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ETFs for an RESP? The math doesn’t work for this investor

Globe and Mail Update

Sometimes, the math on ETF investing just doesn't compute.

A reader found this recently when he looked at making regular contributions to his daughter's registered education savings plan account at an online brokerage. He wanted to contribute $300 per month and put the money in exchange-traded funds. But his broker's per-trade commission of $9.95 equates to a fee of 3.3 per cent on a $300 investment. That's a "substantial haircut," this reader argues.

True, that. So, do you do if you want to build a portfolio through regular contributions and are running up against prohibitive ETF trading commissions? Here are some possibilities:

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- Find an online broker with no ETF trading commissions

Qtrade Investor and Scotia iTrade offer a limited list of ETFs you can trade with zero buy or sell commissions. National Bank Direct Brokerage offers free ETF trading on all Canadian ETFs, as long as you buy a minimum of 100 shares. Obviously, this won't work for regular contributions of $300.

- Find a broker with no ETF buy commissions

Questrade and Virtual Brokers offer zero commissions for ETF purchases – regular charges apply for sales. This is an ideal option for building any sort of an account with regular ETF purchases.

- Check out the TD e-series of index mutual funds

These very low cost index funds can be bought and sold through online broker TD Direct Investing at no cost. Another benefit is that you can have your dividends automatically reinvested. ETFs don't do this unless you have your broker set up a dividend reinvestment plan for you (you'll need enough in dividends to buy at least one share). With fees for core ETFs drifting ever lower, the e-series lineup doesn't look quite as cheap as it used to. But it's still an effective, economical option for this reader.

- Find some cheap mutual funds

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As a DIY investor, this reader has access to the D-series mutual funds pretty much all online brokers now offer. A D-series fund has a management expense ratio that is much-reduced from regular levels to reflect the fact that the account holder is not getting any advice or sales assistance. There are D-series versions of some pretty good big bank Canadian dividend funds.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998.Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More


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