Selling ETFs to buy index funds a bad idea

A friend recently asked me:

I’m just about to switch my ETF‘s to mutual index funds so I can contribute monthly without the transaction fees associated with ETF’s. I found a few funds from Altamira that have MER fees of 0.54. That seems pretty good to me…not quite as good as the 0.17% that you get for the iShares S&P TSX 60 ETF’s, but I think the ability to automatically contribute monthly makes up for the additional 0.36% in MER fees.

They wanted my opinion on this before they went ahead and did it. My reply was:

I wouldn’t switch if I were you because you’ll pay commission on the sale. If you are already invested in an ETF I would just hold it and let it grow. . . Definitely if you want to contribute monthly you should put your money into a mutual fund. Obviously no one would recommend buying ETFs monthly with the kind of monthly amounts you’re probably putting in, so really you have no choice. Just don’t sell the ETFs you already own.

The only reason I could see for you wanting to sell your ETF is if the mutual funds you are interested in required some sort of initial minimum. That would have surprised me though, because all of TD‘s funds for example, only require a minimum RSP investment of $100, and minimum subsequent investment of $100.

Basically if you are putting in small amounts per month, use mutual funds, that’s what they are for, if you have large amounts, get stocks or ETF indexes. When the amounts in mutual funds are large enough, it might make sense to transfer them into an ETF. But it’s up to the individual, especially if the difference in MER is so small, you might as well just leave it in mutual funds.

The MER on those mutual funds are really low which is great, so I would say buy them every month, but just don’t sell the ETFs you already own.

2 thoughts on “Selling ETFs to buy index funds a bad idea”

  1. I agree with Dave’s comments. You don’t need to SELL ETFs to make it easier to buy more. Leave what you’ve got in the ETF (no commission if no sale) and buy an index fund (I use TD’s e-Funds) to contain your biweekly (or whenever) deposits.

    Then every few years or when a few thousand dollars worth accumulate in the fund, you sell the fund and buy more (cheap) ETFs. Then continue to accumulate into the fund.

  2. gossg: I have owned some TD e-funds for a few years now because until recently my only account was a TD RRSP mutual funds account. I am in the process of transferring everything to a non-big-bank financial management company. Can I still buy TD efunds even if I will no longer have an account at TD? If not, then maybe I should keep my TD account alive. I have not seen any index funds with MERs as low as TD’s e-Funds.

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