The different indices may track slightly different allocations of bonds and stocks, but given the number of holdings is into the hundreds, the impact on TD e-Series fund performance should be minimal after the change. Presumably, the goal is to increase performance net of fees by bringing costs down and holding ETFs that track low-cost indices instead of buying individual bonds and stocks directly.
Even after the fee reduction, the cost for e-Series funds may seem steep to ETF investors, and are obviously higher than even TD’s own ETF fees. But index mutual funds do have their place.
Couch Potato investors with small accounts have long been directed towards e-Series funds over ETFs as an effective solution for accounts under $50,000, unless your discount brokerage offers commission-free ETFs.
TD e-Series funds are not subject to commissions on purchase and sale, other than a potential early redemption fee of 2% if selling within 30 days. This may make index mutual funds a better solution than ETFs if you are doing frequent, small, pre-authorized contributions, or if you are retired and decumulating your Couch Potato portfolio. Discount brokerage commissions on ETF purchases generally range from as little as nothing, up to $10 per trade.
Some accounts may be better suited to mutual funds over ETFs, just like some investors may be better suited to working with an investment advisor than being a do-it-yourself (DIY) investor. Everyone is different.
ETFs are also subject to differences between the bid and ask price, which may cause your purchase to be slightly more expensive or your sale to be slightly less lucrative than a mutual fund, which always trades at net asset value (NAV).
The tax implications of the pending TD e-Series switch should be minimal. The underlying e-Series fund investments will be transferred on a tax-deferred basis to the ETFs they are acquiring. TD estimates approximately 3% to 8% turnover of the funds’ existing holdings as the S&P and Solactive indices hold slightly different allocations of investments. This may trigger some capital gains, albeit minimal, and only for those who own TD e-Series funds in taxable non-registered or corporate investment accounts (RRSPs* and TFSAs* being tax-deferred and tax-free, respectively).
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