Floatation cost reduction strategies?

[schmidtjas]

I put away $125 per week for my RRSP (6500 per year) and at tax time I tend to purchase on top of that another $5000. Currently the 125$ is added every week to three different mutual funds. I'm moving away from this and into either index mutual funds or index ETFs. My question is geared towards the ETFs. I would likely have four ETFs in my portfolio, at least initially.

It seems like if I rely on ETFs that I would be better off saving a big chunk and investing all at once to minimize the floatation costs of purchasing new shares. The mutual fund index funds have a higher MER (in Canada I'm finding the MER of mutual fund index funds tends to range between 0.5% to 1.0% except for TD, whereas the ETFs like iShares tend to be half of that), but seem to have no floatation costs. In the end intuitively it seems like the MER is more important of the two, but if I were to buy ETFs every week the floatation cost per trade would kill me! So what I'm trying to figure out is a good strategy to use for ETFs. What do people on here who buy shares for the long haul do? Once a year? Once a quarter?

BTW I'm really glad I stumbled onto this forum, I feel like I've learned so much in the year or so that I've been a member! Of course each time I learn something new I find that I realize how much more I need to learn!

 

[DJRR]

Where is the money held and how are your options to purchase? Can you use US based brokerages?

There are 3 cheap options that I know of in the US

1. Fidelity now charges $0 commission for ishare ETF trades
2. Sharebuilder will let you do 20 trades a month for $20
3. Wells Fargo will let you have 25 free trades if you keep $25,000 in a money market account

Don't know if any of these options are available to you. Otherwise I would try to keep the transactions cost to less than 2%. That would give you a 4 year break even. If I could not do better than that I would hold onto the money and invest it whenever I hit that %.

 

[schmidtjas]

I live in Canada and I'll be using an "investor's edge" RRSP account with CIBC. I'm not sure exactly yet what the trade fees are, but I'm pretty sure they aren't going to be as low as an online only discount broker. I chose them mainly for convenience, I know I'm going to be eating a higher cost than an online-only broker. I'll be getting the transaction fee schedule on Monday. I think they have a package that can have fees as low as $6 per trade, but you have to use them all (50 I think?) to make that worth it. From research on the net without the package it'll probably cost 25 per trade, so pretty steep. I have enough to qualify for no annual fees through them, which I don't qualify for some other banks from what I can see.

So the rule of thumb then is to have floatation costs between 1%-2%? For me I might only be able to trade once per year then

 

[schmidtjas]

From the article:
Canadian Online Discount Stock Brokerage Comparison | Million Dollar Journey

I don't think they are a ton of way cheaper options for me, except maybe QuestTrade. Most seem to be 19,99 or more unless you do a lot of trades or have 50K+ assets.

 

[DJRR]

So the rule of thumb then is to have floatation costs between 1%-2%? For me I might only be able to trade once per year then

That was my suggestion. If you save .5% per year with an ETF and you pay 5% to trade it would take you 10 years to break even. I think you are better off with the mutual funds until you can get the transaction costs down to a reasonable level.

 

[schmidtjas]

Here's a thought I had:

Purchase ETFs with the 40K I have now, then use 0.5ish MER index funds (about the best I can get in Canada with CIBC) for new purchases. Once the balance in an index fund reaches like 5k, sell it and buy ETF equivalent. Does that make sense? For what I'm planning for allocation that would take probably two years for a particular index fund.

 

[DJRR]

Here's a thought I had:

Purchase ETFs with the 40K I have now, then use 0.5ish MER index funds (about the best I can get in Canada with CIBC) for new purchases. Once the balance in an index fund reaches like 5k, sell it and buy ETF equivalent. Does that make sense? For what I'm planning for allocation that would take probably two years for a particular index fund.

I think that is a great idea. You can purchase the 4 ETFs you are interested in for $10,000 each and your trade fee would be $25 or less. That would be only .25% and you would start saving right away

Then you can build up in index funds until you have enough to transfer economically to the ETFs.