ETFs or low-cost index funds for the frugal investor? Here’s an argument for both.
A column last week looked at how TD e-series of index mutual funds would be cheaper than exchange-traded funds for an investor who wants to make monthly contributions and has a portfolio of $50,000 or less. While the e-series index fund has a higher management expense ratio than a comparable ETF, money can be invested in the index fund at no cost. Commissions for buying ETFs can be as high as just under $10 per purchase or sale, which works out to $120 per year. On a $30,000 account, that would be the equivalent to a hefty fee of 0.4 per cent.
A more advanced strategy has been suggested by a reader – onetime Financial Post personal finance columnist Bruce Cohen. His idea: Invest on a monthly basis in the e-series index fund, and transfer the holdings to a cheaper ETF once annually.
This beauty of this approach is that you get the long-term benefit of the lower ETF fee, while paying nothing to invest your money on an ongoing basis except for a once-a-year commission to buy your ETF.
Mr. Cohen adds two caveats, the first being that this strategy is best done in a tax-free savings account or registered retirement savings plan. Otherwise, you’ll have to keep track of capital gains and losses when selling the index fund to buy the ETF, and pay taxes accordingly each year. The second caveat is that e-series index funds held for less than 30 days are subject to a fee set at the greater of 1 per cent of the redemption amount or $45. You’ll have to time your annual index fund sale to avoid the redemption fee applying to the final monthly contribution you made.
An additional benefit of using e-series funds for your monthly contributions is that you can buy fractional shares and thus put all your money to work. If you contributed $500 to your account, you’d get $500 worth of the mutual fund. You buy ETFs like shares – you’d have to be exceptionally lucky to be able to invest your $500 in ETFs every month with no spare change left over.
-- Rob Carrick, Globe personal finance columnist
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Stocks to ponder
General Electric Co. (GE-N). Investors who have scooped up decimated shares of General Electric Co. are willing to wait years to reap a solid return but also hope the U.S. conglomerate will show progress in its turnaround plan and avoid more negative surprises. GE shares, which traded above US$32 at the end of 2016, sank to US$6.66 late last year, and remain at levels not seen since the financial crisis a decade ago. The stock, an original component of the Dow Jones Industrial Average, was replaced in the blue-chip index last year. The dramatic plunge has lured investors who see worth in GE’s jet-engine, healthcare equipment and power turbine businesses and are confident in new CEO Larry Culp, as shareholders seek to capitalize on the stock’s steep slide. Reuters reports.
B2Gold Corp. (BTO-T). With two of the biggest takeovers in the Canadian gold sector in a decade unveiled in the past few months, attention has turned to who might be next. Some analysts think it could be B2Gold Corp. The Vancouver-based gold miner has posted sharply higher production and earnings in a sector where many companies have stumbled in pursuit of growth. In a little over a decade, the company has turned itself from a tiny explorer to close to a million-ounce-a-year producer. B2Gold has done that primarily by making smart acquisitions and building its own mines, a rarity in an industry that typically outsources construction to an external engineering firm. Niall McGee reports (for subscribers).
The Rundown
Cracks in China’s economy get wider - and investors pay the price
Simmering concerns about the slowing Chinese economy and rising global trade tensions turned more alarming on Monday after a new round of influential U.S. companies reported disappointing outlooks, citing China as a key factor. Caterpillar Inc., which makes heavy equipment used in construction and mining, missed analysts’ expectations with its fourth-quarter results and said that revenue growth in China would likely turn flat in 2019, marking a significant slowdown after two years of strong growth in the region. The shares fell 9.1 per cent. Nvidia Corp., which makes chips used in computers and driverless cars, cut its outlook for its fourth-quarter results, due to be released on Feb. 14. The company reduced its quarterly revenue forecast by US$500-million, to US$2.2-billion, noting “deteriorating macroeconomic conditions, particularly in China.” The shares fell 13.8 per cent. David Berman reports (for subscribers).
Why stocks have been rallying despite all the global economic gloom
Anyone searching for positive news about the global economy faces a tough challenge right now: Fading projections for corporate earnings and downbeat readings on growth suggest the outlook is dimming. Yet, despite the steady drizzle of gloom during the first few weeks of 2019, investors have turned downright sunny. In both Canada and the United States, stock markets have marched higher since New Year’s Day. This is not as crazy as it sounds. Several forecasters say the swoon in stock prices late last year set up markets for a healthy and sustained rebound this year. If political clashes over Brexit or China-U.S. trade don’t derail the global economy, the optimists could well be right. Ian McGugan explains (for subscribers).
Gordon Pape: Four ETFs worth buying now
John Bogle passed away earlier this month. He was the creator of index funds, a man who believed in keeping investments simple and costs low. When he started his first index fund for individual investors in 1976, he could not possibly have imagined how the concept would catch on. Today, U.S. based index-based mutual funds and ETFs have more than US$3.6-trillion in assets under management. Canadian ETF assets at the end of December were $156.8-billion. The total number of Canadian ETFs is 660, with more being added each month. Here are four ETFs that Gordon Pape is recommending as buys right now. They are quite different in nature, as you’ll see. Three are for conservative investors while the fourth is only for those who are willing to take some risk. (For subscribers).
It’s time to rethink the 60-40 portfolio asset mix
The dismal performance by global stock markets in recent months might prompt some investors to ditch stocks in favour of fixed-income investments, such as bonds, mortgages or Treasury Bills. Computer simulations, however, suggest that could be a mistake. Investment professionals will tell you that long-term success in investing is all about asset mix. Stock picking may seem sexier, but over the long run, your investment results will depend primarily on your equity weighting. It is therefore critically important to get that right. Frederick Vettese takes a look at which is best – a 60-40 stock/bond split or a 70/30 split. The result might surprise you. (For subscribers).
Solace for those worried about retiring at a market peak
Investing in retirement can be nerve-racking. Take the wrong step and you might walk into the poor house. But a sensible approach can help you make it through the bad times. Norman Rothery takes a look at what happened to an investor who retired at the top of the stock in 2000 and how withdrawal rates can impact your portfolio. (For subscribers).
Where Leith Wheeler portfolio manager Leanne Scott is seeing opportunities in these volatile market times
Leanne Scott doesn’t like to see people panic in a market downturn – such as the pullback in late 2018. It’s why the portfolio manager at Vancouver-based Leith Wheeler Investment Counsel Ltd. urges investors to stay the course, even when their portfolio values have dropped. Brenda Bouw recently spoke to Ms. Scott about what she’s buying and selling, and one stock she wishes she brought on board years ago. (For subscribers).
Ongoing series: The Cashless Society
Going cashless: How far will Canadians go in parting with their bills and coins?
A survey published Monday by Angus Reid Institute in partnership with The Globe and Mail found that 63 per cent of 1,500 respondents agreed either strongly or moderately that they hardly ever carry cash. The number was particularly high among the younger set: 70 per cent of respondents between the ages of 26 and 37 were cash averse. But, remarkably, 57 per cent of Canadians over the age of 55 also said they hardly ever carry cash. Some banks, restaurants and other service providers have also strayed from cash as there are now so many ways to pay electronically. David Berman takes a look at some of the changes the cashless society has brought in, and the benefits and concerns it raises.
Others (for subscribers)
How the ‘greatest single mistake’ for investors relates to marijuana stocks
In private, Davos plutocrats are obsessed with using AI to replace workers
For young investors, jumpy market presents first big test
Governments malfunction and the markets place their bets
These 17 TSX stocks are creating shareholder wealth – and here’s how we found them
Fund managers continue retreat from consumer-related stocks
Tuesday’s Insider Report: CEO cashes out over $1.8-million in this stock yielding over 6%
Monday’s Insider Report: CEO invests over $170,000 in this beaten-down dividend stock
Tuesday’s analyst upgrades and downgrades
Monday’s analyst upgrades and downgrades
Others (for everyone)
Six insights into retirement saving for those in their 30s and 40s
The Globe’s stars and dogs for last week
Ask Globe Investor
Question: Do you think the market recovery is for real, or is it a head fake?
Answer: I get this question – or variations of it – all the time. My answer is always the same: I have no idea where the market is going in the short run, and trying to time the ups and downs will just give you stomach acid. All I know is that the market tends to rise over the long run.
That said, the recent gains have been unusually strong. In the 20 trading days from Dec. 27 through Jan. 24, the S&P/TSX Composite Index rose 17 times – a remarkable 85-per-cent success rate – and posted a cumulative gain of 10.9 per cent.
Sounds impressive, right? But all that’s happened is that the index has regained the ground it lost in December (plus a little bit more). Is this a head fake? Anyone who tells you it is – or it isn’t – is just guessing. That includes forecasters at banks and brokerage houses who are constantly issuing predictions about the market’s direction.
Do yourself a favour and stop trying to guess where the market is going. Invest in strong, stable, dividend-paying companies – or in diversified exchange-traded funds – and vow to hold them through thick and thin. This is how you make money on the stock market – not by speculating on which way the market winds will blow next week or next month.
--John Heinzl
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What’s up in the days ahead
John Heinzl explains why there’s more to Canadian Tire than just tires - when it comes to dividend investing.
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Compiled by Gillian Livingston
Rob Carrick