TD E-Series Changes

August 28th, 2019 by Potato

You may have received a proxy form in the mail if you’re a TD e-series holder, asking you to for a change in the investment objective of the funds. In case you haven’t seen it, the information circular is on SEDAR.

The main points are that the e-series funds will change the index provider to Solactive, and instead of holding the underlying stocks/bonds themselves (and derivatives), will be able to hold the corresponding ETF. This will come with a 5 bp reduction in management fees.

To break that down a bit, fund companies have to pay a licensing fee to the index creators when they have a fund that tracks that index — they can’t just free-load like I would if I wanted to re-create the S&P500 with an insane number of trades myself. Solactive is an index provider that’s reportedly cheaper to use than S&P/MSCI/FTSE, so the move helps TD save some money. Moreover, it’s the index provider that TD’s ETFs use, which lets the e-series funds start to use those to share some of the work of fund management.

I don’t believe their indexes are different enough from the ones we’re familiar with to worry about it or to have substantially different expected returns. Unfortunately, their site isn’t quite as handy as the other index providers (or Vanguard/iShares) for figuring out what’s in there. Fortunately, TD’s ETF pages list that, for example here’s the Canadian equity index page. It has slightly more holdings (270 vs 239 in the S&P TSX Composite), and some minor differences in sector weightings (e.g. 5.9% vs 7.6% in Technology, though most are closer than that). The US one looks very similar to the S&P500 (even having 500 holdings), as does the new international one to the MSCI EAFE.

The changes are subject to a vote by unitholders, but I don’t foresee that failing.

Remember that MER is backward-looking, so it will take a full year before the new lower management fee is reflected in the MER listed in the fund facts (a year after this is implemented, which may be a few months yet — the vote is late September).

4 Responses to “TD E-Series Changes”

  1. Jan Muir Says:

    So why wouldn’t I own the ETF instead of the mutual fund? Presumably there won’t be any capital gains on the transition.

  2. Lance Says:

    Will this mean an increase to the MER? I see a 5 bps decrease, but if the underlying assets are ETFs, don’t they carry their own charges, that I assume are greater than 5 bps?

  3. Potato Says:

    Over in his round-up post, Michael James asks a good question about whether this will lead to capital gains for non-registered investors. The relevant paragraph from the offering doc:

    “If TD Canadian Index Fund were to shift some or all of its assets from the current investment in underlying Canadian equities to TD Canadian Equity Index ETF, this may result in TD Canadian Index Fund realizing capital gains. While the intention is to transition TD Canadian Index Fund’s holdings to TD Canadian Equity Index ETF, no immediate shift will be made if there is a material taxable impact to unitholders. In the case of material tax consequences, the transition to TD Canadian Equity Index ETF will be done in such a way, while using up any available tax loss carry forwards, to limit the tax impact to unitholders. This may take several years.”

    Jan: same reason as before, because to own an equivalent ETF would mean going out and buying an ETF, which means placing more complicated orders over an exchange, paying commission (or moving to a brokerage with low/no commission options), and not being able to automate purchases. Those benefits of the e-series will stay the same.

    Lance: The standard for funds-within-funds is to list the total MER (i.e., to only charge MERs once), though I didn’t see it spelled out explicitly in the circular.

  4. Potato Says:

    Canadian Couch Potato (no relation) has also put up a post on the e-series changes, and he went to the trouble of digging into the past few years’ performance of the ETFs that use Solative indices to show that they’re pretty comparable to the existing suite.

    Dan also has more solid news on TD e-series being more widely available at other discount brokerages (I had heard on Reddit that it might be the case, but found they were on CIBC but not on Questrade, and I hadn’t had a chance to check iTrade yet).

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