Blessed by the Potato

Here is me in the Spring of 2020:

Now after a long shut-down and with lots of people wearing masks and respecting social distancing, things were getting a bit closer to normal. It was a very tough call, but Blueberry is physically back at school. It’s been a crazy year, with lots of things upended. It’s been especially hard for kids: no birthday parties, no play dates, and months of being way too close to the parents. No funerals for dead grandparents. No trips to the science centre, and even the outdoor playgrounds were taped off through almost all the days of decent weather. We didn’t have a big Thanksgiving get-together (not that kids care about that one), and Christmas will likely have to change a bit (opening gifts should work fine with my siblings together if we wear our masks, though we may retreat to our own homes for separate dinners).

But thankfully, Halloween will happen more-or-less normally (maybe they can’t rove the streets in packs or have Halloween parties, but trick-or-treating is good, right?). Or it briefly seemed that way, until the local health authorities decided to recommend against it in Toronto.

And I’m usually all for listening to the health authorities. We have way too many people who aren’t, and we haven’t been able to join the Maritimers in the covid-free bubble because we just can’t quite get our shit together. The pejorative “mouth breather” has taken on a whole new literal meaning this year with people who only partially wear their masks (“it’s ok, I only breathe through my mouth anyway”).

But the decision against trick-or-treating isn’t one I can get behind. It’s about as safe as we can make a holiday tradition: naturally lending itself to mask-wearing, taking place outside*, very brief interactions, and with a candy chute/tongs/grab-bags lined up on the driveway, it can be even safer. And the kids need something normal this year.

It’s also hard to explain to them why trick-or-treating outside isn’t considered safe, but the kids can go to school in a still somewhat crowded classroom, people can still go inside restaurants to get take-out, and the friggin realtors are back to banging on the door every week asking if we’re interested in listing the house. So why can these other, riskier activities take place but not a super-fun, super-important holiday tradition? Do we want 2020’s November disaster to be the vengeance of the dead?

There is the argument that these other things have economic value to offset the risk — parents can’t effectively get back to work without school and child care, so the higher risk of classrooms is accepted, whereas trick-or-treating isn’t as big an economic force. Ditto for restaurants and stores and what-not (and I guess the terrible realtors going door-to-door?). And there’s a good point in there, but on the idea of risk-benefit: trick-or-treating can be made pretty darn low-risk. (The benefit side is a harder argument: there are non-economic reasons for doing things, and Halloween is the bestest most importantest holiday in the whole spooky calendar, but that’s a slippery slope to people justifying their weddings and thanksgiving dinners and spin classes.

So anyway, I don’t want to be the anarchist guy saying we should ignore the public health authorities at every turn because they sometimes make mistakes. And I don’t want to incite others towards a sugar-fueled covid anarchy… but we will be handing out (dropping down a chute) candy for any kids who want to come to our door. We even up-sized to full-sized Nestle bars ’cause we know the hit rate will be lower for the kids this year.

My one big tip is to keep the mask on the whole time: don’t pull it up and down each time there’s a knock on the door, or as you’re going up the driveway if you’re a kid or roving backup candy hauler.

* – yes, some people live in apartment/condo buildings, which could have been a more targeted message about staying safe for Halloween if you’re not outside.

Passiv is a neat tool that helps you manage your portfolio. It plugs into your Questrade account, and can send you email notifications when new money arrives in your account, and can even do one-click rebalancing of your portfolio, either by just distributing un-invested cash to the parts of your portfolio that are under-weight, or by also selling parts that are over-weight.

I should mention that they now have a referral program and I’m part of that — you can find a link over in the sidebar where the advertisey stuff goes.

So they recently put up a blog post comparing the costs of all-in-one ETFs to unbundling them and investing in the handful of underlying funds. Usually you’d also have to consider and weight the extra work and complexity that goes along with the savings of unbundling, but the pitch is that Passiv can manage the rebalancing and multiple purchases for you, so it should just come down to cost.

I’m a big fan of the all-in-one ETFs, in part because they force you to look at your portfolio as a whole, on top of the convenience factor. Even with no rebalancing to do, you can still make use of Passiv to do the purchases for you with one click, and send those emails when new money arrives in your account. And for the moment those services are free to the user.

But if you want to get the lowest possible costs, then sure, you can save a bit by investing in a set of individual ETFs. However, the comparison in the post is missing a few important factors. Yes, you will pay a slight MER premium for the convenience of an all-in-one fund. But that doesn’t mean you should automatically break them apart to seize those savings, even with Passiv to help. Also, the MER premium is a bit smaller than their post makes out — only about 8 bp.

Commission Costs

First off, the article completely ignores transaction costs. While ETFs are nearly free to buy at Questrade, you do have to pay to sell an ETF. And if you’re manually rebalancing, you may sometimes have to do that, especially once your portfolio gets large enough to be hard to rebalance from regular contributions making purchases only.

If you have 3 holdings to sell every 6 months, that’s just $30/yr in commissions, which doesn’t sound like much. But with just 8 bps of savings on the table, you’d need at least $37k invested to break-even. That same comparison also shows how little the convenience of the all-in-one funds costs for smaller portfolios — $30/yr for the convenience on a 5-figure portfolio.

Ok, that’s not a high bar, and below that point you’re almost certainly going to be able to rebalance with new cash rather than having to sell something first anyway. But still, it’s worth pointing out if you are considering using multiple ETFs.

US Funds Complication

A mistake in Passiv’s blog post is comparing a Canadian product to a mix of Canadian and American funds. For example, in saying that you can save 13 bp by breaking apart VGRO, the blog post is putting an allocation toward VTI, the American-listed ETF; similarly for breaking apart the iShares funds, the author is looking at several US-listed funds, which would be more expensive on the Canadian side (ITOT, IMEG) or have no exact analog (USIG, GOVT). But those currency exchanges are going to be tricky (and potentially costly) to handle, and those costs aren’t included in the comparison. Using a Canadian-listed fund would make for a fairer comparison. VUN, for example, rather than VTI. The Canadian versions carry MERs that are a bit higher, reducing the benefit for breaking up VGRO to just 8 bp.

What About Quantization?

Take a look at XGRO’s allocation (which I’m pulling from their post rather than double-checking with iShares myself). It has two components with just a 2% weighting, and then a 3% and 3.9% allocation. Will there be an issue trying to actually hit those small targets, especially if the underlying ETFs can only be purchased in whole units costing say $80 each when trying to invest on your own?

I thought this quantization issue might also be a factor in the decision of whether to break up all-in-one funds, particularly for smaller accounts. While I can really cherry pick and say that if you have $18k, you can’t get within 10% of a 2% weighting with a fund that costs $80 CAD (USIG for example) — 5 shares would be 2.22%, while 4 shares would be 1.78%. I don’t know how Passiv would handle that if you had your rebalancing threshold set at 10% or tighter, would it keep flipping back and forth, buying and selling a share to try to hit an unachievable target allocation? But for the most part, quantization isn’t really a real-world argument for sticking with all-in-one funds. You’re unlikely to run into any issues with it, especially if you’re willing to increase your rebalancing threshold until your portfolio grows larger.

But concerns about buying very small amounts of these funds that the all-in-one ETFs happen to use could lead to a bit of analysis paralysis: should you blindly follow what they have done, or use a 3- or 4-fund canonical portfolio instead?

Summary

I’ve been telling people how to invest in a canonical portfolio for years, and I’m a big fan of the all-in-one ETFs. If you want to save a bit of money and use separate ETFs, be my guest, especially if you have a 6-figure portfolio where the minor cost savings may be worth the extra bit of effort. If you want to use Passiv to help you do that, that’s great. But I don’t like the post’s insinuation that all-in-one funds are costing that much (by framing the extra costs as a percentage difference off a very low base cost) or are “less than ideal”. It ignores the other benefits of simplification (such as better behaviour), and it over-states the benefit by ignoring commissions and currency conversion costs.