No Fees Please! Create Your Own 'Mini-ETF'

Includes: BMO, BNS, CM, RY, TD
by: Mike Nadel


ETFs might not be attractive for those who want to choose their own stocks and avoid fees.

An investor can create a mini-ETF in practically any sector.

I did exactly that with five Canadian banks and have outperformed the ETF.

Control freak that I am, I want to choose my own business partners. And cheapskate that I am, I don't want to pay an annual fee just for the right to hold companies in my brokerage account. So exchange-traded funds are not for me.

By buying an ETF, an investor can acquire a bundle of companies within a particular sector. Although similar to mutual funds, ETFs trade like stocks, with share prices that fluctuate throughout the day.

Unfortunately, ETFs charge management fees. I want my gains going to me, not to a fund group.

Besides, there isn't an ETF out there that includes only the companies I want to own. I don't particularly enjoy the hoppiness of India Pale Ales. Why would I buy a 24-bottle variety pack of beer that includes 16 IPAs?

So when I decided back in January that I wanted some Canadian banks in my portfolio, I passed on the BMO S&P/TSX Equal Weight Banks Index ETF - which invests equally in Canada's six largest financial institutions and trades on the Toronto stock exchange under the ticker ZEB.

I thought I could do better constructing my own "mini-ETF", and I was right.

The purpose of this article isn't to boast about my incredible ETF-creating skills - because I do not claim to have extraordinary talent in that regard. My goal here is to show how simple building a mini-ETF is.

Banking On Canada - The Mini-ETF Way

While conducting my due diligence, I learned that Canada's large banks are ranked among the world's strongest and have paid dividends without interruption since the 19th century. Even as many U.S. banks severely slashed or eliminated dividends during the Great Recession, their Canadian counterparts kept taking care of shareholders.

That sounded good to me, so I bought fairly even amounts of the country's "Big Five": Toronto-Dominion Bank (NYSE:TD), Royal Bank of Canada (NYSE:RY), Bank of Nova Scotia (NYSE:BNS), Bank of Montreal (NYSE:BMO) and Canadian Imperial Bank of Commerce (NYSE:CM). (I skipped the sixth-largest, National Bank of Canada (OTCPK:NTIOF), which is included in ZEB but is far smaller than the others.)

I said "fairly even amounts" because I did not divide my investment of $12,324 equally. Instead, I allocated money in a way that would generate $100 in annual income from each bank based upon the stated dividends on the Jan. 14 purchase date.

Reinvesting dividends, as I do with every company I own, the value of that five-company mini-ETF has grown to $14,431 - a 17.1% gain in six months.

Had I bought $12,324 worth of ZEB on Jan. 14, my gain (with dividends reinvested) would have been 14.5% to $14,107. Not shabby, but not 17.1%.



Shares - Value


Shares - Value

BMO 35.0 - $2,290 35.7 - $2,709 18.3%
BNS 43.0 - $2,503 43.4 - $2,947 17.7%
CM 27.0 - $2,178 27.3 - $2,507 15.1%
RY 40.0 - $2,596 40.8 - $3,036 16.9%
TD 62.0 - $2,757 62.6 - $3,232 17.2%
TOTALS $12,324 $14,431 17.1%
ZEB 631.0 - $12,324 641.5 - $14,107 14.5%

(Note: All values in this table are in U.S. dollars.)

Meanwhile, thanks to dividend hikes announced by the companies and to increased share counts via dripping, my annual projected income payout is now $528. Had I bought ZEB instead, my projected annual dividend payment would have been about $437.

Oh, and this is not a theoretical exercise. My mini-ETF actually exists within my Roth IRA. The gains are real (or at least as real as any paper gains are). The dividends already have been paid and reinvested.

One major reason for my outperformance: ZEB charges .55% annually in fees. At the current value of my mini-ETF, that's $79. As my investment grows, that number will increase year after year after year.

Another reason: ZEB's 3% yield is less than even the lowest yielder in my mini-ETF (TD at 3.4%).

But I faced brokerage commissions, right? Absolutely - 10 whole bucks' worth, as I pay only $2 per trade with Vanguard. Even if I had to pay $10 apiece, as some online brokerages charge, it still would have cost considerably less than one year's worth of fees for ZEB.

Importantly, I am a long-term investor and an extremely reluctant seller. These five banks combine to form one "full satellite position" in my portfolio, and I plan to hold them and harvest their dividends for many years. Those who trade in and out of stocks might not benefit from forming such a mini-ETF because commissions would add up quickly.

Do It Yourself!

This investment in Canadian banks is just one example of the kind of mini-ETF an individual can create on his or her own.

For example: You like the idea of owning a group of utilities but you don't want all 30 companies in the Utilities Select Sector SPDR ETF (NYSEARCA:XLU). You also want to avoid ETF management fees, and you seek a higher yield than XLU provides. So you can choose the four or six or eight or however many utilities you prefer and build your own mini-ETF, weighting the positions as you see fit.

The same method can be used regardless of sector. Maybe you want five retailers, four automobile manufacturers or eight foreign telecoms. Whatever you fancy, you can build your own mini-ETF.

Hey, if an Average Mike like me can do it, so can anybody else.

Disclosure: The author is long BMO, BNS, CM, RY, TD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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