Last week, I wrote about the easiest, cheapest, and perhaps even the best way to invest with your bank mutual funds. That type of investment strategy is best for those who have no interest in opening a discount brokerage account of their own, regardless of the savings. However, a lot of you are willing to take the next step in taking over your finances.
If you are just starting out and interested in opening a discount brokerage account but not interested in watching the markets day-in and day-out, then index investing using ETFs is an ideal solution. Index ETFs have almost identical holdings as index mutual funds, but with much lower fees. Over the long term, a 1% reduction in portfolio MER will result in a 20% larger nest egg. To further reduce costs of buying and re-balancing ETFs, here are some of the best brokerages that offer commission free ETFs.
Once you have an account open, the next step is to figure out which ETFs to buy. The goal is to keep it as simple as possible but with proper diversification and asset allocation. With new ETFs introduced every year, using ETFs for global market coverage is getting easier and cheaper. I have written an article that I update regularly on example index ETF portfolios.
Similar to the index mutual fund portfolio, the goal is for the ETF portfolio to have:
- Canadian equity index;
- US equity index (non-hedged);
- International equity index; and,
- Canadian bond index.
While there are a number ETFs out there, it is further complicated by the fact that some are traded in CAD and others in USD. Moving money from CAD to USD with discount brokerages can be tedious and expensive (some brokerages charge up to 2% on the amount being exchanged).
Foreign exchange (FX) costs can be reduced by using Norbert’s gambit, but this can be painful if you have a discount brokerage that requires a phone call to journal the shares over. On the other hand, some brokerages, like Royal Bank and BMO, automatically journal shares on inter-listed stocks. Brokerages like Investors Edge (CIBC) do not offer registered USD accounts, but they do not charge a FX fee when buying USD stocks/ETFs.
I know, this stuff can be confusing! The best way to think about an index ETF portfolio is that it can either be all in CAD or a mix of CAD and USD.
All CAD ETF Portfolio (Portfolio A)
- Canadian Equity Index (CAD): XIC or VCN (MER: 0.05%)
- All-World ex-Canada Index (CAD): VXC (MER: 0.25%)
- Canadian Bond Index (CAD): VSB (MER: 0.10%)
This is as simple as it gets for an index ETF portfolio. While it may be a few basis points more expensive than the CAD/USD portfolio below, it can very well be worth it if your discount brokerage does not allow for cheap and easy FX.
Mix of CAD/USD ETF Portfolio (Portfolio B)
- Canadian Equity Index (CAD): XIC or VCN (MER: 0.05%)
- Total U.S Index (USD): VTI (MER: 0.05%)
- Total International Index (USD): VXUS (MER: 0.14%)
- Canadian Bond Index (CAD): VSB (MER 0.10%)
The Easiest Index Portfolios for Your Discount Brokerage Account
Lets go through some of the more popular discount brokerages out there and choose if Portfolio A or B is best. By “best”, I mean easiest first, and cost efficient second. The fact of the matter is that most investors do not want to go through the process of journaling shares from CAD to USD and vice-versa to save money.
Note that the list below is for registered accounts only.
Questrade: Portfolio A but Portfolio B is ok too.
This brokerage is a favorite among MDJ readers due to their low fees and ability to buy ETFs without paying a commission. For this brokerage, Portfolio A is the better choice. While they do allow using DLR/DLR.U to save money on FX, it still requires an email to their admin staff for journal the shares from CAD to USD.
TD Waterhouse: Portfolio A
In the early days, TD was commended in offering “wash trades” where you could sell your USD asset and settle in USD without having to convert back to CAD which resulted in high fees. However, this required a phone call which adds to the pain factor. Because there is no easy way for FX, I would recommend Portfolio A.
CIBC Investors Edge: Portfolio B
This is one of the only discount brokerages that does not offer a USD registered account. While they are behind the times, they have remedied this by eliminating the FX fee (up to 2% one way with some brokerages) when buying USD assets. If you buy VTI, you will only be charged the FX spot rate. Combined with low trading fees ($6.95/trade), this is a compelling brokerage for an index investor.
RBC Direct Investing: Portfolio A or B
This is a very progressive account that can automatically journal inter-listed stocks. This means that if you buy 100 shares of the inter-listed stock RY in CAD, you can sell 100 shares of RY in USD and the account will magically know to move your CAD holdings to USD with no additional FX fees. While RBC Direct Investing offers an easy and cost efficient method of FX, many are not comfortable with this process. So, Portfolio A for beginners, Portfolio B for those more comfortable with Norbert’s gambit process.
BMO InvestorLine: Portfolio A or B
This account is very similar to RBC where they can automatically journal inter-listed stocks. Same conclusion as RBC Direct Investing.
Scotia iTrade: Portfolio A
While this brokerage offers “US Friendly” registered account solutions, they charge a $30/quarter fee to eliminate the FX fee. They also offer a limited list of commission-free ETFs. For me though, the $120/year fee is a bit steep, so I would stick with keeping everything in CAD.
Interactive Brokers: Portfolio B
IB is a new entrant in the registered accounts game. While this brokerage is tailored for traders, their low trading fees are certainly compelling. The only issue I have with IB is that buy and hold investors are faced with a monthly minimum charge of $10USD (if you trade less than $10USD worth of commission/month but waived if over $100k USD balance) and a registered account maintenance fee of $50/year. If you are willing to put up with those fees, their FX conversion cost is negligible and super easy to do in your online trading account. I’m going with Portfolio B here.
Qtrade: Portfolio A
From my research, it appears that Qtrade clients can journal shares through their online portal (however need to wait 3 business days for trade to settle) which is ideal using the DLR/DLR.U combo. I’m uncertain though about moving USD back to CAD and if you can simply buy/sell an inter-listed stock to facilitate the move. Unless Qtrade users can clarify the ability of journaling inter-listed stocks, I would go with Portfolio A.If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).