Unlike the competing wrap ETFs from iShares, Claymore has published asset allocation targets for these funds. For instance, CBD has a 45% to 55% split between fixed income and stocks and offers a reasonably simple portfolio in one package. Note that the equity funds held in the wrap are fundamental ETFs, which tend to be more expensive than traditional index funds.

Related Reading:

• iShares Portfolio Builder ETFs: Complex and Pricey
• More New ETFs
• New Claymore ETFs

The fees for these portfolio ETFs are slightly less than portfolio mutual funds available through TD e-Series Funds or ING Streetwise Funds but the same criticism directed towards the mutual funds applies here: investors could assemble the same portfolio at a much lower price. The weighted average MER of the Sleepy Portfolio, for instance, is a fraction of these fees: 0.22%.

A far bigger issue with these wraps is their complexity. Let’s take the iShares Growth Core Portfolio Builder Fund (XGR). Here is the fund’s stated objective:

While remaining consistent with the fund’s investment objective, Barclays Canada seeks to identify and optimally diversify certain fundamental sources of return through a proprietary multi-factor selection process. The identified fundamental sources of return include exposure to: interest rates; inflation; credit quality; liquidity premium; incomplete information/transparency; global and domestic economic growth; political uncertainty; and foreign currencies. The selection process determines the fund’s level of exposure to the fundamental sources of return and its expected level of risk. Barclays Canada will apply the selection process to the fund at least once per quarter and more often if market conditions warrant, and, if it considers it appropriate, rebalance the portfolio of the fund.

Can you tell what the asset allocation is? Me neither. The current allocation doesn’t explain much either. The portfolio has 42.7% allocated to bonds, 16.2% to Canadian stocks, 26.5% to foreign stocks and the rest in REITs, commodities etc. The fund holds a motley collection of 21 ETFs and fully three make up less than 1% of the portfolio. Compare the complexity of this fund with the simplicity of the ING Streetwise Balanced Fund, which has 40% in bonds and 60% split equally among Canadian, U.S. and other developed markets.

Passive investors are presumably looking for simplicity and low cost. Products like these fail on both counts.

Related Reading:

• ING Direct’s Low-Cost Mutual Funds
• Wrap ETFs from Claymore
• More New ETFs

Savings TFSA: ING Direct has already announced a TFSA account that can hold cash or GICs and is promising to keep its tradition of charging no fees and requiring no minimums. A savings TFSA that doesn’t charge any fees of any kind would be an ideal place to hold your emergency savings.

Mutual Fund TFSA: Once again, ING Direct has taken the lead in offering a mutual fund TFSA account with Streetwise funds on the menu. It would be a good bet that TD Mutual Funds will be competing with a TFSA product in which investors can hold the TD e-Series index funds (similar to RESP accounts). If you are planning on making long-term investments within a TFSA and you’ll be dinged with an admin fee with self-directed accounts, a mutual fund account might be your best choice.

Self-Directed TFSA: Typically offered by discount brokers, a self-directed TFSA will offer the most flexibility. However, investors need to watch out for fees. We are already getting a glimpse of the kind of fees that will be charged on these accounts. BMO InvestorLine recently announced a TFSA account with a $50 annual administration fee (waived for investors with $100K or more in InvestorLine assets) and a $25 withdrawal fee. Other major discount brokers can be expected to announce fees on similar lines. If you are eligible for an admin fee waiver and don’t plan on making withdrawals, a self-directed TFSA might be a good place to keep long-term investments.

Bottom Line: Initially, TFSA accounts will be small – a $5,000 contribution will earn about $150 in interest per year and save $60 in taxes at a marginal rate of 40%. In the first year, a $50 admin fee or a couple of $25 withdrawal fees will almost wipe out any tax savings. So, watch out for administration and withdrawal fees when opening a TFSA account.

Related Reading:

• Watch out for higher discount broker fees
• Ideas for your Tax-Free Savings Account (TFSA)
• TD Waterhouse Review

Emergency funds: Since emergency funds are typically kept in savings accounts, they attract tax at the marginal rate on interest payments, guaranteeing a loss in purchasing power over time. The flexibility of the TFSA – no tax on withdrawals and the contribution room for the next year bumped up by the withdrawal amount – make it a perfect candidate for stashing emergency savings.

Saving for a home: The Home Buyers’ Plan (HBP) allows first-time buyers to withdraw up to $20,000 ($40,000 for a couple) from their RRSP but first-time buyers wanting to save even more or buyers trading up to another home should save in a taxable account with all its attendant disadvantages. The TFSA could be an ideal place for such savings and unlike a HBP, there is no repayment schedule to worry about.

Other short-term savings: As the TFSA is very flexible, it can used for all kinds of savings such as a new car, a boat, a dream vacation or that around-the-world-trip that you’ve always been dreaming about. Admittedly, the $5,000 contribution room in the first year wouldn’t go very far but the TFSA can add up to some serious chunk of cash in a few short years.

Saving for your child’s education: The RESP is still the best place to save for a child’s education because any contribution attracts the Canada Education Savings Grants (CESG) resulting in an immediate boost of at least 20%. With the introduction of the TFSA, it is best to contribute enough to the RESP to get the maximum allowed CESG of $7,200 per child (for a total RESP contribution of $36,000) and save more inside a TFSA.

Retirement savings: Since withdrawals from a TFSA do not affect income-tested benefits such as OAS or GIS, the TFSA is likely to supplant RRSPs entirely for lower income Canadians. RRSPs are likely to remain the preferred vehicle for retirement savings for Canadians in the higher income brackets. But for those who max out their RRSPs every year, the introduction of the TFSA is equivalent to adding $8,300 to the RRSP contribution room.

Initially, we plan to keep our emergency savings inside a TFSA but in subsequent years we will be contributing securities currently held in taxable accounts in-kind to a TFSA. What do you plan to do with your TFSA account?

Related Reading:

• Tax-Free Savings Account (TFSA)
• Quick Tip: Catch up on RESP Contributions
• TFSA versus RESP

Have a great weekend everyone!

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• This and That # 116: Thank goodness October is over
• Beware of tax shelter donation arrangements
• This and That # 111: Bailout edition

It turns out that the numbers reported in the latest SPIVA report isn’t all that unusual. A recent study by Vanguard found that there is little evidence to back up the claim that active funds are better performers in bear markets despite their potential to do so through tactical shifts in asset allocation:

Despite the bias toward survivors, we observe that a majority of active managers outperformed the market in just 3 of 6 U.S. bear markets and in 2 of 5 European bear markets. To be sure, in each bear market, funds existed that successfully outperformed the broad market. However, these results clearly indicate a lack of consistency with respect to the success of active funds in general.

Related Reading:

• Surprise! Mutual fund cheerleaders fault indexing
• Two Strikes against Active Management
• Why invest your own money?

1. Administration fees: The discount broker arms of the big banks typically charge an administration fee on self-directed registered accounts if the value is less than a certain threshold. TD Waterhouse, for instance, charges an administration fee of $100 plus GST for RRSP accounts that are less than $25,000. Check the small print in the fee schedule for details on when the fee waiver eligibility is determined.
2. Higher trading commissions: TD Waterhouse, RBC Direct and BMO InvestorLine charge lower trading commissions for household accounts larger than $100,000. If the value of your accounts falls lower than that threshold, you would be charged the higher trading commissions.

There may not be much you can do about these fees apart from topping up your account.

Related Reading:

• TD Waterhouse Review
• TD Waterhouse Lowers Commissions
• Globe and Mail’s Discount Broker Rankings

• a sound business model characterized by above average levels of profitability and a secure and growing dividend
• an earnings stream that is diversified both by product and by geography
• a strong balance sheet and access to a variety of funding sources
• a competent and shareholder-oriented management team

The report then concludes:

When one examines the list of a healthy financial company’s necessary attributes, the major Canadian chartered banks and insurance companies stack up extremely well relative to their global peers. The Canadian chartered banks have diversified streams of earnings that include powerful retail and commercial banking, wealth management, investment banking, corporate lending, and trading businesses. The large Canadian insurance companies have been building out their international insurance and wealth management franchises for over 100 years. The balance sheets, levels of profitability, dividend streams, access to liquidity, risk management practices and management teams of the major Canadian financial institutions are world class.

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• This and That #107
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After some initial confusion, I set up one family RESP account for each of my three children and added the other two as beneficiaries. The Altamira rep was very helpful with the paperwork and even caught what looked like a mistake on my part in the transfer from TD (it wasn’t a mistake as I had transferred one kid’s amount to another on purpose to make the amounts deposited in the new accounts more proportional to the kids ages), but I was impressed that she caught it.

So overall I was pleased with Altamira, and very happy my kids will be able to receive the additional grants for which we are eligible. We have other business with Altamira and I have been happy with them because although their index fund MERs are a bit higher than TD (most are 0.5% I think), I find their online system, phone system, and monthly reports much easier to read/use. I don’t know what it is with TD as I find their reports much harder to read and track, and when I make trades within my account, it always seems harder than it should be. I know you’ve had good experience with them, and overall I am still pleased, but I am glad that I only have to call them a couple of times a year.

One more thought: Overall the RESP process just doesn’t seem that easy. My local TD banker told me that many people are missing out on all the free government money (here in Alberta each kid is eligible for $500 for just being born!) because they don’t ever set up an account. I am fairly good with numbers and have a decent investment understanding and I still found it a lot of work and confusing, so I think the government isn’t succeeding in getting the money to families who could really use it in the future. I hate seeing people miss out on good things like this. It would be interesting to know how many people do not get the grants for which they are eligible.

Related Reading:

• Basics of Registered Education Savings Plans (RESP)
• Lump Sum RESP Contributions
• RESP: Getting Started

Around the Personal Finance Network

1. Four Pillars takes issue with CARP’s stand on mandatory RRIF withdrawals.
2. Squawk Fox asked her readers about their three worst financial decisions.
3. I’m not sure how prevalent credit repair is in Canada. Blunt Money warns that the only real way to repair credit history is to change behaviour and give it time.
4. Clever Dude offered some frugal car maintenance ideas.
5. Money Ning on what his parents taught him about money.

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