividends. The pharmaceutical giant GlaxoSmithKline has its corporate headquarters in Britain, and the chemical and plastics company LyondellBasell moved its tax residency to the U.K. from the Netherlands in 2013. So the dividends should not be subject to withholding tax in either case. If you’re looking to buy dividend stocks in other countries, however, there’s a good chance that withholding tax will apply. So be sure to research the tax implications before you invest. For U.S.-based companies, you can avoid withholding tax by holding your shares in a registered retirement savings plan, registered retirement income fund or other registered retirement account. But be careful: The exemption to withholding tax on U.S. dividends does not apply to tax-free savings accounts or registered education savings plans.
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What’s up in the days ahead
Anyone searching for positive news about the global economy faces a tough challenge right now: Fading projections for corporate earnings and downbeat readings on growth suggest the outlook is dimming. Yet, despite the steady drizzle of gloom during the first few weeks of 2019, investors have turned downright sunny. In both Canada and the United States, stock markets have marched higher since New Year’s Day. This is not as crazy as it sounds, as Ian McGugan will explain this weekend.
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Compiled by Gillian Livingston