Andrew Hallam is the index investor for Strategy Lab. Globe Unlimited subscribers can view his model portfolio here and read more in the series online here.
Sesame Street's Cookie Monster is a harmless blue chap. He just can't resist stuffing his face full of cookies. Most mutual fund companies are much the same. But they're not devouring chocolate-chip delights. They're gobbling other people's money. This is great for financial services companies. But investors get the shaft.
Most active funds cost 2 per cent or more each year. If a fund manager generates 4 per cent before fees, investors paying hidden fees of 2 per cent would give up 50 per cent of the fund's profits. That goes straight into the fee monster's mouth.
That's why many investors flock to index funds and ETFs. Vanguard's FTSE Canada Index ETF (VCE), for example, has a management expense ratio of just 0.06 per cent a year. Canadians in most actively managed funds pay 30 times more. But there's a catch. Most index fund investors are like climbers without a guide. Those buying ETFs or TD's e-Series index funds have to pay extra if they want an adviser to manage their portfolio. The cost advantage could disappear after paying such fees.
That's why TD's Investor Series Index Funds could be the bank's best-kept secret. Most cost less than 1 per cent a year. They aren't cheap, by index fund standards. But they cost much less than the bank's actively managed funds. TD's financial advisers could also build and manage such a portfolio – for free.
There's just one thing to remember. Banks make a lot of money from charging high fees. That's why they prefer clients who never negotiate mortgage rates. They prefer actively managed mutual fund investors for much the same reason. If you want a portfolio of TD's index funds, you'll have to stand your ground.
"Index funds are riskier," you might hear them say. But that isn't true. Risk is determined by asset allocation. "But we can pick active funds for you that will beat index funds," is what they might say next. That isn't true either. Winning funds during one time period often underperform during the next.
"But an active manager can save you money when markets fall. They can eke out money when the markets go sideways." This isn't likely either. The past 10 years were the perfect testing ground. Markets jumped around but they made up little ground.
Canadian stocks rose from 2005 to 2007. They got pummelled in 2008. They gained ground again until 2010, before getting whacked in 2011. Between 2012 and 2014, they rose. But in 2015 and (so far) in 2016, Canadian stocks got hammered. The past decade's roller-coaster would have been an active manager's dream – if the sales story had merit.
TD has four actively managed large cap Canadian stock market funds. On average, they earned a compound return of 2.44 per cent a year over the past 10 years. TD's Canadian Index Fund Investor Series Fund did better. It averaged a compound annual return of 2.81 per cent.
TD's U.S. Large Cap actively managed funds averaged a compound annual return of 7.3 per cent. But that wasn't good enough to beat their three non-hedged U.S. Investor Series Indexes. They averaged a compound return of 7.99 per cent a year.
It's important to compare apples to apples. That's why we can't compare TD's Investor Series International Index with an actively managed equivalent. No actively managed equivalent exists. But we can put TD's actively managed European and Japanese stock market funds to the test.
TD's Japanese Growth Fund lost an average of 1.14 per cent a year. Its Investor Series Japanese Index gained 0.72 per cent a year.
TD's European Equity Fund averaged 3.3 per cent a year. Its European Investor Series Index gained 3.4 per cent.
TD's five actively managed Canadian balanced funds also fell short. They averaged a compound return of 3.48 per cent a year. TD's Balanced Index Fund averaged 4.25 per cent.
The bond story is much the same. TD's three actively managed Canadian bond funds averaged 3.47 per cent per year. TD's Investor Series Bond Index gained an average of 4.25 per cent per year.
It is possible to use one of the bank's financial advisers and invest with index funds. But remember to stand firm. Avoid their actively managed products. Like the Cookie Monster, the bank is hungry for those fees. Don't be naive enough to settle for the crumbs.
| Fund | 10 Year Annual Average Compound Returns % | Management Expense Ratio % |
|---|---|---|
| TD’s Canadian Large Cap Equity Funds | ||
| Canadian Blue Chip Equity | 2.34% | 1.61% |
| Canadian Equity Fund I | 2.47% | 2.17% |
| Canadian Value Fund I | 0.82% | 2.16% |
| TD Dividend Growth Fund I | 4.16% | 2.02% |
| Actively Managed Fund Average | 2.44% | 1.99% |
| TD Canadian Index Fund-I | 2.81% | 0.88% |
| TD’s U.S. Large Cap Equity Funds | ||
| Epoch U.S. Large Cap Value Fund-I | 5.71% | 2.38% |
| TD U.S. Blue Chip Equity Fund-I | 8.04% | 2.54% |
| TD U.S. Quantitative Equity Fund-I | 8.15% | 1.59% |
| Actively Managed Fund Average | 7.30% | 2.17% |
| TD Dow Jones Industrial Average Index Fund-I | 7.82% | 0.89% |
| TD Nasdaq Index Fund-I | 8.38% | 1.02% |
| TD U.S. Index-I | 7.77% | 0.55% |
| Index Fund Average | 7.99% | 0.82% |
| TD European Equity | ||
| Epoch European Equity Fund-I | 3.30% | 2.55% |
| TD European Index Fund-I | 3.40% | 1.04% |
| TD Japanese Equity | ||
| TD Japanese Growth Fund-I | -1.14% | 2.85% |
| TD Japanese Index Fund-I | 0.72% | 1.06% |
| Balanced Funds | ||
| TD Balanced Growth Fund-I | 3.08% | 2.22% |
| TD Balanced Income-I | 2.28% | 2.23% |
| TD Diversified Monthly Income Fund-I | 3.45% | 2.30% |
| TD Dividend Income Fund-I | 3.90% | 2.03% |
| TD Monthly Income Fund-I | 4.70% | 1.47% |
| Actively Managed Fund Average | 3.48% | 2.05% |
| TD Balanced Index Fund-I | 4.25% | 0.90% |
| Canadian Fixed Income (Bond) Funds | ||
| TD Canadian Bond Fund-I | 4.28% | 1.11% |
| TD Real Return Bond Fund-I | 3.13% | 1.49% |
| TD Short Term Bond Fund-I | 3% | 1.11% |
| Actively Managed Fund Average | 3.47% | 1.23% |
| TD Canadian Bond Index Fund-I | 4.25% | 0.83% |