There is a right way to be an index investor, and a more expensive wrong way.
The right way is through exchange-traded funds, which have management-expense ratios as low as 0.06 per cent or so for funds that track the S&P/TSX Composite Index. That’s darn close to zero.
The wrong way is through the index mutual funds sold by the big banks. As a rule, these funds range from notably to egregiously overpriced. A quick example: The CIBC Canadian Index Fund Class A, with an MER of 1.14 per cent.
A warning about bank index funds is necessary because there is a significant amount of money invested in them. CIBC Canadian Index has about $567-million in assets, while RBC Canadian Index Series A has $718-million and the various versions of TD Canadian Index have $1.4-billion. The Scotia Canadian Index Fund has a total of roughly $250-million and the BMO Canadian Equity ETF Fund is around $320-million. (Note: this mutual fund holds a Canadian-index ETF.)
All of these funds offer a few strong advantages over ETFs. You can buy and sell them at no cost, you can open an account with as little as $100 to $500, and subsequent investments can be as low as $25. But the comparatively high fees of these funds make them a weak substitute for ETFs.
It’s true that you generally have to pay brokerage commissions to buy and sell ETFs – figure on roughly $10 a go. But the lower MERs more than compensate. Let’s assume the S&P/TSX Composite delivers an annualized total return over 10 years of 7 per cent. An ETF with a fee of 0.06 per cent would ideally deliver a net gain of 6.94 per cent, while an index fund with an MER of, say, 0.9 per cent, would give you 6.1 per cent. After 10 years, on an initial investment of $1,000, the index fund would give you $1,808 and the ETF would give you $1,956.
One exception to the high fees of bank index funds is the e-series from Toronto-Dominion Bank. TD Canadian Index – e has an MER of 0.33 per cent, comparatively cheap for its peer group. It’s a better choice than other index funds, but the fees are still higher than ETFs.
About that BMO Canadian Equity ETF Fund: It holds the BMO S&P/TSX Capped Composite Index ETF (ZCN), with an MER of 0.06 per cent. Buy the ETF, not the index fund that holds it.
-- Rob Carrick, Globe Investor personal finance columnist
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Stocks to ponder
Macro Enterprises Inc. (MCR-X). This is an outperforming small-cap stock that may resurface on the positive breakouts list (stocks with positive price momentum) if analysts’ expectations are correct. While the share price has soared 53 per cent year-to-date, the average target price suggests that the stock price may rise an additional 57 per cent over the next 12 months, fuelled by strong revenue growth. This small-cap stock is thinly traded, resulting in heightened share price volatility at times. Consequently, this stock is best suited for consideration by investors with a high risk tolerance. Fort St. John, B.C.-based is a pipeline contractor, providing construction and maintenance services to energy companies with operations focused in western Canada. The company’s key customers include TransCanada, Pembina, Enbridge, FortisBC, AltaGas and Shell. Jennifer Dowty reports (for subscribers).
The Rundown
Why these five TSX insurance stocks are dividend powerhouses
Scott Clayton take a look for Canadian insurance companies that are tapping into strong economic growth abroad that also boast a sustainable dividend. (For subscribers).
Investors not impressed as Canadian oil producers trade shares to fund growth
Depressed Canadian oil prices are forcing energy companies to use their shares as a currency to fund acquisitions, but investors have been hard to win over to the strategy. Unusually large price discounts for Canadian crude, due to clogged pipelines, and faltering global prices have made growth hard to realize. Some producers have reduced output and lower cash flow has left consolidation using stock as the main option. Shares of Encana Corp, Baytex Energy Corp and International Petroleum Corp, for example, each plummeted by double digits on the days they announced deals to buy rivals with shares. The TSX energy index performed better on those days, although it has been in steep decline since early October.
Oil falls, set for more than 20-per-cent loss in November
Oil prices edged lower on Friday due to concerns of oversupply but losses were limited by expectations that the Organization of the Petroleum Exporting Countries (OPEC) and Russia would agree some form of production cut next week. The two global oil benchmarks, North Sea Brent and U.S. crude, still have had their weakest month in more than 10 years in November, losing more than 20 per cent as global supply has outstripped demand. Reuters reports (for subscribers).
Fund manager Brenham Capital to close as sinking energy stocks take toll
Brenham Capital Management LP, an energy equities fund manager with about $800-million in assets under management, will shut after two years of losses, its founder said in a letter to investors on Friday. The Dallas-based fund will be liquidated and investor capital will be returned at the end of the year, according to the letter which was reviewed by Reuters. (For subscribers).
Others (for subscribers)
Summit may mark ‘new low’ for G20 and ‘false dawn’ for markets as Trump, Xi dine
Naive investors may be spending thousands on frothy pot stocks, OSC warns
Friday’s analyst upgrades and downgrades
Friday’s Insider Report: COO and CFO buy this beaten down dividend stock yielding 6.6 %
Friday’s small-cap stocks to watch
Ask Globe Investor
Question: In a recent tax tip article in the paper, it advised to withdraw funds from a TFSA in December and then add them back to the next year’s contribution limit. It didn’t explain why this would be beneficial. Is it? If so please explain.
Answer: The only tax advantage I can think of is a situation where you need some cash in December (Christmas shopping and all) and you don’t want to receive if from a taxable source, such as an RRIF, RRSP, or, if you’re a business owner, salary or dividends. A TFSA withdrawal provides the cash you need at the time on a tax-free basis. The withdrawal amount will then be added to your contribution room in the New Year.
--Gordon Pape
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What’s up in the days ahead
Rob Carrick profiles the man behind the Connolly Report, as he retires and John Heinzl answers reader questions about bank dividend hike and tax loss selling.
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Compiled by Gillian Livingston