Vanguard ETFs Move to NYSE Arca Exchange

I was hoping to buy some VTI today but I couldn’t buy it through E*Trade’s website because there was no quote available. I had noticed in the past few weeks that there was an asterisk next to the market prices of my Vanguard ETF holdings that said: “A quote was not available on this security. It has been priced using the previous day’s closing value.” I called E*Trade and they weren’t much help. The lady kept saying “that is not the correct symbol” to which I kept replying “I don’t understand what you are saying.” Eventually she said that it was on the “Pacific Exchange.” Well the Pacific Exchange doesn’t actually exist anymore:

by 2005, the Pacific Exchange was bought by the owner of the ArcaEx platform, Archipelago Holdings, which in turn was bought by the New York Stock Exchange in 2006. The New York Stock Exchange conducts no business operations under the name Pacific Exchange, essentially ending its separate identity. Pacific Exchange equities and options trading now takes place exclusively through the NYSE Arca (formerly known as ArcaEx) platform

Googling for NYSE Arca and Vanguard finally gave me some hits. Apparently on September 19th, 2008, Vanguard ETFs are now trading on the NYSE Arca Exchange after moving from the American Exchange:

NYSE Euronext (NYX) announced that its fully-owned subsidiary NYSE Arca today began trading 34 Vanguard Exchange Traded Funds (ETFs) after the group transferred over from the American Stock Exchange (AMEX).

I wonder if E*Trade will ever support quotes from the NYSE Arca exchange? Apparently I can buy them over the phone. Going to give it a go tomorrow because the markets were closed by the time I sorted everything out.

Update (2008/10/7): They will not charge you extra commission because it is sold on an exchange that E*Trade’s website doesn’t support. They have apparently always done this with stocks that cannot be purchased through the online system. We just bought some VTI shares. I’ll give it a few days and I’ll let everyone know if I see any extra commissions drawn my account due to this trade.

Ask Dave: Choosing a Discount Broker

Anthony asks:

I am reading about your move to ETRADE.

My question is a simple one…..did you research all the discount brokers before moving to ETRADE?

I am about to move my accounts, (they are sizeable), to a discount broker, and take care of them myself.
I just coundn’t figure the value I was getting from a full service broker.

Why did you go with ETRADE? And would you, or your readers recommend any one in particular?

I would really appreciate a reply directly to my email address, if you have the time,

Thanks and good luck,

No, I didn’t really do tons of research. I was paying $70 or something like that during my brief stint at a full service brokerage. E*Trade offered $20 per trade and I figured that there might be some other brokers out there with $10/trade, and there were some, but they were not names I had heard of before. E*Trade has been around for a while and I knew their name so I went with them. I didn’t really care about the details, I just needed some where to put my money after my financial advisor’s company got swallowed up by another company and he was (I assume) laid off. E*Trade does offer $9.99 trades if you have more than $50,000 in assets with them.

Rob Carrick recently compared online brokers in “With online trading, it pays to shop around“.

E*Trade Looking Better?

Can the much-exaggerated claims of E*Trade’s possible bankruptcy finally be laid to rest? After being on holidays for a week I found this letter waiting for me after logging in to my E*Trade account:

To our valued E*TRADE Canada customers:

This morning E*TRADE Financial announced that it has strengthened its capital position and eliminated exposure to the types of asset-backed securities that have been generating business losses, as well as headlines, over the last several months. This has been accomplished through a strategic transaction with affiliates of Citadel Investment Group.

As part of this transaction, E*TRADE Financial has received a U.S. $2.5 billion capital infusion. This transaction, led by affiliates of Citadel, not only strengthens E*TRADE Financial’s capital position, but also represents a significant vote of confidence from one of the world’s leading investment firms. Further, Citadel has removed the entire $3 billion asset-backed securities portfolio from E*TRADE Financial’s balance sheet, solving the company’s most significant balance sheet issue. Citadel understands E*TRADE Financial has been faced with a challenged balance sheet, not a challenged business.

Today, with the infusion of additional capital, we reinforce customer confidence with the assurance that our parent company, E*TRADE Financial, has no exposure to the asset-backed securities that have been of concern to the marketplace generally during the past several months. As previously communicated, E*TRADE Canada has always been and remains well capitalized, with continued investment in high quality government-issued short-term paper and no investments in asset-backed commercial paper (ABCP).

As we turn the page to a new chapter, the reasons that you have chosen E*TRADE Canada – industry leading value, innovative products and strong service – remain as true as ever, and we will continue to work hard to exceed your expectations today, tomorrow and well into the future.

We appreciate your business and continued loyalty. Thank you for your continuing confidence in E*TRADE Canada.

Now I read that E*Trade’s stock is down another 29% since the Citadel deal and there is some negative press still; however I less worried now then I was before and I will be staying with E*Trade for now.

Ask Dave: US Dollar Investments Inside Your RRSP

With no more foreign holding limits inside RRSPs, a lot of people are looking into holding foreign currency investments inside the RRSP. In fact my first ever “Ask Dave” post was about this very topic (see “Ask Dave: USD Holdings In an RRSP“).

Another reader recently wrote me with similar questions. Rob writes:

I’m confused. I want to own US $ investments in my RRSP. RBC Direct advises that all RRSP investments must be in CDN $. They didn’t know what a “wash trade” was. With the Cdn $ at $1.08+ is this a good time to own US $ denominated equities or a USD ETF? If so, can I do this in an RRSP or does it have to be held outside?

Rob, you can certainly own US $ investments inside an RRSP (ie. any US stock (this includes ETFs)). As for US$ mutual funds I’m not really sure (as I’ve never done it) although you probably could. If RBC Direct truly does not allow you do hold USD investments in your RRSP (I would be REALLY surprised if they didn’t), find another broker. The one restriction that the Canadian banks and brokers place on customers (although there is nothing in Canadian laws/regulations that forces them to do so, see “Foreign Currency Investments and Exchange Spreads Inside Your RRSP” and this class action lawsuit against BMO for more information) is that you may not hold any foreign currency inside an RRSP. All cash inside an RRSP must be in Canadian dollars. As a consequence of this ridiculous restriction, if a USD investment is sold, the proceeds must be converted into CAD, then to buy another USD investment, the CAD cash is converted into USD again. Hence huge foreign exchange rate spread-related costs, and hence, wash trades’ raison d’être…

I am not surprised that RBC Direct did not know what a “wash trade” was as I think TD Waterhouse is the only one that offers it (and even then, they will only do it for a phone trade, not an online trade). Refer to the Canadian Capitalist’s site on how to make a wash trade. At the time (August 2006) the Canadian Capitalist said that “as far as I know, RBC Action Direct, which is our primary brokerage account does not offer this feature.”

It is impossible to predict what the US or Canadian dollar will do at this point. Much like with the Vancouver housing market 2 years ago in Vancouver, would it defy all odds and go up even further? Or would it come crashing down as it seemed destined to? The pundits and economists will say whatever they want but they have no clue what will actually happen (although there have been some rumblings about possible Bank of Canada currency intervention measures). I say don’t worry about timing your purchases of USD investments and don’t ask the question “is this a good time to own US $ denominated equities.” Instead you should think long term and ask “should I have US $ denominated equities in my portfolio (for the next 10+ years).” You especially should not be trying to “time” investments in USD investments (or any other currency) because the costs of buying and selling USD investments inside an RRSP are huge unless you use wash trades. Your best bet to minimize costs is to buy them once and hold. For more on the costs associated with USD investments inside an RRSP, see “Foreign Exchange Costs Associated With USD Investments in an RRSP.” If you really want to speculate, use a non-RRSP US$ trading account.

It’s good to be diversified and not have all your investments in Canadian dollars, although if you plan to retire in Canada you definitely want to have most of your retirement assets in Canadian investments as you approach retirement and not expose yourself to unnecessary currency risk (see “US vs. Canadian dollar investments made inside an RRSP” for more detail, especially bullet point 2). You will also incur lower costs (assuming you don’t incur too many foreign exchange-related costs). Observe the difference in MERs between the Canadian iShare XSP (0.24%) vs. the American iShares’ IVV (0.09%) or the Vanguard’s VTI (0.07%), for example. Adding foreign currency investments also decreases the correlation between the different components of your portfolio even further, thus providing more diversification, and in the end, a higher risk-adjusted return.

Send your questions for my “Ask Dave” posts using my contact form. I look forward to hearing from you. My queue of questions is not long, but it’s not short either, so I may take anywhere from a few days or a few weeks to respond. Thanks for your patience.

Fidelity Says You Need 80% Pre-Retirement Income in Retirement (just don’t use them to get you there)

According to Fidelity, we need 80% of our current income to retire (see Canadian Capitalist’s “Fidelity’s ‘Scary’ Retirement Findings“, where I found this story). Canadians on average have 50% of their pre-retirement income in retirement, but this is no different from other countries; United States: 58%, Britain: 50%, Germany; 56%, Japan: 47% (see “Want to play in retirement? Test your future income“). If those numbers are not adequate, it implies that the average senior in the United States, Britain, Germany, and Japan are all in dire need. I doubt that is the case. (My opinion is that people should save as much as they want. You might need only 50% but if you want to spend a lot in retirement and travel instead of just tinkering in your garden then maybe you need 80% of your pre-retirement income, or maybe 150%, just in case.)

The funny part is that even if you wanted to get to 80%, the hardest way to get there would be to use Fidelity’s products. All their MERs are above 2% (click on Facts & codes). It’s too bad their retirement calculator doesn’t have a slider bar for the MER or rate of return, then you would be able to see just how badly these management expense fees can affect the final value of your portfolio, and in turn, your annual income in retirement.

I just did a calculation and if you invest $8,500 annually starting from the age of 30 you end up with $2 million at the age of 65 if the contributions are indexed to inflation and the rate of return is 8% (the return you might get if you buy a low-MER (0.25%) investment, like an index ETF). Decrease that return to 5.75% (the return you’ll get if you pay a 2.5% MER on Fidelity mutual funds or their managed portfolios) and you’ll have only $1.32 million at age 65. Assuming $2.64 million is what one would need to keep the same income one enjoyed pre-retirement:

In the 2.5% MER case: $1.32 million is 50% of $2.64 million

In the 0.25% MER case: $2 million is 76% of $2.64 million.

So by simply not using a company like Fidelity and going with a competitor like Vanguard or iShares and buying index ETFs (with far lower MERs) instead, you can easily get closer to that 80% figure and increase your nest egg from to $2 million from $1.32 million without even having to save any more money. By the same token, it could probably be argued that one of the main reasons that Canadians do not have 70-80% of their pre-retirement income in retirement (and only have 50% instead) is because of the amount of MERs, fees, and commissions they pay every year to the financial industry.

See also:
Should Retirement Replacement Ratio be 50%, 80% or in between?

TD Waterhouse Lowers Commissions, E*Trade Still Not Offering Wash Trades

For those who don’t know what a wash trade is, a wash trade allows you to convert a holding in USD into another holding in USD without having to switch to CAD first.

After reading Canadian Capitalist’s post about TD Waterhouse Lowering Their Commissions, I posted this comment on his blog:

I just sent an email to E*Trade asking them when they are going to start offering wash trades or the ability to hold US cash in an RRSP. Everyone who has an E*Trade or questrade account, please bug them about this. I hope hoping this move by TD will cause the others to become more competitive. I do not want to move from E*Trade as it is a pain but I will have to in a few years if they don’t react at all.

By the end of the day, E*Trade had gotten back to me (as they have before when inquiring about this). Here was their reply:

Thank you for choosing E*TRADE Canada.

We are always looking for ways to increase customer satisfaction and attract new business and we realize that Wash Trades are something that clients want. With that being said, there is no specific time frame of when this will be offered through E*TRADE.

We are aware of TD Waterhouse’s new commission rates and we strive to be competitive. I will however mention some of the other benefits that are exclusive to E*TRADE, such as our high interest Cash Optimizer Investment Account, free Research from 5 independent resources, and our no fee, no minimum RRSP accounts.

So they aren’t totally clueless and they aren’t totally ignoring me. But that fact that there is no timeframe is a bit annoying. If they have a half-decent team of developers you would think they would have some idea of when this could be implemented. Maybe it’s that management has not okayed any resources for it or something. Well maybe now they will.

Update: Today I got another email from E*Trade, this time from a different person. So maybe my email got forwarded up the chain of command. Here it is:

Thank you for choosing E*TRADE Canada.
We have a plan to set up a system so that you do not have pay FX for buying and selling US stocks in rrsp account. But
we do not have any expected time frame yet. Please feel free to call us anytime from 8am to 12pm 7days a week, if you need further assistance.

I hope they can do this. This will be even better than wash trades.

Ask Dave: Which Broker to Choose and Couch Potato Technique

A reader recently asked me:

I hope it’s not too much trouble to ask, but what broker or bank would you suggest that I use for my self-directed RRSP? I have Scotia bank for my mortgage, but TD looks like they have an interesting setup for the investor. Low fees and no fees are important to me of course, other vise it defeats the purpose. I plan on doing the “Couch Potato” approach so I should only be buying and readjusting once a year (no monthly purchases necessary).

Do you have any comments on the “Couch Potato” technique?

My answer:

I use E*Trade and their commissions are super cheap. I think TD will allow you to do “wash trades” where you sell a USD ETF and buy another one without having to convert to CAD. They will only do this over the phone, but I have heard that they will do it.

Re: Couch potato technique. I don’t know exactly what it is. It sounds like it involves putting your money into 2-3 index funds in some simple allocation like 33-33-33 or 50-50 and rebalancing only once per year. The most cost effective way to do that would be to save up cash throughout the year and then buy some investments (and sell if necessary) once per year to rebalance. Eventually your portfolio will become much larger than the cash you will put in annually so the “cash drag” is not that significant relative to the size of your portfolio. I agree that investing in low-cost passive investments like indexes are a great way to invest and also believe that everyone should stick to some initial asset allocation and rebalance when necessary. The couch-potato technique is not really much different from mine. I wait until I have over $2000 in cash in my RRSP rather than waiting until some anniversary date, so I end up buying more than once per year. I also try to rebalance my investments and I invest in index ETFs which are passive low-cost investments.

Pitfalls of Do-It-Yourself (DIY) Investing: Checking Your Account Daily

Since switching to E*Trade I am noticing an all-to-familiar behaviour creeping back into my daily life. It is something that I have not done since I had my TD Mutual Fund account in 2005. Last year I had an advisor and I pretty much never knew how my portfolio was doing except for those monthly statements I would get in the mail. I loved those days. Now I find myself checking my E*Trade account online about once a day, depending on the week. This week and last week were bad but the week before that wasn’t so bad. Checking your portfolio daily is bad for so many reasons. Reasons that are so obvious that I am not going to waste time mentioning them.

I am thinking of changing my password to something really complicated and giving it to my wife. Then once every 3 months or so (about the time it will take for enough cash to build up to buy some more ETFs) I will ask her for it. That might actually work.

Status of Transfer to E*Trade

Well four of my mutual funds were finally transferred. My one ETF (iShares XIU, the S&P TSX 60 Index ETF) was transferred very quickly. But it took the mutual funds almost a month, and I am still waiting for one more (an Elliot & Page Growth Opportunities)! Yet another reason to get ETFs instead of mutual funds I guess. 🙂

I have just noticed that E*Trade’s website does not offer much. Beyond buying & selling that is. Would be nice if some of these online brokerages would include some performance data in there automatically. Or at least an open API or webservice (like Google or Flickr) so you can connect to your data and do some crunching or something. Then all sorts of applications would start popping up.