If you are looking at TD’s different fund suites, you may have come across the bank’s e-Series funds as well as their ETFs. It’s important to understand the differences between the two.
In terms of assets, mutual funds continue to experience net redemptions while Canadian ETFs have grown. ETF growth has increased from $1.85 billion in the month of September to $3.35 billion in the month of October.
In this comparison, I will compare ETFs and TD’s e-Series mutual funds over the following categories:
- Fees
- Performance
- Tax efficiency
- Downside protection
- Trading
I will cover the TD e-Series vs ETFs below and go through some of the key differentiating features.
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ETFs vs Mutual Funds: the Basics
Two popular types of pooled investments are ETFs and mutual funds, which are accessible to Canadians. How each of the two funds is structured leads to many of the differences between the two, which I will cover below.
ETFs were initially created with the original purpose of being passive investments. A passive ETF follows a basket of investments (typically an index), which is determined by a set of rules and aims to replicate the performance.
Most mutual funds take an active approach to investing. This means that the portfolio management team is using their expertise and skill to try and outperform a specific benchmark.
A mutual fund’s ability to beat a benchmark (and by extension, passive strategies like index ETFs) is largely impacted by the portfolio management team’s abilities. Although some mutual funds may have excellent performance track records (which is fairly rare), most tend to underperform the broader benchmarks that they attempt to outperform.
TD e-Series Mutual Funds
TD’s e-Series mutual funds are similar to a low-cost index ETF. E-Series mutual funds are passive mutual funds looking to replicate an index that are offered at much lower costs than actively-managed mutual funds.
e-Series mutual funds are offered at no trading commissions, allow systematic purchase plans, and come with a minimum required holding period (otherwise a fee is charged).
TD e-Series vs ETFs: Fees
One of the most important categories for comparing both ETFs and mutual funds is fees. Since TD’s e-Series mutual funds are passive mutual funds, they are offered at a significantly lower management expense ratio than most actively-managed mutual funds.
Despite being significantly more inexpensive than active funds, TD’s e-Series mutual funds are still significantly more expensive than comparable low-cost passive ETFs.
As an example, TD’s e-Series Canadian index mutual fund is currently offered at a management expense ratio of 0.28% while TD’s Canadian equity index ETF is offered at a management expense ratio of 0.05%.
Since passive mutual funds like TD’s e-Series offer minimal value relative to passive ETFs, it does not really make sense to pay several times the fees for an almost identical product. Over long periods of time, savings from lower fees can compound significantly, leading to much higher investment returns.
Fees verdict – When it comes to fees, passive ETFs are still significantly more inexpensive than TD’s e-Series mutual funds, making ETFs the clear winner in this category.
TD e-Series vs ETFs: Performance
Performance is another key consideration when investing in mutual funds and ETFs.
When it comes to TD’s e-Series mutual funds versus passive ETFs (especially relative to TD’s passive ETFs), both fund types have a similar investment mandate. Major differences in performance will come down to differences in fees.
TD’s passive index ETFs are actually some of the lowest-cost index ETFs available to Canadians. Since the ETFs are many times more inexpensive than their mutual fund counterparts (both tracking the same indices), the ETFs outperform due to their lower fees.
Other passive ETFs that track identical (or even highly similar) mandates to TD’s e-Series mutual fund suite are also very likely to be offered at a lower management expense ratio. This will again cause them to have stronger performance most of the time.
Performance verdict – Since both TD’s e-Series mutual funds as well as index ETFs have passive investment mandates (and generally track similar or identical indices), ETFs will typically outperform due to their lower fees, making them the winner in this category.
TD e-Series vs ETFs: Tax Efficiency
The tax efficiency of an investment is critical to consider, especially if taxes have a large impact on your overall financial picture.
ETFs are considered to be more tax-efficient than their mutual fund counterparts, especially if the mutual funds are actively managed.
In this case, since both TD’s e-Series mutual funds and index ETFs are passively managed, they should both have similar (and low) turnover.
A key difference is that if a mutual fund receives a large redemption request (an investor wishing to sell their units), the fund must liquidate securities to generate cash for meeting the redemption. An ETF investor that wishes to sell their position can sell it on the open market, like any stock, without implications for the ETF.
Tax efficiency verdict – When it comes to tax efficiency, ETFs are marginally more tax efficient than TD’s e-Series mutual funds, making them the winner in this category.
TD e-Series vs ETFs: Downside Protection
If you are an emotional investor, investing through difficult market conditions can be very stressful. Equity ETFs and mutual funds can drop in value by quite a bit during bear markets.
Passively managed ETFs that are looking to replicate the performance of a benchmark index will drop in value by the same amount as the benchmark. They do not have any risk-mitigating strategies in place.
Since TD’s e-Series mutual funds are also passively managed and track various indices, they also lack specific risk-mitigating strategies. When it comes to actively-managed mutual funds, seasoned portfolio managers may be able to mitigate risks by making tactical portfolio adjustments.
Both TD’s e-Series mutual funds and generic passive index ETFs have similar mandates, making this category fairly uneventful.
Downside protection – when it comes to downside protection, both passive index ETFs and TD’s e-Series mutual funds both lack any risk-mitigating strategies, resulting in a draw in this category.
TD e-Series vs ETFs: Trading
The difference in structure between ETFs and mutual funds causes them to trade in very different manners. Well-established ETFs are a lot more flexible in terms of their liquidity and ability to trade in most cases.
Mutual funds do not trade like stocks on an exchange. Mutual funds trade once per day, typically after market close, which is executed at the mutual fund’s new net asset value. A mutual fund’s new net asset value is typically calculated once markets are closed. Mutual funds also sometimes have minimum investment requirements.
ETFs trade exactly like stocks and are listed on an exchange. ETF units can be bought or sold at their respective ask and bid prices anytime during the trading day (when markets are open). The minimum investment for an ETF is usually determined by its unit price.
Investors or traders are also able to short ETFs since they trade like a stock.
Trading verdict – Since ETF units trade like regular stocks throughout the trading day, the fund structure is easier to trade and offers investors more flexibility. ETFs are the superior structure out of the two, making them the winner in this category.
Frequently Asked Questions
Is there a TD e-Series S&P 500 Fund?
TD does offer an e-Series mutual fund that tracks a benchmark index that is identical to the S&P 500 Index – the Solactive US Large Cap Index. This is the TD US Index Fund and is sold under the fund code TDB902.
TD d-Series vs e-Series
TD’s d-series mutual funds are available for self-directed investors. They come with lower fees than TD’s a-Series mutual funds (which charge investors an embedded commission designed to be paid to an advisor). d-Series mutual funds are typically actively-managed funds.
TD’s e-Series mutual funds are passively-managed index mutual funds.
TD e-Series List
A current list of TD’s e-Series mutual funds can be found below:
- TD Canadian Index Fund
- TD US Index Fund
- TD Dow Jones Industrial Average Index Fund
- TD US Index Currency Neutral Fund
- TD International Index Currency Neutral Fund
- TD European Index Fund
- TD Japanese Index Fund
- TD NASDAQ Index Fund
- TD Canadian Bond Index Fund
- TD International Index Fund
- TD Managed Index Income Portfolio
- TD Managed Index Income & Moderate Growth Portfolio
- TD Managed Index Balanced Growth Portfolio
- TD Managed Index Aggressive Growth Portfolio
- TD Managed Index Maximum Equity Growth Portfolio
Our Final Verdict
Although TD’s e-Series mutual funds are a great improvement (mainly in terms of fees) over regular mutual funds, ETFs still handily outperform as a fund type across almost all metrics, making ETFs the overall winner in my comparison.
If you are restricted to only investing in mutual funds, for whatever reason, TD’s e-Series mutual funds are a great alternative to most actively-managed mutual funds, which can be several times more expensive.
If you are a beginner investor, make sure to read my guide on how to start investing in Canada to avoid some common mistakes that are frequently made.
