As a follow-up to my previous post where I quoted a site that said ETF distributions could only be paid out in cash, I just found out from a comment on the canadiancapitalist.com that it is possible to have distributions from iUnits ETFs re-invested through a DRIP:
Dividend reinvestment plans let you take advantage of the power of compounding. Instead of receiving cash dividends from the company, you may purchase more of a company’s stock by having the dividends reinvested. Your brokerage firm may offer a dividend reinvestment plan that allows for the reinvestment of cash distributions on iUnits. Cash distributions, in the form of income, return of capital or dividends could then be reinvested in additional units of the same fund. You should check with your brokerage firm to see whether you will be charged for this service.
iUnits (Barclays) lists four companies which offer DRIPs for iUnits, three of which are Canadian big-bank brokerage affiliates. The one that wasn’t, Canadian ShareOwner Investments Inc. states “to enjoy complete dividend reinvestment and the lowest trading commissions in Canada, your iUnits need to be in an account at ShareOwner.”
The iUnits.com website goes on to say that “as demand increases, more firms will likely have DRIPS available on iUnits.”
I still can not see a huge advantage to DRIPs, except that using them would reduce the cash-drag in an investor’s account ever so slightly. I recently talked to my advisor about cash distributions the ETF I will be buying soon and our plan will be just to roll the cash into my regular monthly purchases within my RRSP.
Popularity: 8% [?]
I found an informative Comparison of ETFs and Index Mutual Funds. It has some great information about the internals of ETFs and how they compare to index mutual funds. Notably, that “overall, there are few pros and many cons to using ETFs.” This came as a bit of a surprise to me. Much of what the article says is true, although told in a way that is biased towards index mutual funds. Some of the information is out of date such as: “ETFs have poor coverage of foreign style/size indexes. If you wanted to buy a foreign value ETF, for example, you would not be able to do so at present” and “there are few bond ETF options available at present.” I think these two points are no longer true.
One big difference between ETFs and mutual funds is that “they [ETFs] pay out distributions as cash. If you want to then reinvest that cash, you need to take some action to do so (and incur whatever transaction costs apply).” Although I initially found this annoying, it is really no big deal because the distributions can easily be re-invested into no-load mutual funds on a monthly basis along with other cash. Since you SHOULD be dollar-cost averaging on at least a monthly basis this should not be a problem for most people.
With many low-MER index mutual funds out there (and I expect to see even more, with possibly even lower MERs), the low-MER advantage of ETF is not a huge deal. I still think that the best option is to buy index mutual funds (with as low an MER as possible) on a monthly basis and switch them into index ETFs when the cost of making the ETF purchase (from commissions) becomes a small percentage of the total amount to be invested.
Popularity: 4% [?]
The iUnits unitholders of the ETFs (Exchange-traded funds) XIC, XGV, XSP, and XIN have approved changes to the underlying investment objectives (ie. they have changed the underlying index being tracked by these ETFs).
- The new investment objectives of XIC and XGV are to replicate the S&P/TSX Capped Composite Index and the Scotia Capital Short Term Bond Index, respectively. The Funds’ new names are the “iUnits Composite Cdn Eq Capped Index Fund” and the “iUnits Short Bond Index Fund,” respectively. As of November 16, 2005, the ticker symbol for the iUnits Short Bond Index Fund will change to “XSB” on the Toronto Stock Exchange.
- The new investment objectives of XSP and XIN are to replicate the S&P 500 Hedged to Canadian Dollars Index and the MSCI EAFE 100% Hedged to CAD Dollars Index, respectively. These are the same indexes these funds previously replicated, except the currency exposure is now hedged to reduce the risk of exchange rate fluctuations affecting the returns of XSP and XIN.
Information regarding the increase in the MER (Management Expense Ratio) for XIC is curiously absent from this press release. Not only that, but links to the original press release announcing the unitholders meeting (which mentioned the commission increase) and the information circular outlining the changes to the iUnits ETFs are now absent from the iUnits home page.
Popularity: 4% [?]
I used to own many mutual funds in my account at TD Canada Trust. A glance at an old statement shows that at one time, I owned the following funds in the Canadian portion of my portfolio:
TD Canadian Equity Fund
TD Canadian Index Fund
TD Dividend Growth Fund
TD Blue Chip Equity Fund
TD Canadian Small Cap Equity
What is wrong with being invested in so many funds at once? The problem is that with 4 funds, primarily large-cap funds, I was over-diversifying and basically forming an index for myself. I was owning the entire market, which is what indexes do anyways, and diluting the active management within each of the funds. But I was not paying what I should have been paying for an index (MER <= 0.25%). These funds have MERs of at least 2%, except for the index fund. So basically I was buying the equivalent of an index, but paying through the nose for it. The effect of a high MER eating into your returns every year can be huge. Don’t make the same mistake I made. Get an index for the large-caps, and no more than one other large cap fund. Perhaps owning an actively-managed small-cap fund as well.
If I had to do it again at TD, I would have bought TD Canadian Index Fund and TD Canadian Small Cap Equity. The other large-cap funds (TD Canadian Equity, TD Canadian Dividend, and TD Blue Chip Equity) are not significantly better than the indexes themselves, so I would rather take the low-cost index fund. The small-cap fund gives me some exposure to smaller companies which are not owned by the index.
Popularity: 6% [?]
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.
Popularity: 2% [?]