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Mutual Fund News

Enlightened portfolios for the frugal investor

rcarrick@globeandmail.com

There is no one right path to being a fee-conscious investor. Exchange-traded funds get a lot attention because of their low fees, but you can invest frugally in mutual funds and index mutual funds as well. In this edition of the Portfolio Strategy column, we'll prove this in three simple model portfolios designed to be cheap to buy, cheap to own and low maintenance as well.

These portfolios have several different potential uses:

You're a pure do-it-yourself investor who wants a cheap, manageable portfolio;

You have a fee-based adviser who charges an advice fee of 1 to 1.5 per cent and you're looking for cheap investments to put in your portfolio (fund fees are in addition to the advice fee);

You hire a fee-only planner to build a financial plan that you use to guide your own investing.

Let's look at three paths to cheap investing:

1. The low-cost mutual fund portfolio

Funds were selected for use here on the basis of blending low fees and solid returns.

These are not necessarily "the best" low-fee funds - just examples of what's available for cost-conscious investors who understand that it's an over-simplification to dismiss all mutual funds as being overpriced.

The funds selected here pay little or nothing to advisers or dealers who sell them - that's a major reason why they're so comparatively inexpensive to own. If you have a fee-based account with an adviser, make sure funds like these have been considered for your portfolio.

Products from big fund companies don't typically appear on lists like these, so you might be wondering what gives with RBC U.S. Dividend Series D. RBC Asset Management offers a low-fee version of its products to do-it-yourself investors, and it may be the only large, high-profile firm to do so. Unfortunately, RBC's D-series funds aren't widely available. You need an account at RBC Direct Investing to buy them, and you need a minimum $10,000.

That's typical of low-cost funds - upfront minimum investment requirements are between $5,000 to $10,000 to limit administrative costs of serving tiny accounts.

2. The index fund portfolio

Index funds - they track major stock and bond indexes - are sold mainly by the big banks and as a general rule they're no great bargain when it comes to fees. One notable exception is the e-series of index funds from Toronto-Dominion Bank. You can assemble a balanced portfolio of e-series TD index funds and pay well less than half a percentage point in fees. The best way to set up an e-series account is through TD's own online brokerage firm, TD Waterhouse. You can also buy them over the Internet through TD Asset Management, but they're not sold in TD branches. The selection of funds is modest, but there's just enough to build the sort of portfolio that can carry you for decades while keeping fees to a minimum.

A higher cost but still reasonably priced family of index funds is available through National Bank of Canada's Altamira lineup. One plus here is that you can buy these funds through most dealers.

One of the best things about index mutual funds, TD's e-series included, is that it costs nothing to buy or sell them.

3. The ETF portfolio

The goal in building this portfolio was to squeeze fees as low as possible while enhancing diversification by investing in widely recognized, broad-based indexes with as many constituent stocks and bonds as possible. In a couple of cases, this meant forgoing the cheapest ETF to target a more varied index. For example, the lowest cost Canadian stock market ETF is the Horizons BetaPro S&P/TSX 60 Index ETF (HXT), with an MER of about 0.08 per cent. That's a bit less than half the cost of the ETF used here, the BMO S&P/TSX Capped Composite Index ETF. Why pay more? Because the BMO fund (formerly the BMO Dow Jones Canada Titans 60 Index ETF) tracks a much broader index - the S&P/TSX Capped Composite. About 246 stocks are included here, compared to 60 for HXT. By the way, the term "capped" in the BMO ETF's name means that no stock accounts for more than 10 per cent of the underlying index.

HXT has a couple of other features that may affect its attractiveness to less experienced investors. One is that it uses derivatives to generate its return, and that, in turn, creates a little extra risk. Also, HXT doesn't pay dividends - instead, its share price reflects both share price gains and dividend payments.

There are a few bond ETFs that give you exposure to both government and corporate bonds in a single package, and the cost is comparable to dividing the two categories into separate ETFs. So why buy two funds when one might do? The reason is to get a more even balance between government bonds, which have a high level of vulnerability to rising rates, and corporate bonds, which will drop somewhat less in price in a rising-rate world. The two ETFs used here add an additional level of defence here by focusing on short-term bonds.

It's important to note that we've been looking here at the cost of owning investments. ETFs are traded like stocks, which means you have to pay brokerage commissions when buying and selling. Two low-cost brokerage choices for ETF investors are Virtual Brokers, where you can pay as little as 99 cents per trade, and Questrade, where you pay as little as $4.95.

For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).

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CHEAP, CHEAPER, CHEAPEST

These model portfolios show how it's possible to build low-cost portfolios with mutual funds, index funds and exchange-traded funds:

MUTUAL FUNDS

Weighting....Fund............................................MER (%)

40%..............Bonds..........................................0.61

......................PH&N Bond-D

30%..............Canadian stocks........................1.36

......................Beutel Goodman Canadian Equity D

15%..............U.S. stocks..................................1.21

......................RBC U.S. Dividend Series D

15%...............International stocks....................1.54

.......................Mawer International Equity

.......................MER for the whole portfolio:......1.06

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INDEX FUNDS

Weighting....Fund............................................MER (%)

40%..............Bonds.........................................0.51

......................TD Canadian Bond Index e

30%..............Canadian stocks.......................0.33

......................TD Canadian Index e

15%..............U.S. stocks.................................0.35

......................TD U.S. Index e

15%..............International stocks....................0.51

......................TD International Index e

MER for the whole portfolio: 0.43

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ETF'S

Weighting....Fund.....................................................................................MER (%)

20%..............Bonds

......................iShares 1-5 Year Laddered Gov't Bond Index (CLF)......0.17

20%..............iShares 1-5 Year Laddered Gov't Bond Index (CLF)......0.28

30%..............Canadian stocks

......................BMO S&P/TSX Capped Comp. Index (ZCN)..................0.17

15%..............U.S. stocks

......................Vanguard MSCI U.S. Broad Market Index (VUS)............0.19

15%...............International stocks

......................Vanguard MSCI EAFE Index (VEF)..................................0.48

MER for the whole portfolio: 0.24

THE GLOBE AND MAIL

SOURCE: GLOBEINVESTOR.COM; COMPANY WEBSITES

© 2007 The Globe and Mail. All rights reserved.

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