Archive for November, 2011

TD Waterhouse and US Dollar Dividends in RRSP Accounts

November 16, 2011


TD Waterhouse used to be a leader at offering innovative features at least among bank-owned brokerages. They were the first to offer wash trading as a way around avoiding forced currency conversion charges in RRSP accounts. They were also the first to lower trading commissions to $9.99 for clients with accounts above a certain threshold. But recently, TD Waterhouse has gotten complacent. While RBC Direct and BMO InvestorLine have introduced the ability to separate US Dollar holdings in RRSP accounts, TD Waterhouse has not follow suit. As a result, TD Waterhouse has now slipped to the bottom half of the pack in the Globe and Mail’s Annual Discount Broker Rankings put together by Rob Carrick.

One could argue that separate US Dollar RRSP accounts are less of an issue at TD Waterhouse because a client can take advantage of automatic wash trading these days and completely avoid currency conversion from US dollars to Canadian dollars and back when selling and buying US dollar denominated securities. However, there still remains the issue of forced conversion of US dollar dividends received in RRSP accounts. For instance, an investor owning a US stock that pays a 4% dividend is losing 8 basis points or so (assuming currency conversion costs 2%). If the investor turns around and buys another US stock and converts currency at the retail rate, it will cost her another 8 basis points for a total of 16 basis points. The same investor could have avoided the currency conversions entirely if she had transferred her account to a competitor offering US Dollar RRSP accounts.

It is possible that TD Waterhouse is saddled with legacy systems that make it difficult to offer completely segregated US Dollar RRSP accounts. But they should try and offer clients a way to avoid forced conversions of US dollar dividends into Canadian dollars. They can do so by either waiving the retail markup on foreign exchange conversions for US dollar dividends or allowing clients to wash US dollar dividends into the TD US Money Market Account (TDB166). Otherwise, current TD Waterhouse clients might be tempted to take their business to more nimble competitors.

Should you switch to Vanguard Canada ETFs?

November 14, 2011


Last week, Vanguard Canada announced the management fees and ticker symbols for its initial line-up of six Exchange-Traded Funds (ETFs). Staying true to its low-cost philosophy, Vanguard priced the ETFs cheaper than existing comparable products. While I’m very excited about the lower fees charged by Vanguard ETFs I think that any decision to switch out of existing ETFs should be made on a case-by-case basis. For instance, the management fee charged by the Vanguard MSCI Canada Index ETF (TSX: VCE) is about 6 basis points or so less than the iShares S&P/TSX 60 ETF (TSX: XIU). As Michael James pointed out in a recent post, if you own $10,000 worth of XIU, switching to VCE will save you just $6 per year. For investors paying $30 per trade, the tiny savings may not be worth the bother.

So, how do you decide whether you want to switch from an existing ETF into a new product? Here are some factors to consider:

1. Do you hold the investment in a registered account or a taxable account? In taxable accounts, if the adjusted cost basis of your investment is less than its current value, you may be liable for taxes on capital gains. It probably won’t make much sense to pay capital gains to save a few basis points in management fees. But you could decide to channel future savings into the lower cost ETFs and if markets take a steep dive, you could switch out of current holdings and if things get really bad, you may even be able to trigger capital losses.

2. In registered accounts, the math is straightforward. Let’s say that if you save $100 per year in fees, it will be worth your while to switch. The Vanguard Short-Term Bond ETF (TSX: VSB) costs 10 basis points less than the iShares DEX Short-Term Bond ETF (TSX: XSB). If you hold $100,000 worth of XSB in a registered account, switching to VSB will save you about $100 per year. However, keep in mind that you’ll be paying two trading commissions and bid-ask spreads when selling one ETF and buying another. You can knock down the number of trades to one by switching during a rebalancing event but switching will still cost you one trading commission plus bid-ask spreads. If it will take many years for the savings in management fees to make up for the upfront trading costs, it may not be worth your while to switch ETFs.

3. Investors should pay close attention to the bid-ask spreads of the new Vanguard ETFs. Even if volume is low, there may be enough bids and asks to execute your trades at a tight spread. In other words, it is tight bid-ask spreads, not volume that matters when trading ETFs.

4. If you do decide to switch to Vanguard ETFs upon launch, you are making a bit of a leap of faith that Vanguard will be able to keep tracking errors low. I think Vanguard ETFs will be successful in tracking their indexes closely but you are not paying too much in extra fees if you do decide to wait-and-watch.

This & That: Spotting Bubbles, Annuities and more…

November 11, 2011


Thinking, Fast and Slow: Michael Lewis has high praise for Prof. Daniel Kahneman’s new book saying that it seeks to explain the research of the past few decades into what appears to be “permanent kinks in human reason”.

A Financial Advisor Makes a few Blunders: In a New York Times article, a financial advisor explains how he lost his home in the housing market bust and the lessons he has learnt from his experience.

Is that an asset bubble? The Wall Street Journal’s Jason Zweig says that it is easier to spot a bubble after it has burst but it is hard to identify one that has not popped yet.

Buying an immediate annuity: A column in Forbes magazine explains the factors a retiree needs to consider when converting a nest egg into an income stream by purchasing an annuity.

Around the blogs

Vanguard announcement that it filed the final prospectus for its initial lineup of ETFs this week attracted much commentary. Preet broke the initial story and Canadian Couch Potato called it great news. Michael James pointed out that investors pondering a switch to Vanguard ETFs should weigh the MER savings against trading costs.

Million Dollar Journey surveyed the most expensive and lowest cost MBA programs in Canada.

Potato a.k.a. John Robertson is out with a new book called Potato’s Short Guide to DIY Investing.

Planning on borrowing to invest? How to Invest Online drills down into the details on when it can work, the risks and the tax implications.

Thicken My Wallet argues that the active versus passive debate is less important than whether the adopted strategy is implemented successfully.

Canadian Financial Stuff points out with Costco selling gas in Ottawa now, just filling up the family car will easily justify the annual membership fee.

My Own Advisor featured a guest post that explained the basics of annuities.

Have a great weekend everyone! And for our veterans out there, thank you for your service!