Comments on: Portfolio Size for Choosing ETFs over Index Funds

By: Best Of Friday Links 2009 - Canadian Finance Blog

Best Of Friday Links 2009 - Canadian Finance Blog — Wed, 23 Dec 2009 10:03:12 +0000

[...] Capitalist posted about what portfolio size you need for choosing ETFs over index funds. – May 1, [...]

By: Best of April 2009 and Giveaway | Canadian Capitalist

Best of April 2009 and Giveaway | Canadian Capitalist — Tue, 12 May 2009 03:24:12 +0000

[...] Portfolio Size for Choosing ETFs over Index Funds: My conclusion that ETFs are suitable for larger portfolios and mutual funds for smaller ones came in for some discussion and others felt that under certain circumstances, ETFs can be cheaper for smaller portfolios as well. [...]

By: riamo

riamo — Sat, 02 May 2009 02:13:54 +0000

how much does questrade cost to trade ETFs?

By: Patrick

Patrick — Fri, 01 May 2009 14:34:16 +0000

@CC: Ok, I see where you’re coming from. I think we were comparing apples and oranges. You’re looking at one lump sum, rebalanced annually. I’m looking at what to do with periodic contributions.

By: Canadian Capitalist

Canadian Capitalist — Fri, 01 May 2009 14:25:28 +0000

@Patrick: I use the one year thumb rule because I’m assuming 1 buy of each ETF initially and rebalanced annually. So, let’s say MER differences are ‘delta’. Holdings are over ‘y’ years. And trading commissions are ‘tc’ and ‘x’ the size of the portfolio. The equation works out to:

x * delta * y = tc * y

x = tc / delta.

I’m basically assuming that this is not a one shot buy and trading commissions are incurred to rebalance every year thereafter.

By: Patrick

Patrick — Fri, 01 May 2009 13:21:26 +0000

@CC: Yes I guess I did miss that. It does seem to make your results less useful though. What is the practical purpose of making up the commissions in one year? I thought we were trying to minimize our costs.

By: Canadian Capitalist

Canadian Capitalist — Fri, 01 May 2009 12:42:24 +0000

“One simple thumb rule that I use is that the MER savings from owning ETFs should cover the initial trading commissions in one year.”

Patrick: Perhaps you missed that I want to make up the MER savings in one year. Even if you can estimate correctly how long you are going to own an ETF instead of a mutual fund, you still need to factor in growth to get an accurate estimate.

Starting out with e-Series funds is a great choice and investors can always switch out when the portfolio becomes larger. Of course, in taxable portfolios, it may be better to start out with ETFs as others have pointed out here.

By: Patrick

Patrick — Fri, 01 May 2009 12:20:12 +0000

I think your math’s wrong. MERs are expressed not in percentages, but in percentages per year. The right formula would be:

Size of portfolio for choosing ETFs = Trading commissions / (Higher MER – Lower MER) / Years invested

“Years Invested” is how long you expect to be in this ETF before moving your money elsewhere and incurring more commissions.

If you expect to stay invested for, say, 10 years, then your Sleepy Mini example (without currency conversion charges) works out to $5100, a much more reasonable number.

By: Friday Links | The Canadian Finance Blog

Friday Links | The Canadian Finance Blog — Fri, 01 May 2009 11:02:06 +0000

[...] Canadian Capitalist posted about what portfolio size you need for choosing ETFs over index funds. [...]

By: Weekend Reading - April 30, 2009 | Million Dollar Journey

Weekend Reading - April 30, 2009 | Million Dollar Journey — Fri, 01 May 2009 10:31:08 +0000

[...] Canadian Capitalist gives us a rule of thumb when determining when to switch from ETF’s to mutual funds. [...]