This was a reader question from "Earl" as to when he should switch his retirement portfolio from mutual funds to ETF's. Here is the question straight from the horses mouth:

I currently have some registered investments that are held with Sunlife and was wanting to switch to an ETF where MER fees would be lower and to realize a better rate of return by invest in a market, rather then the decisions of a mutual fund manager.

I'm also concerned about the up-front fees for purchasing ETF's from your typical brokerage. I want to make use of dollar cost averaging but feel that these cost might remove all benefit of dollar cost averaging. Is there a certain amount of ETF units you should purchase before it becomes useful?

Many will argue that ETF's are the only way to go, and that mutual funds are the way of the past. In my opinion, this is only true if you have an established portfolio with a considerable amount of assets. Index mutual funds (especially TD-E funds) are still a great low fee way to get into the equity market for someone just starting their account with a lower balance. On top of that, mutual funds enable you to invest monthly with smaller amounts without paying any commission.

However, there does come a point where an ETF's low MER does become cheaper than an equivalent index fund. But when is that? Lets assume that the choice is between either investing in index mutual funds or iShare ETF's. A typical index mutual fund MER is around 1% where the iShare ETF's MER ranges from 0.25% 0.17% to 0.50%.

Based on $25,000 Portfolio

Mutual Funds

MER(1%): $250/year

Total: $250/year


MER (avg 0.40%): $100/year

Annual re-balancing commission w/ 5 transactions: 5 x $29 = $145 Total: $250/year From this example, it seems that $25,000 in assets is the tipping point of whether or not it's better to go with ETF's or Mutual funds. However, this ratio will change if a discount brokerage like Questrade is used ($5 or $10/trade). Every situation is different, and you'll have to evaluate accordingly.

As a general rule of thumb, if you are just starting your portfolio, buying index or low MER mutual funds may be your best bet as you can add to your portfolio with small increments. Once your account size gets large enough, then you should consider switching from Mutual Funds to ETF's.

As a side note, if you are going to go with Index Mutual funds, there are few (if any) that are cheaper than the TD-E funds which have a low MER that ranges from 0.31% to 0.5%. The other exception is CIBC who offer a rebate off the MER of their index funds if you have a larger account.

Disclaimer: The articles posted on Million Dollar Journey are the opinion of the author and should not be considered professional financial advice. Please consult a financial professional before using any information provided by this site. 


  1. Q Cash on May 17, 2007 at 9:12 am


    Quick question on ETFs. If I pick an ETF that mirrors the TSE/S&P 60 for example, and there is a 0.5% MER. Does the fund still issue distributions of the dividends to the fund holders? Are those distributions considered dividends for tax calculation?


  2. FrugalTrader on May 17, 2007 at 9:58 am

    Q: The iUnits TSX Large cap 60 index ETF is called XIU and only charges a MER of 0.17%. They distribute their “dividends” quarterly, and capital gains at the end of year. You can read more about this ETF here:
    Or more about Canadian based ETF’s here:

  3. Q Cash on May 17, 2007 at 11:12 am

    Thanks FT

  4. on May 17, 2007 at 1:28 pm

    Another gotcha to consider when planning your switch is capital gain tax outside of non-registered. Ideally you want to defer taxes as long as possible.

    Capital gain tax on the switch is a cost attributed to index funds, and should lower the tipping point.

  5. This and That on May 17, 2007 at 10:06 pm

    […] Million Dollar Journey stole of a bit of my thunder with his post on when ETF investing makes sense over index mutual funds. I’ll still publish my post because I have some additional thoughts. […]

  6. Jim daddy on May 18, 2007 at 11:37 am

    I have about 50k in Td Efunds. So according to this I should switch over. I still like the fact I can contribute small amounts to my account. What would you do with the cash you have saved up for a large contribution later on for ETF’s? High intrest savings account?

  7. FrugalTrader on May 18, 2007 at 11:46 am

    Jim: If you have an average MER of 0.40% with your TD efunds, then you are paying about $50k x 0.40% = $200/year. You might save a few bucks if you switch to ETF’s with Questrade, but not a whole lot. If I were you, I would stick with the efunds. In my example, I used a 1% MER in my calculations.

  8. Jim daddy on May 18, 2007 at 11:57 am

    I have 4 funds ranging from .31-.48. If I add them together I have a total MER of 1.6. Too much?

  9. FrugalTrader on May 18, 2007 at 12:06 pm

    Jim: Say that you average 0.40% in your funds, with 4 funds of 10k each. Each fund will owe 0.40%/year which will equate to $40/year, so your total portfolio will have a fee of $40×4=$160/year. $160 on a $40k porfolio = 0.40%.

    I’m just trying to show that you don’t add together your MER’s. If you average 0.40% between all your MERs, that’s your total MER from your portfolio value. The MER’s are not added together.

  10. Jim daddy on May 18, 2007 at 12:11 pm

    ah gotcha! Thanks for clearing that up. So when would you change over to ETF’s? 100k?

  11. FrugalTrader on May 18, 2007 at 12:24 pm

    Jim: In your case, it’s a tough call as you like to dollar cost average (buy a little at a time). Mutual fund index funds have a huge advantage in that respect as there are no transaction fees. In a lot of cases, the average MER for ETF’s are very close to that of the TD-E funds. The biggest advantage of ETF’s in your scenario is that you can specialize in certain sectors if that suits your investor/style. Otherwise, i’d stick with the efunds.

  12. on May 18, 2007 at 1:25 pm

    Again, another culprit to consider is capital gain tax.

    If you have $5,000 worth of embedded capital gain, selling the index funds, and buying ETFs will set you back $5,000 x 30% x 50% = $750 in capital gain tax. (Assuming 30% tax bracket)

    Of course, the longer you wait for the switch, the bigger the tax will likely become.

  13. FrugalTrader on May 18, 2007 at 1:28 pm

    Just to clarify, the tax issue is only a consideration for non-registered portfolios.

  14. sam on May 18, 2007 at 2:51 pm

    you could still do dollar cost average with ETF on

    i do them….but i am not sure if they are as sound a bank brokerage(eg. TD waterhouse…)

    i hold my investments long term…so i don’t bother about initial brokerage cost..because i would save on MER year after year..

    this is the point most miss while doing comparisons..they just take MER saved on the year of investments for calculations..not the savings obtained year after year..

  15. sam on May 18, 2007 at 3:26 pm

    reg TD-e funds..
    make sure you buy only e-funds..
    when we went to TD Bank to open the account..the personnel was not even aware what e-funds where..& he has been in the bank for many years..he then called somewhere else & then he realised about e-funds..but he still could not open efund account..we opened a regular account there..went home printed a form for e-conversion..mailed them & got into e-funds..

  16. FrugalTrader on May 18, 2007 at 3:31 pm

    Shareowner is a great way to go if you want to do dollar cost averaging with smaller amounts. Do they charge any fees?

  17. Jim daddy on May 18, 2007 at 3:33 pm

    Yes, you do all your Efund business online.

  18. sam on May 18, 2007 at 5:24 pm

    share owner charge $9 for every purchase lot(irrespective of no of shares..)

    so in a order if you purchase 1 lot of
    share/etf -$9
    2 different lots-$18
    3 different lots- $27
    4 & above- $36

  19. Jim daddy on May 18, 2007 at 6:51 pm

    There are also these fees associated with locked in accounts:

    RSP Administration Fee
    RSP Administration Fee (per year or part thereof) $59
    LIRA/Locked-In RSP (per year or part thereof) $100

  20. trevor on June 11, 2007 at 11:51 pm

    i’m doing a smith maneuver where i take readvancable home equity loc and put it into dividend funds. my question is about the dividend funds. the dividend has been 15% for a long time. would it be better to take the full 15% dividend and put it back into mortgage or take an 8% div. and buy more stock with the rest in case it goes down, i’ll have protected a bit of my investment.

  21. FrugalTrader on June 12, 2007 at 6:58 am

    Trevor, that all depends on your mortgage rate and what you feel will be your investment return going forward. Also, when you say that you div fund is returning 15%, is that in dividend payments only? If so, there is probably a ROC portion of the return, which actually reduces the amount of your deductible investment loan. You should consider switching to a fund that pays dividends ONLY.

    With that said, what is your mortgage rate? If it’s 5%, paying down the mortgage will give you a guaranteed return of around 7.5% (depending on your tax bracket). So the question to ask yourself, do you want to go with the 7.5% guaranteed return, or bet that the dividend fund will beat 7.5%?

  22. Should I buy a Mutual Fund or an ETF? on February 8, 2008 at 4:56 pm

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  24. Kitty on March 8, 2008 at 2:33 pm

    It looks to me like buying ETFs with low MERs isn’t that great a cost saver because most of us still need to hire professional advisers to help us set up our portfolios


  25. Nikolai on July 23, 2009 at 11:44 pm


    I have just noticed that Claymore now offers PACC, this allows you do buy the ETFs without paying the broker commissions – on regular basics. However, the minimum frequency seems to be once a month which is still OK, but I would rather do it every two weeks for a smaller amount.

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