Under the Hood: TD Balanced Index Fund

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The fund: TD Balanced Index (TDB965)

The index: This index mutual fund tracks a blended benchmark made up of 48% DEX Universe Bond Index (Canadian bonds), 32% S&P/TSX Composite (Canadian equities), 9% S&P 500 (US equities), 9% MSCI EAFE (European/Pacific stocks), 2% DEX 91 Day T-Bill Index.

The cost: The fund’s MER is 0.83%; as of July 2010, the HST makes the total cost of the fund 0.94%.

The details: The TD Balanced Index fund is an all-in-one portfolio that holds several other TD index funds. It holds half of its assets in fixed income and half in equities. Here’s the breakdown as of August 31:

Both the US and international funds are hedged to Canadian dollars to remove currency risk.

The fund has a minimum investment of just $100, and subsequent contributions must also be at least $100. This makes it accessible for investors who have only a small amount to invest and would like to set up a simple index portfolio with just one fund.

Here is the fund’s performance since 2000 (the 2010 figure is as of August 31):

The fund’s annualized return for the decade 2000–09 was 3.79%. That doesn’t sound like much, but it’s good enough to rank in the second quartile (that is, above average for Canadian balanced funds) according to Morningstar. GlobeFund gives the fund four out of five stars compared with its peers over the last 10 years.

SEDAR only has reports going back to 2005, and since that time the fund’s tracking error has averaged –1%, or 17 basis points higher than its MER.

The alternatives: There are only two other balanced index funds available: the CIBC Balanced Index Fund, with an MER of 1.09%, and the ING Streetwise Balanced Fund, with an MER of 1%.

Only a small number of actively managed balanced funds can compete on fees. The notable ones are the Mawer Canadian Balanced Retirement Savings Fund (MER 1.01%), the McLean Budden Balanced Growth Fund (MER 0.95%), the Phillips Hager & North Balanced Fund (MER 0.86%). These funds are available through discount brokerages, but they require minimum investments of $5,000 to $10,000.

All five of these competing funds have a strategy of 60% equities, compared with 50% in TD’s fund. All but the PH&N fund also divide the equity portion more or less equally between Canada, the US and overseas. (The PH&N and TD funds have a much higher weighting to Canada.) Keep these differences in mind when comparing the funds’ performance over the past 10 years. Any fund with a lower allocation to US and international stocks will have performed better during the dreadful 2000–09 period:

ING’s Streetwise Balanced Fund has only a two-year track record: it returned –14.1% in 2008 and 10.7% in 2009, considerably worse than the TD fund.

The bottom line: The TD Balanced Index is a low-cost, well diversified fund with a decent, though not outstanding track record. Clearly index investors who want exposure to these four asset classes can do better by assembling the portfolio themselves, either with TD’s own e-Series funds or with ETFs.

However, the fund is a good option for beginning indexers who have a very small sum to invest but want to begin making a regular monthly contribution. With just one preauthorized plan to set up and no rebalancing necessary, this would be a convenient way to get started.

This fund might also help ETF investors who are looking for a way to use dollar-cost averaging. If you have an all-ETF portfolio, you likely don’t want to add money to your positions more than once or twice a year in order to keep trading costs to a minimum. But of you’re making monthly contributions to your account, you may have several thousand dollars lying around in cash for much of the year. (This idea was discussed earlier this month in Dollar-Cost Averaging With ETFs: Part 1 and Part 2.)

By setting up a preauthorized contribution to this fund, you’ll be maintaining exposure to both the stock and bond markets throughout the year. Then you can withdraw money from the fund whenever necessary to rebalance your ETFs.

Disclosure: I do not own the TD Balanced Index fund in my own portfolio.