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moneysense.ca, 11/09/07
Costs of the Sleepy Portfolio
I was curious to see what the blended MER of the Sleepy Portfolio was, ignoring the initial commissions and foreign exchange transactions. In other words, if no transactions were made, how much does the Sleepy Portfolio cost every year?
The most expensive ETFs in the portfolio are the iShares CDN REIT Sector Index Fund (XRE) at 0.55% and the iShares CDN Real Return Bond Index Fund (XRB) at 0.35%. The lone mutual fund in the portfolio, the Altamira T-Bill Fund used to capture the cash component costs a surprising 0.52%. The cheapest ETFs are from the Vanguard – the Total Market ETF (VTI) at 0.07% and the new Europe Pacific ETF (VEA) at 0.15%.
The blended MER of the entire portfolio is a low 0.22%. A $100,000 portfolio invested in a mix of typical mutual funds would cost $2,000 per year, compared to $220 for the Sleepy Portfolio.
moneysense.ca, 11/09/07
Assuming your portfolio grows at a real rate of return of 5%, the cost in future dollars will be $3260 for a mutual fund portfolio vs. $359 for the sleepy portfolio in 10 years. And that disregards the contributions over those 10 years.
Even better is to just think of MERs as subtracting off your rate of return and giving you a lower effective rate of return. A 2% or so reduction on a rate of return can cause a huge percentage reduction in the final portfolio value (depending largely on time of course). Over 40 years this amounts to about a factor of 2 reduction in the portfolio’s final value.
I don’t buy any bond funds whatsoever. The reason why people buy bonds is to preserve their original capital and holding individual bonds will do just that… But bond funds have no maturity date and are marked to market daily, so in a rising interest rate market, you will lose money and hence it won’t preserve your capital.
Regarding REIT funds, I’m OK with ETFs of REITs as a general rule, but any market weighted REIT “index” fund in Canada is heavily slanted towards the performance of the mother of all Canadian REITs, RioCan. Instead of buying a REIT index, why not just buy RioCan? For me personally, I generally prefer to buy individual REITs and I will only buy a REIT ETF if it appears to me that the ETF is trading below its NAV.
As a side note, in the USA, REITs and especially many REIT ETFs are trading at ridiculously low prices!!! When was the last time that you can buy an ETF of REITs with over a 9.5% yield? Well, you can right now in the good old US of A (see symbol RPF on the NYSE).
Why the ALtamira T-Bill over, say, the Altamira HighInterest Cash performer for your cash portion?
Phil: I am planning a future post on how to get fixed income exposure – bond ladders or funds or GICs. It is true that bond funds fluctuate in value but unless you need money maturing at a certain point in the future, bond funds are an acceptable alternative to owning bonds directly in long-term portfolios.
You are right about XRE, of course. I think it is better to just buy REI.UN and HR.UN directly as a proxy for XRE.
“The reason why people buy bonds is to preserve their original capital and holding individual bonds will do just that… But bond funds have no maturity date and are marked to market daily, so in a rising interest rate market, you will lose money and hence it won’t preserve your capital.”
So if we pretend the fund is like a person and it is holding individual bonds they will preserve their original capital just as you said. But you’re saying that all the shareholders of that fund will lose money. Seems like you’re violating conservation of money here.
Sorry newbie Question…
Can Canadians purchase Vanguard ETFs in CDN dollars? Or is there a currency exchange which must take place within a Canadian Discount Brokerage? Thanks in advance…
Joe: Good question. I didn’t know of AIS100 when I started the Sleepy Portfolio.
Anon: You cannot purchase Vanguard ETFs in CDN dollars. Therefore, when you first buy the ETF, your CDN dollars will be first converted to USD usually for about a 1% fee. You can check on many discussions on currency effects in the archives. Just search for “currency”.
Dave, let’s discuss this issue in the future after CC gets his post together about fixed income exposure.
Guys sorry for this naive question but can you please tell me: each time you do a transaction via a broker it costs you 29$ in fees. What do they consider as 1 transaction?
If I buy 100 shares of company X and I buy 200 shares of company Y those are 2 transactions meaning 2×29$ or is considered as 1 transaction?
As I suspect the answer is 2 transaction… but let me ask anyway. The buy and sell are also 2 transactions? So using the above example to buy 100 shares of company X and sell 200 shares of company Y?
thanks
Remus, yes every order to buy or sell each stock is considered one transaction.
[...] The blended cost of the Sleepy Portfolio is just 0.22%! [...]
Phil – A bond ETF is equivalent to a bond ladder. If your investment horizon is longer than the fund’s duration, then your principal is pretty safe.