Archive for the ‘ETFs’ Category


More ETFs Now Paying Monthly

June 28, 2010

Both iShares and Claymore have announced that several of the their ETFs will start paying distributions monthly instead of quarterly. The announcements came within five days of each other earlier this month. It’s good to see the two biggest players in the ETF market pushing each other into improving their products.

Here are the ETFs that will begin paying monthly distributions starting in July:

Claymore Equal Weight Banc & Lifeco (CEW)
Claymore 1-5 Yr Laddered Government Bond (CLF)
Claymore 1-5 Yr Laddered Corporate Bond (CBO)
Claymore Advantaged Canadian Bond (CAB)
Claymore S&P/TSX CDN Preferred Share (CPD)
Claymore Balanced Income CorePortfolio (CBD)
Claymore Balanced Growth CorePortfolio (CBN)

iShares DEX All Corporate Bond (XCB)
iShares DEX Short Term Bond (XSB)
iShares DEX Universe Bond (XBB)
iShares DEX All Government Bond (XGB)
iShares DEX Long Term Bond (XLB)
iShares U.S. IG Corporate Bond (CAD-Hedged) (XIG)
iShares U.S. High Yield Bond (CAD-Hedged) (XHY)
iShares Dow Jones Canada Select Dividend (XDV)
iShares S&P/TSX Capped REIT (XRE)
iShares S&P/TSX Capped Financials (XFN)
iShares S&P/TSX Income Trust (XTR)

The press releases from both Claymore and iShares say they made this change because investment income is becoming more important to Canadians. It’s true that the new monthly schedule will improve cash flow for people who are drawing down their nest egg.

However, the new schedule may be a disadvantage for small investors who are trying to grow their portfolios with dividend reinvestment plans, DRIPs. (Many discount brokers offer this service with Canadian ETFs.) Because only full shares can be purchased with a DRIP, small investors may find that monthly distributions are smaller than the cost of a single share.

For example, suppose an ETF trading at $30 currently pays a quarterly distribution of about 1%. That would mean you’d need 100 shares in the fund — about $3,000 — to receive enough to purchase a single share with a DRIP. When the fund switches to a monthly distributions, each payout will fall to 0.33%. That means investors will need to hold about $9,000 in the fund to receive a distribution large enough to buy one share. Anyone holding less than that will receive all of their distributions in cash.


Should You Use Index Funds or ETFs?

June 25, 2010

This week I got an email from a reader who is in the process of firing her advisor and becoming a Couch Potato. “I have decided it’s time to take matters into my own hands,” wrote Sarah. “I have $25,000 in mutual funds in my RRSP with my current adviser. I want to create a Couch Potato portfolio with ETFs, but I’m a little intimidated. I don’t even know how to set up a brokerage account.”

I surprised Sarah with my response: I suggested that she not open a discount brokerage account, and that she forget about ETFs for now. That’s because $25,000 is not enough to make ETFs efficient—index mutual funds are a much better option. The trading commissions Sarah would pay to buy and sell ETFs would outweigh the benefit of the lower annual fees. In fact, index mutual funds beat ETFs for most small portfolios.

I recently wrote an article in MoneySense about this issue, but I wasn’t able to go into detail about the math. Doing the calculations is important, though: choosing the wrong option can cost you a lot of money. If you’re considering your first Couch Potato portfolio and you’re not sure whether to use index funds or ETFs, here’s how to figure it out:

1. Determine the total MER of each portfolio option.

In general, ETFs have lower annual fees than index mutual funds, but the gap isn’t necessarily large, especially if you’re comparing ETFs to TD’s e-Series mutual funds. To determine the total MER of a portfolio, multiply the annual fee of each individual fund by the percentage you’ve allocated to that fund, then add them all up. For example, here are the calculations for two versions of the Global Couch Potato portfolio:

Index mutual fund % MER Weighted MER
TD Canadian Index – e 20% 0.31% 0.2 × 0.31 = 0.06%
TD US Index – e 20% 0.48% 0.2 × 0.48 = 0.10%
TD International Index – e 20% 0.50% 0.2 × 0.50 = 0.10%
TD Canadian Bond Index – e 40% 0.48% 0.4 × 0.48 = 0.19%
Total MER for portfolio
Exchange-traded fund % MER Weighted MER
iShares S&P/TSX Composite (XIC) 20% 0.25% 0.2 × 0.25 = 0.05%
iShares S&P 500 (XSP) 20% 0.24% 0.2 × 0.24 = 0.05%
iShares MSCI EAFE (XIN) 20% 0.49% 0.2 × 0.49 + 0.05%
iShares DEX Universe Bond (XBB) 40% 0.30% 0.4 × 0.30 = 0.12%
Total MER for portfolio 0.32%

If you’re investing in only these four asset classes, the MERs are not dramatically different. The iShares version has an edge of just 0.13%.

2. Multiply the total MER by the value of your portfolio.

This step will determine your annual cost in dollar terms. We’ll use Sarah’s $25,000 portfolio value to make the comparison:

$25,000 × 0.45% with TD e-Series Funds = $112.50
$25,000 × 0.32% with iShares ETFs = $80

Turns out the difference in MERs works out to only $32.50 a year on Sarah’s portfolio. Fractions of a percent don’t add up to much in small portfolios. Had Sarah been investing $200,000, the difference between the two options would have been $260 a year and more of a concern.

3. Determine how many ETF trades you’d make annually.

At a minimum, count on making one trade per ETF each year. (If you make an annual lump-sum contribution and rebalance the portfolio at the same time, that’s as efficient as you can get.) Multiply the number of trades by the commission charged by your brokerage. For example:

4 trades with big-bank brokerage at $28.95 = $115.80
4 trades with low-cost brokerage at $9.95 = $39.80

4. Add the cost of the MER and the cost of the trades.

You need to consider both the annual MER and the trading commissions to determine the overall cost of your portfolio. Let’s compare the different versions of the Global Couch Potato portfolio at $25,000:

MER in Trades Cost of
MER dollars per year trading Total
TD e-Series Funds 0.45% $112.50 0 $0 $112.50
iShares ETFs @ $28.95 0.32% $80 4 $115.80 $195.80
iShares ETFs @ $9.95 0.32% $80 4 $39.80 $119.80

You’ll notice that for a $25,000 account, the total cost of maintaining the portfolio is less with the TD e-Series funds, despite the lower management fees of the ETFs. It’s a lot lower compared with the $28.95 trades, and even a few bucks less with super-cheap $9.95 trades.

5. Find the break-even point for the two options.

As your portfolio grows in size, the dollar cost of the MER goes up, but the cost of trades remains the same. That’s why ETFs are more cost-efficient in large portfolios. The trick is to find the break-even point. If your portfolio is more the break-even point, use the ETFs. If it’s lower, use the index mutual funds.

Here’s an illustration that assumes you’re comparing an ETF portfolio with a total MER that  is half that of comparable mutual funds, and that you’re making eight trades per year. In this case, let’s use a portfolio value of $75,000:

MER in Trades Cost of
MER dollars per year trading Total
Index mutual funds 0.60% $450 0 $0 $450
ETFs @ $28.95/trade 0.30% $225 8 $231.60 $456.60
ETFs @ $9.95 trade 0.30% $225 8 $79.60 $304.60

When comparing index funds with ETFs at a big-bank brokerage, $75,000 turns out to be the break-even point: the price difference between the two options is less than $7. (With the low-cost brokerage option, the break-even point is about $27,000, at which point the annual cost of the ETFs and index funds in this example is about $161.)

Keep the cost differences in perspective: in the above example, the low-cost brokerage would save you about $145 over the mutual funds, or 0.19% of a $75,000 portfolio. Those small savings come at the cost of flexibility: you can’t make monthly contributions with ETFs (unless you use Claymore’s PACC plan), and your dividends sit in cash until your annual rebalancing date.

While ETFs dominate almost every discussion of index investing (I’m guilty here, too), the fact is they are not cost-efficient for small portfolios. In Sarah’s case, at $28.95 per trade, her portfolio would have to be $86,000 before iShares ETFs were less expensive than TD e-Series Funds (assuming four trades per year). At $9.95 per trade, she would need only $35,000 to make ETFs cheaper. However, she would also be unable to make monthly contributions to each fund, something she does with her current RRSP.

There’s another factor to consider here: Sarah was nervous about even opening a discount brokerage account. With an ETF portfolio, she would need to be comfortable making her own trades, which is intimidating for many inexperienced investors. A couple of errors when entering orders would instantly wipe out any potential cost advantage of ETFs. And when investing makes you nervous, you’re liable to abandon your strategy, which is just about the worst thing you can do as a Couch Potato.


Not All Indexes Are Created Equal

June 18, 2010

In yesterday’s post I looked at the recently launched BMO Equal Weight REITs Index ETF (ZRE), which invests in Canadian real estate investment trusts. The new ETF is going head-to-head with the  iShares S&P/TSX Capped REIT Index Fund (XRE), which until now had no competition in this space. The big difference between the two funds is that ZRE is equal-weighted, while XRE uses traditional cap-weighting. So, which strategy is superior?

There’s no question that cap-weighted indexes have a flaw: because they are heavily influenced by each stock’s current share price, they give greater weight to overvalued companies and less to undervalued ones. That makes them prone to bubbles: for example, when the price of Internet stocks rose to absurd heights in the 1990s, technology companies dominated the S&P 500, even though some of these had never actually made any money. Meanwhile, fundamentally sound but undervalued companies made up a smaller and smaller portion of the index. We all know what happened next.

In recent years, a number of index providers have looked for ways to avoid this Achilles heel of cap-weighting. Perhaps the best-known “price-neutral” strategy is fundamental weighting, which is based on a company’s dividends, free cash flow, total sales and book value. This is the strategy Claymore uses in its most popular equity ETFs.

Another alternative strategy is equal weighting, or assigning the same fixed allocation to every stock in the index. A number of BMO’s new ETFs use this strategy, including ZRE, which includes 17 real estate investment trusts, each of which makes up about 6% of the fund’s holdings. In contrast, the cap-weighted iShares fund assigns 25% to its largest holding (RioCan) and less than 4% to its smallest.

Many commentators seem to take it for granted that XRE’s top-heavy index is a problem. But my first reaction is that we don’t apply that logic to other indexes. If you buy a cap-weighted Canadian equity index fund, you’re investing 30% of your money in the financial sector and just 3% in consumer staples. A European index fund has about 32% of its holdings in the United Kingdom and 2% in Finland. That simply reflects the economic reality, and few people would argue that we should weight sectors or countries equally.

By the same logic, if RioCan represents 25% of the REIT economy in Canada, why should it not represent a similar amount of the index? RioCan’s market cap is almost $4.8 billion, compared with Artis REIT’s $480 million. Why is it a sound strategy to invest equal amounts in both companies (as BMO’s REIT fund does) when one is ten times larger?

In some ways, criticizing an index for overweighting large companies is like suggesting that Canadian democracy is problematic because Ontario’s voters have more influence than Prince Edward Island’s. In fact, I’d make the opposite argument: by giving all the premiers an “equal weighted” position at First Ministers’ conferences, the 140,000 residents of PEI have a representation that is way out of proportion. This kind of distortion occurs in the Rydex S&P Equal Weight ETF (RSP), which holds all the companies in the S&P 500 and assigns each one a weight of 0.2%. In this index, Exxon Mobil has the same influence as Office Depot, even though the former is a hundred times larger.

If traditional indexes give too much weight to large or overvalued companies, equal-weight indexes are biased toward small-cap stocks, sometimes dramatically. They also overweight sectors that are made up of many small companies (like consumer discretionary) and underweight those dominated by a few large players (like utilities and energy). If you believe in efficient markets — and if you don’t, you’re not an index investor — then equal weighting is hard to justify as an investment strategy.

There are practical considerations that work against equal weighting, too, at least in theory. Daily price changes constantly cause the stocks in the index to deviate from their target weights. That can mean either large tracking errors or frequent rebalancing, leading to higher expenses and capital gains taxes.

OK, time for a deep breath. Despite its flaws, I don’t think the equal weighting strategy is nearly as problematic in ZRE as it is in more broadly based funds. First, an index fund dominated by one or two sectors, or by one or two countries, is not as vulnerable as a fund dominated by a single company. Barring Armageddon, an entire sector or country can’t go to zero. But a company sure can. Nortel once made up more than 30% of the S&P/TSX Composite and is now a penny stock—that’s the reason the iShares S&P/TSX Capped Composite Index Fund (XIC) no longer allows any stock to make up more than 10% of the index. If RioCan were to implode, holders of XRE would be dramatically affected, while investors in ZRE would have much more protection.

Second, there’s a big difference between a fund with 11 stocks (like XRE) and one with 500. The academic literature suggests that a portfolio needs to contain at least 30 names or so before company-specific risk is minimized. I don’t think equal weighting makes sense for the S&P 500, where no single company represents more than 3% by cap weight. But when an index has fewer than a dozen stocks and one of them is hugely dominant, that’s a different story.

The potentially higher cost of equal weighting isn’t likely to be a problem for BMO’s REIT fund either. According to its prospectus, ZRE will be rebalanced just twice a year, and with 17 stocks, that’s not going to be expensive. Its management fee (0.55%) is also the same as its iShares competitor. By contrast, Rydex charges 0.40% for RSP, about four times more than cap-weighted S&P 500 ETFs.

So, what’s my verdict on ZRE? I’m warming up to it. While I am always suspicious of new products that claim to improve on cap-weighting (most have more to do with marketing than sound investment principles), I think equal weighting may well be a superior way to invest in a sector with a small number of companies. I haven’t switched from XRE yet, but I may do so the next time I rebalance my portfolio.

[Congratulations to reader Len, who won the draw for a copy of Keith Matthews’ book, The Empowered Investor. Thanks to everyone who commented on last week’s series of posts, and to Keith for donating the book.]


New Kid on the Real Estate Block

June 17, 2010

It looks like BMO has finally made a splash in the ETF market. Most of the bank’s family of exchange-traded funds, launched about a year ago, either duplicated existing products from iShares or focused on exotic asset classes. But they’ve changed that with the launch of BMO Equal Weight REITs Index ETF (ZRE) last month. This new fund tracks an important asset class — real estate — and does so with a strategy that may be superior to its competition.

Until the launch of BMO’s fund last month, the iShares S&P/TSX Capped REIT Index Fund (XRE) was the only exchange-traded fund tracking the Canadian real estate sector. With almost a billion dollars in assets, it’s a category killer. But perhaps not for long.

Let’s compare the two funds to get a better understanding of how they differ. First we’ll take a closer look at the index that XRE tracks. The S&P/TSX Capped REIT Index is a subset of the S&P/TSX Composite. That means that if a REIT is not part of the S&P/TSX Composite, it can’t be included in XRE. That explains why there are only 11 REITs in the iShares ETF, even though there are more than 11 publicly traded real estate investment trusts in Canada.

The S&P/TSX Capped REIT Index is capitalization-weighted, meaning that  companies occupy a share of the index proportional to their size (as measured by the current price of a share multiplied by the number or shares outstanding). As a result, RioCan, the largest REIT in the country, makes up a whopping 25% of XRE, which is the maximum allowable. (The word “Capped” in the index’s name refers to the rule that no single security can represent more than 25%.) Indeed, the index is extremely top-heavy: the largest three holdings comprise half the ETF’s holdings.

Now let’s look at BMO’s new fund. This ETF tracks the Dow Jones Canada Select Equal Weight REIT Index. The companies in this index do not need to be part of the S&P/TSX Composite Index. As result, BMO’s fund includes 17 securities, six more than XRE. More importantly, however, the Dow Jones index is not capitalization-weighted. It’s equal weighted, meaning that every REIT is given the same weight in the index (100% / 17 = 5.9%) regardless of market cap.

Many commentators on this blog and others have argued that the equal weighting strategy is inherently superior, because it doesn’t concentrate the fund’s holdings on a small number of securities. That assessment may be valid, but as with any investment decision, it needs to be considered carefully. Capitalization-weighted indexes are not perfect, but they have endured for decades because they are based on fundamentally sound principles. In tomorrow’s post I’ll look at the pros and cons of equal weighted indexes and consider whether they truly are a better way to invest.

Disclosure: I currently own XRE in my own portfolio.


Under the Hood: BMO Real Return Bond

May 30, 2010

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The fund: BMO Real Return Bond Index ETF (ZRR)

The index: The fund tracks the DEX RRB Non Agency Bond Index, which consists of inflation-linked bonds issued by the Government of Canada. It seems to have been created specifically for this ETF.

The cost: The ETF’s management fee is 0.25%. As with other BMO funds, the actual MER will be higher because it includes GST/HST and some other expenses.

The details: This brand-new ETF (it started trading on Wednesday, May 26) holds five real-return bonds issued by the federal government, each making up about 16% to 23% of the fund’s assets.

Real-return bonds — or Treasury Inflation-Protected Securities (TIPS), as they’re called in the US — are an important asset class, and some financial experts recommend them as a core holding.

Both the principal and the interest payments of real-return bonds are tied to the Consumer Price Index, so they go up with inflation. Here’s an illustration of how this might work, courtesy of Bylo Selhi:

On a $1,000 bond, if the coupon interest rate is 3% and inflation is 1% after six months, the principal is adjusted to $1,010. You then receive a semi-annual interest payment of $15.15. If inflation rises to 3% by year end, the principal is adjusted to $1,030. You then receive another interest payment of $15.45. Assuming similar inflation over 10 years, you will receive $351.64 in interest payments while the principal will have risen to $1,343.92.

Real-return bonds typically have long durations: the maturity dates of the five in this ETF range from 2021 to 2041. Since real-return bonds were introduced in 1992, the average annual return has been 8.2%, which falls between that of short-term (6.6%) and long-term bonds (9.5%) over the same period.

The alternatives: Real-return bonds are an under-served asset class: until ZRR was launched, the iShares Real Return Bond Index Fund (XRB) was the only ETF of its kind in Canada. There are only two no-load mutual funds devoted to them — TD’s Real Return Bond Fund and Phillips Hager & North’s Inflation-Linked Bond Fund — and both are actively managed.

ZRR has undercut its iShares competitor in price — XRB charges 0.35% — although we’ll have to wait for the first Management Report of Fund Performance to learn what its all-in cost will be. TD’s mutual fund charges an onerous 1.42%; PH&N’s has a super-low fee of 0.53%, but brokers may require a minimum investment of $5,000.

What’s most interesting is that all of these funds have very similar holdings. The reason is simple: there just aren’t many real-return bonds to choose from. The federal government has just five issues, all of which are held by BMO’s fund. These five also also make up 86% of XRB, 60% of TD’s fund, and 80% of Phillips Hager & North’s. The only other significant issuers of real-return bonds are Ontario, Quebec and Manitoba, and provincial governments aren’t included in the index ZRR tracks.

The bottom line: It’s too early to pass judgment on ZRR: it will take at least a year to see if it’s able to keep its expenses down and track its index closely. But if it performs well, it will be an attractive alternative to iShares’ XRB, which currently holds over $594 million in assets. Given the extremely limited inventory of real-return bonds, performance of funds in this asset class really comes down to who can keep their costs lowest.

If you’re considering this new ETF, first look through the prospectus.

Disclosure: I do not own ZRR in my own portfolio. I have a small position in TD’s Real Return Bond Fund (too small to make an ETF cost-effective).


ShareOwner: A Better Way to Buy ETFs? Part 2

May 27, 2010

Last week’s post was an overview of Canadian ShareOwner Investments, a service that allows clients to buy stocks and ETFs using an innovative trading platform. Investors can place an order to purchase multiple securities for a single $40 commission, and the trades are implemented according to a fixed monthly schedule. Uniquely, ShareOwner also allows investors to hold fractional shares and automatically reinvests all distributions.

Now let’s consider whether ShareOwner offers good value for Couch Potato investors with all-ETF portfolios. My thanks to reader Steve, who recently opened account with ShareOwner and gave me his impressions of its strengths and weaknesses, and to those who shared their own experiences in the comments section of the previous post.

The Advantages

  • ShareOwner lets investors assemble and maintain a diversified ETF portfolio with much lower trading costs than big-bank discount brokers that charge $29 per trade. First, the service allows you to make individual ETF purchases for $9.95, the same as low-cost brokerages like Questrade and QTrade. Where you can potentially save much more is by buying multiple ETFs for a single $40 commission. (As one commenter pointed out, however, you still need to pay attention to your overall trading costs. A $1,000 order spread across eight ETFs works out to a commission of $5 per fund, which sounds cheap. But a $40 commission on a $1,000 purchase is 4%, which is not a cost-efficient trade at all.)
  • The ability to hold fractional shares allows investors to buy in smaller, rounder amounts, making asset allocation easy and dividend reinvestment more efficient. ShareOwner will reinvest whatever dividend amount you receive, even if it’s enough to buy only a tiny fraction of one share (up to four decimal places).This is especially useful for ETFs that have high share prices and low yields. For example, the SPDR S&P 500 ETF (SPY) trades at over $100 and yields less than 2%, so you’d need more than $20,000 to receive a quarterly dividend large enough to pay for one full share.
  • The strict monthly trading schedule forces investors to stick to a disciplined strategy, which is crucial for Couch Potatoes. As Steve explained: “It seems to me that one is less likely to make spontaneous purchases. It’s like ING Direct, which I use for short-term savings: for some reason, the fact that the money is a day or two away makes me less likely to go to it. Similarly, ShareOwner is forced discipline, because you cannot time the market.”

The Disadvantages

  • ShareOwner has high annual fees for RRSPs ($79) and TFSAs ($50), regardless of account size. Only unregistered accounts have no annual fee. Most discount brokers waive their account fees once you hit a certain threshold: QTrade, for example, charges an RRSP fee only if accounts are under $15,000, while Questrade charges no account fees at all fees.
  • The cost of selling ETFs is higher than buying them — $9.95 per security, with no co-op discounts — and withdrawals cost $12 to $48, depending on the type of account. For long-term investors who don’t trade often, this isn’t a huge disadvantage. However, when rebalancing your portfolio with ShareOwner it would be much more cost-effective to add new money, rather than selling off the top performing funds. See the full schedule of fees here.

The Verdict

ShareOwner is an innovative service that can offer a lot of value to buy-and-hold investors. But I think it’s better suited to stock pickers than to Couch Potatoes for several reasons:

  • For RRSP investors, the $79 annual fee may wash out any cost advantage over low-cost discount brokers. And it makes little sense to pay $50 annually for a TFSA, especially since the contribution limit is just $5,000 a year. If you’re investing in a taxable account, however, you can make a much better case for using ShareOwner.
  • Couch Potatoes with less than $30,000 are often better off staying away from ETFs altogether. Index mutual funds already let you buy fixed-dollar amounts and reinvest distributions, plus you can add or withdraw money with no fees. My first Index Investor column in the current issue of MoneySense discusses this idea in detail.
  • ShareOwner’s DRIP feature is of limited value for Couch Potatoes. Most discount brokers already offer DRIPs on Canadian exchange-traded funds, albeit for full shares only. In any case, there’s an argument to made for taking distributions in cash and using that new money when you rebalance.
  • The real savings from ShareOwner’s co-op trades only come if you’re making a lot of purchases in each order. A stock picker, for example, might have a portfolio have 30 to 40 dividend-paying stocks, which would be very expensive to buy individually. But a Couch Potato portfolio typically includes only four to eight ETFs. In theory, the platform would work well for something like my Über-Tuber portfolio, which includes ten ETFs. But ShareOwner doesn’t offer a wide enough selection of products to build this kind of sophisticated ETF portfolio.

If any readers are using ShareOwner to maintain an all-ETF portfolio, please post a comment and let us know your thoughts.


ShareOwner: A Better Way to Buy ETFs? Part 1

May 20, 2010

Several weeks ago, a reader named Steve wrote to me about using Canadian ShareOwner Investments to build a Couch Potato portfolio with exchange-traded funds. I had no experience with this service, so I asked Steve to report back after he did his research, and he kindly followed up. In today’s post I’ll describe how ShareOwner works, and early next week I’ll pass along Steve’s assessment of its pros and cons.

ShareOwner Investments (formerly the Canadian Shareowner’s Association) is a dealer that allows investors to trade stocks and ETFs in both registered and taxable accounts. But unlike a discount brokerage, ShareOwner uses a dollar-based trading platform that enables you to buy and sell small amounts, and to own fractional shares. For example, you can place an order for $500 worth of a stock or an ETF, and if it’s trading at $27.36, you’d receive 18.2749 shares. ShareOwner also reinvests all dividends including partial shares, something traditional DRIPs don’t allow.

The other important feature of ShareOwner’s platform is that you can place a single order covering as many securities as you want. If you have $1,000 to invest, you can order $50 worth of 20 different stocks or ETFs, all for a single trading commission of $40.

ShareOwner can do this because it makes large “co-op purchases” of the stocks and ETFs in its inventory at specified times. (The schedule is not based on market timing: orders for ABC Company might be executed every Thursday, for example, while orders for XYZ Company might take place on the fourth Wednesday of every month.) Once a month, each client receives his or her allotment of these bulk purchases, including fractional shares down to four decimal points. In this sense, ShareOwner makes buying stocks more like buying mutual funds.

The platform was designed as a cheap and easy way to build a diversified stock portfolio, but it’s also ideal for ETF investors. One drawback of ETFs has always been that it is cost-prohibitive to trade small amounts. Commissions make monthly contributions — and even annual rebalancing — too expensive for many investors. Imagine that you’ve decided to set up a Couch Potato portfolio with the following asset allocation:

20%     Canadian equities
20%     US equities
20%     International equities
5%       Emerging markets equities
5%       Real estate
20%     Short-term bonds
10%     Real-return bonds

Building an ETF portfolio like this through a big-bank discount brokerage would incur seven trading commissions totaling more than $200. I use the rule of thumb that a trading commission should not exceed 1% of the purchase or sale. So if you’re paying $29 commissions, your trades should be at least $3,000 or so. The cost of adding money and rebalancing, even once a year, is so high that you’d likely be better off using index mutual funds unless your account is at least $60,000. (If you’re paying $9.95 per trade you could pull it off with less, but it would still be unwieldy.)

Now consider the same portfolio in a ShareOwner account. You’d build it by placing one $40 order that includes all seven ETFs. Using my 1% rule, you’d need only $4,000 to make this cost-effective. After subtracting the $40 fee you’d have $3,960, which you’d allocate like this:

Dollar Current Number
amount price of shares
iShares S&P/TSX Composite (XIC) 20% $792 17.96 44.0980
SPDR S&P 500 (SPY) 20% $792 107.55 7.3640
Vanguard Europe Pacific (VEA) 20% $792 29.03 27.2821
Vanguard Emerging Markets (VWO) 5% $198 36.38 5.4426
iShares S&P/TSX Capped REIT (XRE) 5% $198 11.56 17.1280
iShares DEX Short-Term Bond (XSB) 20% $792 28.97 27.3386
iShares DEX Real-Return Bond (XRB) 10% $396 20.79 19.0476

Once or twice a year (or as often as you want) you can add a few thousand dollars and rebalance the whole portfolio in one fell swoop. In the meantime, all of your distributions get automatically reinvested rather than lying around in cash.

ShareOwner is a unique service that promises to make buying ETFs even easier and cheaper for small investors. In my next post, we’ll look at its strengths and weaknesses so you can decide whether it would be the right vehicle for your Couch Potato portfolio. Until then, If you’ve used ShareOwner, please let us know your thoughts in the comment section.

Dollar Current Number
Amount Price of shares
iShares Canadian Composite (XIC) 20% $792 17.96 44.0980
SPDR S&P 500 (SPY) 20% $792 107.55 7.3640
Vanguard Europe Pacific (VEA) 20% $792 29.03 27.2821
Vanguard Emerging Markets (VWO) 5% $198 36.38 5.4426
iShares S&P/TSX Capped REIT Sector (XRE) 5% $198 11.56 17.1280
iShares DEX Short-Term Bond (XSB) 20% $792 28.97 27.3386
iShares DEX Real-Return Bond (XRB) 10% $396 20.79 19.0476