Part 9: What to Buy to Invest in Index Funds
So far we have covered why you should invest, that index funds are a good choice for your investments, and how you might want to split up your investments across different asset classes. Finally, it’s time to look at a few examples of funds that you can buy.
Criteria for Choosing your Funds
When trying to choose between your different options, there are a lot of potential criteria you could try to evaluate, which can lead to analysis paralysis. The two most important to focus on however are the cost and the convenience, which is usually a straight-forward trade-off.
Index funds that come in the form of mutual funds are easier to purchase, often with the ability to set up automatic purchase plans to make it easy to stick to your plan. Index funds that are ETFs require a brokerage account and placing an order over a stock exchange – which limits you to purchasing during market hours (typically 9:30am-4pm Eastern time on weekdays), though you can set up orders in advance to execute during those hours if it’s not possible for you to spend a few minutes logged into your account during the day. There are also very few options for automatic purchases with ETFs. However, ETFs will have the lowest possible fees.
In both cases, you can choose between all-in-one funds that provide a complete portfolio for you at a higher fee, or you can combine several funds together on your own.
The all-in-one option has a lot to recommend it in terms of simplicity and it’s worth considering even if it costs a tiny bit more. They also have a behavioural benefit: they force you to look at your portfolio as a whole, which eliminates the temptation to tinker and second-guess your plan when one part inevitably under-performs the rest.
Many authors and websites have provided model portfolios that you can look at for help in choosing a portfolio and the funds to fill it. Perhaps the most popular is from Dan Bortolotti’s Canadian Couch Potato site. Justin Bender’s Canadian Portfolio Manager site also has its own model portfolios of ETFs, with recommendations for increasing levels of complexity.
The broad similarities are that you will be building a portfolio with a bond fund, a Canadian equities fund, a US equities fund, and an International equities fund. Sometimes there are funds that combine multiple components, from all-in-one funds to outside-of-Canada equity funds to combine the US and International components. But the philosophy will be the same regardless.
From most convenient but more costly through to the lowest cost funds, your options include:
Tangerine’s all-in-one mutual funds. Tangerine has long been a leader in providing simplicity in investing. These funds are incredibly easy to buy, and just as easy to set up recurring contributions to. There are no minimums or early redemption fees. And their focus on all-in-one funds helps maintain the investor’s sights on the big picture and keeping things simple – just round off your desired allocation to the nearest fitting fund. Their funds had a management expense ratio (MER) of 1.07%, but at the end of 2020 they introduced a new set of funds (confusingly called their “Global ETF Portfolios” but they are not ETFs) with lower fees. It will take a year of operations before they can officially report a MER, but expect a cost somewhere in the range of 0.7%.
Robo-advisors are another option. Their pricing will depend on how much you have to contribute, but will generally fall in-between the Tangerine and TD e-series options. They will build a portfolio of ETFs for you, providing a way to automate your contributions and really the entire management of your investments. There are many to choose from, and many of them are not strictly passive, with some investing in something very close to the portfolios outlined here and in the model portfolios above right through to robo-advisors that seek to be highly active.
The next level of complexity is to use a set of multiple mutual funds to build your portfolio. While most banks and mutual fund companies will have index funds to fit the bill somewhere in their catalogue, the TD e-series funds are the cheapest and thus there isn’t really a reason to choose any others, though RBC’s offerings are not much more expensive if you have a particular loyalty there. Until recently, these were a TD exclusive, but the e-series funds can now be purchased from most brokerages. There are four funds in particular to look at when building your portfolio, and each has its own MER. A balanced mix of all four would cost 0.37%.
Canadian Equity: TDB900
US Equity: TDB902
International Equity: TDB911
All-in-one ETFs are the next step up in complexity and step down in costs. Vanguard, iShares, and BMO each have a set covering different mixes between fixed income and equities. The ticker symbols for each (the symbol used when purchasing one over the stock exchange) are listed below; Vanguard’s offerings each start with a V, iShares’ with an X, and BMO’s with a Z. TD has also launched a set of “one-click” ETFs in the second half of 2020, but they’re still too new to recommend. The MERs for each will vary slightly, but expect them to be approx. 0.2-0.25%.
100% equities: VEQT, XEQT,
80% equities, 20% fixed income: VGRO, XGRO, ZGRO
60% equities, 40% fixed income: VBAL, XBAL, ZBAL
40% equities, 60% fixed income: VCNS, XCNS, ZCON
20% equities, 80% fixed income: VCIP, XINC
Finally, you can build a portfolio from a set of ETFs to cover each category, which will bring you the lowest-cost (but the most work) portfolio. The fees on each will vary, but at the end of the day a portfolio of individual ETFs will likely end up costing you about 0.15%.
Fixed income: VAB, XBB, ZAG
Canadian equities: VCN, XIC, ZCN
US equities: large-cap (S&P500) ZSP, VFV, XUS; total market VUN, XUU
International equities: XEF, ZEA, VIU; funds that cover both US and International: VXC, XAW
Decide on which approach best suits your needs – there is no one-size-fits-all answer (which is why all these products exist in the first place). While there are many small differences between the options (such as which index provider they have chosen), for the most part the key criteria for your decision will be ease of use versus the cost. Find a balance that works for you, and then this list should give you some leads for your research and eventual purchase of your index funds.