Best Index Funds and ETFs (Canada)

If we assume that any two funds are identical in effectiveness of tracking an index, it would be most beneficial to own the cheapest one. After all, why pay more for more-or-less the same product? While this may be the case, there could be some situations where you might chose a more expensive product, for example, due to practicality. In this article we will discuss the major ETFs and index funds available to Canadian investors. While we've discussed Vanguard ETFs and TD e-series index funds multiple times before, there are other competitive options available.

To give a quick recap, index funds are passively managed portfolios that track major indexes by owning many investments within that index. Exchange-Traded Funds (ETFs) are index funds that are traded on major markets, which come with a commission for trading, but tend to have lower Management Expense Ratios (MERs). You obtain an index fund from the company managing it (usually at no commission), while you buy an ETF off the market.

In the following comparisons we will only focus on: Canadian stock index, U.S. stock index, Canadian bond index and international stock index. Note that there are other index options with most of the funds listened below, although we will only focus on the most common indexes.

Exchange-Traded Funds For Canadians - abbreviated fund name (ticker), MER
Vanguard ETFs

Canada All Cap Index (VCN), 0.06%
S&P 500 Index (VFV), 0.07%
Canadian Aggregate Bond Index (VAB), 0.14%
Developed Europe All Cap Index (VE), 0.20%
Emerging Markets All Cap Index (VEE), 0.19%
Developed Asia Pacific All Cap Index (VA), 0.20%

BMO ETFs
S&P/TSX Capped Composite Index (ZNC), 0.09%
S&P 500 Index (ZSP), 0.13%
Aggregate Bond Index ETF (ZAG), 0.23%
MSCI EAFE Index (ZEA), 0.25%

iShares (BlackRock) ETFs 

S&P/TSX Capped Composite Index (XIC), 0.06%
S&P U.S. Total Market Index (XUH), 0.11%
High Quality Canadian Bond Index (XQB), 0.13%
MSCI All Country World (ex. Canada) Index (XAW), 0.22%
MSCI Emerging Markets IMI Index (XEC), 0.28%

If you’re going to purchase ETFs, Vanguard funds remain the cheapest option available, although both BMO and BlackRock offer competitive products. Given the nature of ETFs (traded on exchanges) you should really be getting the cheapest ones possible, unless you wish to purchase a specific fund not offered elsewhere. Another option not mentioned are Horizon ETFs, Horizon provides a way range of ETFs (including commodity ETFs), although they are more expensive than those mentioned above. Currently Questrade discount broker offers free purchases of ETFs, while you will still have to pay transaction fees on sales, removing all purchasing costs is already fantastic.

Index Funds For Canadians - abbreviated fund name (ticker), MER
TD Canada e-Series Index Funds
Canadian Stock Index – e (TDB900), 0.33%
U.S. Stock Index – e (TDB902), 0.35%
Canadian Bond Index – e (TDB909), 0.50%
International Stock Index – e (TDB911), 0.54%

Even though TD increased the MERs of e-series slightly over the summer of 2015, they continue to be the cheapest index funds directly available to Canadians. You can purchase these investments online through a TD e-series Funds account (accessible online through TD Canada Trust EasyWeb, or through TD Direct Investing). It is also possible to purchase e-series through a TD TFSA. If you have a medium to small sum to invest, e-series index funds will very likely be your best option for simplicity and pure value.

RBC Global Asset Management Index Funds
Canadian Index Fund (RBF556), 0.72%
U.S. Index Fund (RBF557), 0.72%
Canadian Government Bond Index (RBF563), 0.67%
International Index (RBF559), 0.71%

National Bank Index Funds
Canadian Index Fund (NBC814), 0.66%
U.S. Index Fund (NBC846), 0.67%
International Index Fund (NBC839), 0.66%

While RBC and National Bank also offer index funds, they are substantially more expensive to own than e-series. If you have all your banking accounts with one of these banks and have a relatively small sum to invest, it may not be worth the trouble of opening an investment account with TD. Also take note that you have more indexing options with TD e-series than with either RBC or National Bank. An advantage to RBC and National Bank indexes is that they are also available through discount brokerages (although at that point, you really should be buying ETFs).

Tangerine Investment Funds
Balanced Income Portfolio (INI210), 1.07%
Balanced Portfolio (INI220), 1.07%
Balanced Growth Portfolio (INI230), 1.07%
Equity Growth Portfolio (INI240), 1.07%

I came close to leaving Tangerine funds off the list since having an MER of 1.07% is very high for an index fund, but there are benefits to owning these funds. For one thing, it does all the work for you. Each Tangerine fund listed above is actually already a balanced index portfolio, so you only need to buy one to be very diversified and don`t need to worry about rebalancing. For example, the ‘Tangerine Balanced Income Portfolio’ consists of: 70% Canadian bonds, 10% Canadian stocks, 10% US stocks and 10% International stocks. The other three portfolio options are simply more aggressive on stock index ownership. You have to open an account directly with Tangerine to obtain these funds (TFSA option available), and there is no account minimum. If you have just a small sum to invest, this may well be a great option; although if you have even just a couple thousand to invest, you would very likely be better off investing in e-series.

The index or ETF that is ideal for you will depend on a few factors such as: investment amount, frequency of transactions, simplicity, brokerage fees, products to purchase and personal preferences. Please have a look at the complete list of funds available before making a selection, as there are other funds I have not listed for simplicity sake. Also note that not all funds listed can be directly compared in terms of MER, as they do not all track exactly the same indexes (especially the case for international stock indexes). Its is also important to note that while index funds that track the same index are not identical in nature, they tend to be very similar.

Here are some of our other articles on similar topics:
Choosing an Index Portfolio Model
What Exactly is An Index?
TFSA: Index Funds vs. ETFs

Please help pass on this article and give the blog a follow if you enjoy the content!


-Yinvestors


Note that MERs consist of management fees and all associated operating fees. It is typically based on the previous costs experienced over the last 12-month period (or as reported). It is worth nothing that it is based on 'historical data' and does not perfectly depict future costs. Having said that, the most recent numbers provided by each company are used and MER does provide the most accurate basis for cost comparison available. MERs are also fairly consistent given an index fund will typically have relatively stable and predictable costs due to its passive nature. 

The Power of Time (and why you should start investing now)

I often see over the internet people asking questions such as:

- "I am 17 and want to learn about investing, where do I get started?"

- "I am a college student with $5,000 to invest, what are my options?"

- "Can I start investing with $1,000, and how?"

These are all questions that cross the minds of many young people and, to some extend, depict how our education system has failed. It is fascinating that so often business/investment education is not a critical aspect of education systems, while managing and investing money will be of fundamental importance for the rest of our lives. This blog is motivated to help people find answers to such questions in a simple manner so that they have a starting point to develop their investment strategies.

Regarding the last two questions that depict some fix amount ready to invest, some answers I have seen were that it's a small amount and probably not worth investing. While having $1,000 to invest will not give you much flexibility to trade individual stocks (commissions will eat your money away), you definitely have some options! Two clear-cut options are to buy bonds or index funds, where you will face a percentage fee that will be low due to your investment amount.

So is starting to invest $5,000 today worth it? Let's have a look.

We will assume our passionate youth investor has $5,000 and will be building himself a well-balanced index portfolio that yields him 7% annualized average. We will assume that over the years, he will contribute $1,000/year to his investments. Let's watch how his money grows over 50 years:

After 50 years, our investor is now a bit older and has contributed a total of $55,000 to his investment portfolio ($5,000 to start and $1,000/year afterwards). His portfolio value is now a staggering $553,814! How is that possible? Well, your best friend when it comes to investing is time. The younger you are, the more time you have to make your money work for you. Even if it is a small sum, it really does add up. That initial $5,000 alone would be worth $10,000 after about 10.5 years and by the end of the 50-year period, it would be worth $147,285.

Let's look at some of the assumptions here. First off, you never paid any taxes on your earnings, which could be the case if you made use of a TFSA. Second, a 7% return annualized is achievable with a balanced index portfolio, although if you were to hit a downswing right out of the gates, this would significantly impact you down the line (given your initial capital is 5x your yearly contribution). In this example, we simply assessed 7% as a linear return, which would not be the case, some years your might lose 5%, some years you might gain 12%. Regardless, the example does depict the power of time.

Let's now look at a different case, let's compare the same investor who decided to spend his $5,000 and held off investing for another 10 years. Can't be that bad can it? Well let's have a look over that same 50-year period:

So actually, it's pretty significant. In the second case, a total contribution of $45,000 has been made, as compared to $55,000 in the original case (an extra 10 years at $1,000/year contribution). Let's look at the end result though: our delayed investor has a portfolio value of $274,507 versus the more diligent investor with $553,814 - over twice the amount! How is that possible? Again, think back to compounding. The 7% you made your first year off the $5,000 has made 7% from itself every year, this progression reiterates itself every interval and for your contributions. This is how you can establish wealth off not much starting capital!

The sooner you begin investing, the better off you will be. Even a small sum can grow into a fortune under the correct conditions. Don't listen to those telling you a small sum isn't worth investing! You have to start somewhere and if the small sum even just motivates you to save up money, it is immensely valuable.

Here is a link to the table breaking down the number for the graphs depicted above (graphs may not load, but table works). Comment below if you have any questions and please give the blog a G+ follow! More posts on similar topics coming soon!


-Yinvestors.


keywords: youth investing, compounding interest, compounding growth, growing money, how to make money grow, investing, money growth, index funds, index investing, money. 

Combining a Tax-Free Savings Account and Indexing

So we've discussed index funds and the tax free-savings account, but here is where the magic comes together - you can combine them!

The easiest way of doing so will be by opening a TFSA with TD Canada Trust and purchasing e-series yourself directly online. The slightly more complicated way of doing so will be opening an account with a discount broker and purchasing ETFs (if you haven't read our post on comparing these two options, click here). For youth investors, the best option will likely be the TD route - and we recommend it for its simplicity and effectiveness. Let's discuss how you can go about doing so and what the benefits are.

How to open a TD Canada Trust e-series account
To open an investment account you will need to meet with a TD representative. To do this, you can call or visit your local branch and set up a meeting time (don't worry this is all free, and so is opening the account). You will simply need to explain to the TD representative that you wish to open a TFSA for purchasing Index funds. It is quite likely that they may advise you to purchase other products such as much more expensive mutual funds. Don't be put off by this they are simply doing their job of trying to get customers to buy more expensive products and are not insistent. It's very possible your TD representative may never have even heard of e-series! This is because in order to keep the costs (MER) of e-series low, investment advisors will typically not be trained to sell e-series (training costs money). This is also why you can only purchase e-series online (no phone service option). Don’t worry though, purchasing these online is very easy.

When you open an account, you will need to make your initial deposit of $100 minimum. If you can afford it, I would recommend making a deposit of $1,000 or more for the sake of purchasing multiple e-series. This is because the minimum purchase amount for an e-series fund is $100. Remember that this is a TFSA so you are capped as to how much you contribute to this account! If you already have a checking account with TD, they will be able to make an easy direct transfer for you. If this is the first account you open with TD, the easiest ways to make your deposit can be either by cash or by writing a cheque to yourself (from some other bank account). Once your account is opened, it may take a few days for your funds to be available to trade, then you will be ready to begin investing!

Steps overview:
1. Set up a meeting with TD representative to open a TFSA for purchasing e-series
2. Open your account
3. Transfer funds
4. Decide how you wish to balance your investments
5. Place orders

It used to be much more of a hassle to open an account to purchase e-series but with the implementation of TFSAs in the last few years, it's never been easier.

Advantages of using a TD TFSA with e-series

• Easy to open an account
• Easy to manage an account
• No fees for purchasing or selling e-series
• Minimum deposit of only $100 to open an account
• Cheapest index funds directly available to Canadians
• Pre-authorize payment plan option
• Easy way to have very strong diversification in investments
• DRIP program available

The reason why I find combining a TFSA and e-series to be optimal for youth is that it's simple and effective. It is the cheapest way for youth to get into the market with an opportunity to achieve better returns than fix investments while having much lower variance, risk and work requirement than investing in individual stocks. Ideally with an index portfolio, you are continually adding to your investments allowing them to compound. This is very difficult to do if you have a small sum to invest and must pay hefty transaction fees. Furthermore, investing in indexes takes very little time and effort. If you so wish, you could simply add money to your TFSA once a year and rebalance your portfolio - more on what this means down below!

Note that there is a minimum holding period of 30 days with e-series, if you sell before the end of this period you will receive a penalty. One the other hand, if you had 50 units of some e-series for over 3 months and had bought 5 more units last month, you would still be able to sell off 50 units with no penalty.

To expand on the DRIP program, in another post when discussing common stocks (link), we mentioned some companies pay dividends (direct sharing of profit with investors). When you purchase an index, the fund receives dividends from some of the companies it holds. For example, TDB 900 - Canadian Stock Index, currently has top holdings of three major Canadian banks: RBC, TD and Scotia Bank which all pay dividends (4.6%, 3.94 and 5.16% respectively, at the time of this writing). As an owner of an index fund you get to share in these dividends as a function of how much of the fund you own. DRIP stands for Dividend ReInvestment Plan and means that when you receive dividends, they are automatically reinvested into more index units (post on dividends and DRIPs coming soon!). In terms of the pre-authorize payment plan, TD allows automatic purchasing of Index with a minimum amount of $25, making it even easier to continually contribute to your investment account. While this service may be less relevant to youth investors, it's still a great option to have.

How to begin investing in e-series
Great, you now have an account with TD and are ready to begin investing! so what now? It's time to discuss balancing. You will need to decide which e-series you wish to purchase and in what quantities. This can be as simple as you wish. Here is a list of all the e-series available:

TD e-series (link)

To get started you can begin with a portfolio that consists of 1) Canadian stocks, 2) Canadian bonds, 3) U.S. Stocks and 4) International stocks (Non-North American). This would provide with a very diversified portfolio. This would also be one of the more common index strategies to take, if you wish to follow it, here are the potential corresponding tickers:

TD Canada Bond Index - e (TDB909)
TD Canadian Index - e (TDB900)
TD International Index (TDB905)
TD U.S. Index - e (TDB902)

The U.S. Index (TDB902) here tracks the S&P 500, if you wished to purchase one that tracks Nasdaq (TDB908) that would also be an option.

Now that we've decided which indexes to wish to purchase, we need to know how much of each. This again comes down to a personal option. Having greater ownership in stock indexes is associated with greater variance (higher risk, but greater potential rewards) than bond indexes (lower risk, but less potential rewards). Generally speaking, the younger you are, the more aggressive you should be with your index portfolio as you can stand to take a slightly greatest risk for more reward since your investments are likely not your complete retirement fund (you have time to ride out market lows).

Recommendation for portfolio allocation for an investor in their 20s*:

10-25% - Canadian Bond Index

25-30% - Canadian Stock Index

25-30% - U.S. Stock Index

25-30% - International stock Index

These ranges are taken from the book Millionaire Teacher by Andrew Hallam (link). Refer to page 112 in the book. We wrote an article just on portfolio models, click here to read it!

Every year you can rebalance your portfolio to your original percentage allocation. If you're contributing fresh money to your investments, that money can be used to rebalance. If that is not the case, or the amount you are adding is not enough, you can sell from the best-performing index to purchase more of the worst-performing (following the buy-low, sell-high principle).

The purpose of diversification is to lower variance. By investing in Index funds as opposed to individual stocks, you are already massively reducing variance. So how much does your allocation really matter? We will discuss portfolio performance in an upcoming article. The take away message about balancing is that over a large enough sample size (many years) your allocations will likely not make a huge difference. On the other hand, having a greater bond exposure will reduce the volatility of extreme lows and highs. Therefore you will have fewer swings on a shorter sample size and at the end will likely experience slightly lower returns (at least this is what has been seen so far).

Ideally when approaching index investing, you have little care to what is actually happening in the market day-to-day. Given how highly diversified you are, short-term market swings will have little impacts on your portfolio. This also highlights a benefit of investing in indexes, you are never trying to predict market trends. By always purchasing/rebalancing, you remain versatile and flexible to external market dynamics that you simply cannot account for. This is a major benefit as opposed to investing in individual stocks where you typically have to do a lot of research and up-keeping work to keep an eye out on your investments. Furthermore, because the swings are lower in an index portfolio (and you are heavily diversified), it is easy to have little emotions towards your investments. It is easy to panic and sell off a stock at a loss after seeing it drop double digit percentages in just a few days. If anything hearing of market crashes is beneficial to long term index investors as it allows to buy more at a lower price! Also note that by having a DRIP program in place, you are automatically purchasing some small amount every year. The three stock indexes mentioned (Canadian, American, international) pay dividends out yearly, while the Bond index pays out monthly.

Lots more articles coming soon expanding on these topics!


Here are some of our other articles on similar topics:
Choosing an Index Portfolio Model
The Power of Time (and why you should start investing now)
The Tax-Free Savings Account (TFSA)

-Yinvestors.


For more information regarding e-series, here is the link to TD's e-series page. Please note I do not work for nor do I receive anything from TD for recommending their product. I recommend e-series purely because they are currently the cheapest Indexes in Canada and I find TD provides a trading and managing platform that is very user-friendly.

keywords: tfsa, tax-free savings account, index investing, e-series, stock index, bond index, DRIP, dividend reinvestment plan, best Canadian index, index funds Canada, tfsa advantages, index funds benefits 

The Tax-Free Savings Account (TFSA)

A TFSA is an investment account type that you can open with banks or major discount brokers that allows your money to grow tax-free. Typically investors pay taxes on profits made from their investments the year they are sold. In 2009, the government of Canada introduced the tax-free savings account as a mean to help people save more money and grow their investments completely tax-free. TFSAs are a fantastic option for youth looking to get into investing and are the #1 account type that we recommend for getting started. 

TFSA functions on a yearly contribution principle, meaning every year there is a fix maximum amount you can contribute to your account. Your TFSA allowance begins to accumulate as soon you turn 18 (as a Canadian citizen). The current allowance is $5,500/year. The following table depicts how the contribution amount (annual limit) has changed since implementation and the cumulative total if you were 18 or older in 2009.

TFSA Annual limits and Cumulative Total by Year

source: Wikipedia 

The Harper government raised the TFSA allowance to $10,000 during 2015, but when Trudeau won the election towards the end of 2015, the allowance was reduced back to $5,500 for the upcoming year. 

TFSAs are a great option for youth as they make things simple - no need to worry about taxes! Furthermore, the allowance amount is substantial enough for active young investors. TFSAs are also very easy to open and available as savings account with banks as well as with major discount brokers. Within your TFSA you can purchase any standard investment product. If you have to sell off your investments, your TFSA allowance will completely refresh the following year. For example, if you were 18 in 2009, and had maxed-out your TFSA at $41,000 by 2015 but needed to withdraw your savings to purchase a home, in 2016 you would be allowed to put back the full $46,500 (41,000+5,500 from the new year). 

So why care about TFSAs? When looking to grow your investments, you want to minimize anything that takes away from it, that includes fees and taxes! The RBC website has a great graphic to show the impact of how an investment can grow in a TFSA as opposed to a regular taxable account.

Source: RBC

With this example, over a 20-year investment period an investment would have grown to $194,964 in a TFSA, as opposed to $156,258 in a taxable account. This represents nearly a 25% increase. Money saved each year contributes to compounding, thus money saved generates more money from itself. No matter what your investment goals are, we highly recommend opening a TFSA as a first step to begin investing. We cannot say enough good things about TFSAs! 

Tips:

1. If you wish to invest in individual stocks, compare fees of trading with your local bank vs. opening a TFSA with a discount broker. The best option will depend on how often you are looking to trade and your investment amount. (link)
2. If you wish to invest in Index funds (owning a small portion of the complete market), there are two basic ways to go about it in a TFSA. (link)
3. If you wish to find out more information about TFSAs, click here for a link to the government of Canada's website.

- Yinvestors.


keywords: TFSA, tax-free savings account, tfsa contribution room, tfsa limit, tax free savings, free savings account, tfsa rates.