ShareOwner: A Better Way to Buy ETFs? Part 2

Last week’s post was an overview of Canadian ShareOwner Investments, a service that allows clients to buy stocks and ETFs using an innovative trading platform. Investors can place an order to purchase multiple securities for a single $40 commission, and the trades are implemented according to a fixed monthly schedule. Uniquely, ShareOwner also allows investors to hold fractional shares and automatically reinvests all distributions.

Now let’s consider whether ShareOwner offers good value for Couch Potato investors with all-ETF portfolios. My thanks to reader Steve, who recently opened account with ShareOwner and gave me his impressions of its strengths and weaknesses, and to those who shared their own experiences in the comments section of the previous post.

The Advantages

• ShareOwner lets investors assemble and maintain a diversified ETF portfolio with much lower trading costs than big-bank discount brokers that charge $29 per trade. First, the service allows you to make individual ETF purchases for $9.95, the same as low-cost brokerages like Questrade and QTrade. Where you can potentially save much more is by buying multiple ETFs for a single $40 commission. (As one commenter pointed out, however, you still need to pay attention to your overall trading costs. A $1,000 order spread across eight ETFs works out to a commission of $5 per fund, which sounds cheap. But a $40 commission on a $1,000 purchase is 4%, which is not a cost-efficient trade at all.)

• The ability to hold fractional shares allows investors to buy in smaller, rounder amounts, making asset allocation easy and dividend reinvestment more efficient. ShareOwner will reinvest whatever dividend amount you receive, even if it’s enough to buy only a tiny fraction of one share (up to four decimal places).This is especially useful for ETFs that have high share prices and low yields. For example, the SPDR S&P 500 ETF (SPY) trades at over $100 and yields less than 2%, so you’d need more than $20,000 to receive a quarterly dividend large enough to pay for one full share.

• The strict monthly trading schedule forces investors to stick to a disciplined strategy, which is crucial for Couch Potatoes. As Steve explained: “It seems to me that one is less likely to make spontaneous purchases. It’s like ING Direct, which I use for short-term savings: for some reason, the fact that the money is a day or two away makes me less likely to go to it. Similarly, ShareOwner is forced discipline, because you cannot time the market.”

The Disadvantages

• ShareOwner has high annual fees for RRSPs ($79) and TFSAs ($50), regardless of account size. Only unregistered accounts have no annual fee. Most discount brokers waive their account fees once you hit a certain threshold: QTrade, for example, charges an RRSP fee only if accounts are under $15,000, while Questrade charges no account fees at all fees.

• The cost of selling ETFs is higher than buying them — $9.95 per security, with no co-op discounts — and withdrawals cost $12 to $48, depending on the type of account. For long-term investors who don’t trade often, this isn’t a huge disadvantage. However, when rebalancing your portfolio with ShareOwner it would be much more cost-effective to add new money, rather than selling off the top performing funds. See the full schedule of fees here.

• Perhaps the biggest knock against ShareOwner for index investors is the limited selection of ETFs. Its menu includes the most popular iShares products, but Claymore’s best funds — the Canadian Fundamental ETF (CRQ) and their two laddered bond ETFs, CLF and CBO — are noticeably absent. They offer several key Vanguard ETFs (VEA, VWO and VB), but the Total Stock Market ETF (VTI) is a major oversight. Meanwhile, you can choose a number of dubious niche ETFs, such as First Trust ISE Water (FIW), Market Vectors Nuclear Energy (NLR) and the iShares Dow Jones US Aerospace and Defense (ITA). I recognize that not every ETF investor is interested only in broad-market indexes, but their choices still seem idiosyncratic. I emailed ShareOwner to ask them to explain their logic, but got no reply. Hopefully they respond to their clients more quickly than they respond to the media. See the full list of available stocks and ETFs of fees here.

The Verdict

ShareOwner is an innovative service that can offer a lot of value to buy-and-hold investors. But I think it’s better suited to stock pickers than to Couch Potatoes for several reasons:

• For RRSP investors, the $79 annual fee may wash out any cost advantage over low-cost discount brokers. And it makes little sense to pay $50 annually for a TFSA, especially since the contribution limit is just $5,000 a year. If you’re investing in a taxable account, however, you can make a much better case for using ShareOwner.

• Couch Potatoes with less than $30,000 are often better off staying away from ETFs altogether. Index mutual funds already let you buy fixed-dollar amounts and reinvest distributions, plus you can add or withdraw money with no fees. My first Index Investor column in the current issue of MoneySense discusses this idea in detail.

• ShareOwner’s DRIP feature is of limited value for Couch Potatoes. Most discount brokers already offer DRIPs on Canadian exchange-traded funds, albeit for full shares only. In any case, there’s an argument to made for taking distributions in cash and using that new money when you rebalance.

• The real savings from ShareOwner’s co-op trades only come if you’re making a lot of purchases in each order. A stock picker, for example, might have a portfolio have 30 to 40 dividend-paying stocks, which would be very expensive to buy individually. But a Couch Potato portfolio typically includes only four to eight ETFs. In theory, the platform would work well for something like my Über-Tuber portfolio, which includes ten ETFs. But ShareOwner doesn’t offer a wide enough selection of products to build this kind of sophisticated ETF portfolio.

If any readers are using ShareOwner to maintain an all-ETF portfolio, please post a comment and let us know your thoughts.

Filed under: ETFs