If you are a passive investor who invests mostly in Exchange-Traded Funds, the new year may be an ideal time to check your trading behaviour over the past year. ETFs may charge rock-bottom fees but if you are trading too much, you may find that index mutual funds might be a cheaper way to implement your portfolio.

Take the Sleepy Portfolio, for instance. It costs an investor about 20 basis points in fees charged by the portfolio components. Trading costs are extra. The portfolio saw just one transaction in 2010, which would have cost less than 1 basis point assuming a $10 trading commission.

Investors in their accumulation years would have seen more activity because they are regularly adding their savings to their portfolios. Some brokers such as TD Waterhouse (read my review) make it really easy to check up on your trading activity by including information on year-to-date fees and commissions in the monthly statement. Add up the trading expenses across all your accounts and if you find that you are paying more than 20 basis points, you might be better off with TD e-Series or, for larger accounts, CIBC Index Mutual Funds. There is little point in investing in ETFs primarily for their low cost and then frittering away the savings and then some in trading commissions.

This article has 11 comments

  1. CC, to make sure I’m clear, are you saying that if I have a portfolio of $130,000 invested entirely in ETFs, then I should aim to keep my annual transaction costs < 0.02%, which is about 3 trades at Scotia iTrade (my broker). This seems more or less reasonable to me but I want to make sure I understand what you're saying.

  2. @DM: Actually, 20 basis points means 0.2% or $260 for you. But I don’t recommend trading more to reach this cost level just for the sake of trading 🙂

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  4. @DM: Like Michael points out 10 to 20 basis points works out to $130 to $230 on a $130K portfolio. That would mean 13 to 23 trades.

    I did the numbers for my own portfolio and it came out to 5 basis points. It’s a bit on the higher side but one big reason is that I did the Norbert Gambit to convert CAD into USD.

  5. Holy crow, guys! I’m a stock picker and I don’t execute more than 20 trades a year…! Although if you add fixed income transactions such as buying GICs, then that may push me over 20 total transactions.

    • @Phil S: Unfortunately, our household has 5 accounts. My RSP, my spouse’s RSP, my TFSA, my spouse’s TFSA and joint investment accounts. The trades across all these accounts just adds up 🙂

      I think 5 basis points is acceptable especially considering I paid close to the spot price on bulk of my foreign exchange conversions.

  6. I’m in the accumulation stage right now, and my strategy is to keep trading costs low while investing monthly is to buy index mutual funds once a month, and then cash it all out once a year and buy ETFs. I figure that this gives me the best of both worlds: I stay fully invested and avoid the risks of a poorly timed yearly buy, but the majority of my investments get the benefit of the significantly lower MERs on ETFs.

    I also don’t bother with a TSX Composite ETF, as the spread between the Td eSeries fund and the best ETF is so small you need a huge investment for the MER savings to pay for your commissions, even if you’re only buying once a year.

  7. I would like to add to the strengths of having mutual funds during the early stages of saving up.
    That’s the ability to rebalance the entire portfolio for next to nothing. As well the TD e-series MER is very competitive. It’s greatest weakness is the lack of sector diversity. As an added bonus the couch potato strategy uses dollar cost averaging.

    @Rysto that’s an interesting idea and with MER and a large sum it makes sense…but I think it would also depend on if there are any significant net capital gains/losses to consider.

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