The following question is from Jonathan:
I want to start a couch-potato style portfolio using ETFs from iShares and Vanguard with new purchases every 3 or 6 months. I’ve been looking into various discount brokerages and Questrade seems to be the best bet because of its very low commissions.
But if I’m buying ETFs in US dollars (Vanguard), and possibly selling them as I rebalance, am I better off with a brokerage that offers wash trades?
When I transferred our RRSP accounts to TD Waterhouse, I decided that since I held a large number of U.S. stocks that I wanted to sell over time and put the proceeds in index funds, I would save more money with having a wash trade feature as opposed to lower commissions. However, if our portfolios were fully indexed already, I might have reached the opposite conclusion.
Let’s take the Sleepy Portfolio as an example. 50% of the portfolio (cash, bonds, XIC and XRE) is in securities denominated in Canadian dollars and 50% (VTI, VEA, VWO) in U.S. dollars. Wash trades will save money for the Sleepy Portfolio only if I was rebalancing between VTI, VEA and VWO inside a RRSP or if I were replacing an ETF like EEM with its cheaper equivalent like the VWO. For an indexed portfolio that I will be constructing in the future, I would choose lower commissions over wash trades because:
- Money is regularly added to the portfolio. You can rebalance by simply investing the new money in the fund that has fallen the most from the target allocation.
- Even if you sell some existing holdings to buy another (which will happen rarely, if ever), you’ll sell only a small portion of your existing holdings and the bite from a currency conversion should be minimal (0.9% one way is the typical fee these days).
What do you think? Jonathan mentioned that he would like to hear your comments on this issue as well.
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2 responses so far ↓
1 CanadianInvestor // Nov 7, 2007 at 6:51 am
A few thoughts:
- new money, assuming it is coming from Canadian$, always has to incur the FX charge to US$ so there the trade cost is the key
- the smaller the amount to be rebalanced, the more the impact of the trading cost since the FX cost (CC’s estimate of 0.9% is close enough) will remain constant but the commission of $10 on a $200 trade is 5% cost while on a $2000 trade it is 0.5%; the tracking portfolio I have on my blog shows that since May this year on a $100,000 portfolio with 15 holdings, my rebalancing trades would mostly be in the $300 range - I’d be better off with cheaper trades
- the FX costs will dominate trading costs when the portfolio total reaches large amounts like $500k+ and when rebalancing is infrequent, like once per year or less
Beyond that, I have heard hints that the wash trade problem will be going away fairly soon as at least one brokerage (and no doubt the others will soon follow) will introduce US$ cash holdings within registered accounts. Hooray!
2 FourPillars // Nov 7, 2007 at 8:46 am
I’ll agree with CC and CI - cheaper trades are probably better for most accounts.
Currency conversion was something I didn’t really consider when choosing a broker (Questrade). For an rrsp they are competitive but if you have a large non-reg account then IB might be a better choice because of lower forex costs.
Mike
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