Alternatives to some pricey monthly income funds

After this blogpost on my site, you can retire comfortably with less than $1 million in the bank, a few readers seemed a bit shocked by the money management fees charged by monthly income funds referenced in Gary’s article:

“Interesting “wake-up” point about fees. In the example of investing the principal of $500K in a monthly income fund, and paying $7.500 per year in fees, that’s $625 per month!!!! It would nice if that sum went into my pocket, rather than my advisor’s/the bank’s pocket. But, what is the alternative?”

Another investor rightly pointed out “most income funds don’t have any particularly special investments” so while “they do take care of some of the work for you, but there are funds that hold similar investments with much lower fees. And you can also buy many of those securities directly.

Absolutely.  Let’s take a look at some of the big bank monthly income funds and see if you see a trend.

Fund # 1 – BMO Monthly Income Fund

BMO Monthly Income Fund

 Fund # 2 – CIBC Monthly Income Fund

CIBC Monthly Income Fund

Fund # 3 – RBC Monthly Income Fund

RBC Monthly Income Fund

 Fund # 4 – Scotia Diversified Monthly Income Fund

Scotia Diversified Monthly Income Fund

Fund # 5 – TD Monthly Income Fund

TD Monthly Income Fund

What are your first impressions when you see these funds?

What holdings are the same?

What mix of stocks and bonds do you see?

Here are my quick observations:

  • The Management Expense Ratios (MERs) are all over 1%.  Using the RBC product as an example, this means a retiree with $100,000 initially invested in this product will pay about $1,200 in fees every year.  Not so bad.  However, if you hold this product in retirement for 15 years, you’ll pay over $31,000 in money management fees.
  • Most of these monthly income funds might yield between 3%-4% per year.
  • Most of these monthly income funds are made up of Canadian equities and Canadian bonds, roughly in the ratio of 40-60% equities and 30-50% bonds.  The rest of the holdings are largely an irrelevant mix of U.S. equities, mortgage-backed securities, income trusts, cash and more; irrelevant as they relate to your fund’s performance that is.


  • Canadian equities can be bought in the form of lower-cost, broad-market Exchange Traded Funds (ETFs) like:  XIC, ZCN and VCN to name a few options.  The cost is <0.20% in fees.  These Canadian equity ETFs and others yield between 2-3% per year.
  • Canadian bonds, with a mix of corporate bonds and government bonds can be bought in the form of lower-cost ETFs like:  XSB, ZAG and VAB to name a few options.  The cost is <0.25% in fees.  Many Canadian bond ETFs yield around 2-3% but the yield to maturity is lower than that.
  • You could own a “fund of funds” packaged in one ETF.  Examples include:  XTR, XEI and ZMI.  You’re going to have to stomach more risk with these ETFs but your money management fees will be lower.
  • You could own some dividend ETFs like:  DXM, CDZ, ZDV and VDY.  The problem here is a focus on dividend stocks and no fixed-income.  Again, at least your fees will be lower and you’ve solved the equity portion.

Using a couple of ETFs you can “unbundle” your monthly income fund.   This is especially true if you’re already holding a number of blue-chip dividend paying stocks for the long-run, you hold other broad-market equity products in your portfolio or you’re fortunate to have a fixed-income component such as a workplace pension or government pension.   Most diversified portfolios can be built with 4-5 ETFs and no more.  There are other income options for retirees (annuities) but that’s another post for another day.

If you’re not ready to DIY invest yet, are worried about this proposition, and you don’t own an online discount brokerage account yet, just park the ideas above for now and wait until you consult these alternatives with a financial professional.   A financial professional can re-assess if these alternatives could work for you among others.  You’re going to pay these professionals money for this work but I can assure you it will be much less than the $31,000 you’ll pay in money management fees for the next 15 years.

61 Responses to "Alternatives to some pricey monthly income funds"

  1. That $31,000 in fees could buy you a new car. It’s like a senior saying to an investment company, “Can you do all the work for me, and I’ll buy you a free car in return.”

  2. Always good to see posts comparing the funds, Mark.
    My wife’s portfolio is mostly composed of the Scotia mutual fund – and Im trying to convince her to move over to ETFs….slowly trying to educate her about the problems with the fees.


  3. Here’s where a service like Dan’s can help someone who has a large portfolio of mutual funds and needs to untangle themselves from a mess of fees and into a simple low cost portfolio of ETFs.

    1. Exactly. I think the folks at PWL Capital (and Dan Bortolotti) have a good thing going and can likely help many, many investors untangle the web of financial products they own.

  4. This is great advise. However, near the end you advise using a financial professional. I assume you mean a fee based, independent adviser. Also, good advise IF you can actually find one. For most investors (even high net worth ones), finding truly independent advise is next to impossible. Virtually all of them want to manager you money or at least set it up. A good ear and independent advice not so much. Can you suggest a source for such advice?

    1. Yes, a fee-based financial advisor, thanks for pointing that out. I’ve had a good rapport with PWL Capital in the past, here in Ottawa. They also have offices across Canada. They could be a great resource for starters.

      1. Actually, I know the Ottawa PWL folks quite well. Great people. However, they are discretionary portfolio managers at heart, not fee based advise providers. No knowing who else was around was the reason for my question.

  5. it is absolutely mind blowing how much the banks earn from their mutual funds. i am definitely going to make a move after this months distribution. new car here we come!

  6. WOW. $31K in fees is still a TON of money! That’s more than many people’s yearly salary. Like another commenter mentioned, you could get a great, brand new car for that amount. As you mentioned, a financial professional (ie advisor..) would cost money, but it would be much less than the amount of the fees, so it sounds like it would be worth it.

  7. Hi Mark
    I’m assuming you meant to write ‘these funds might return 3-4% per YEAR rather than month as you wrote above… if it is per month, show me where to sign up 😉

  8. I assume you meant to say that they yield 3-4% per year, not 3-4% per month?

    The former could be replicated at a lower cost by unbundling the monthly income funds. The latter is more challenging since it would require a strategy to wind down the portfolio.

    1. Yes, and thanks for catching that. I’ve updated the post as I meant to imply distribution yield was 3-4% per year, excluding any capital appreciation or gains from unit prices.

  9. Please do not generalize that ETFs should be preferable to mutual funds based solely on lower fees. There are several high fee actively managed mutual funds that outperform all ETFs in the same space. Before you paint all funds with the same paint brush check performance figures and practice due diligence!

    For the record, I’m a dividend growth investor. I prefer to own stocks rather than ETFs or mutual funds.

    1. Hey Bernie,

      With most assets being equal, I think ETFs are preferable to mutual funds if there is a difference in fees.

      Most of the monthly income funds I highlighted are made up of Canadian equities and Canadian bonds, roughly in the ratio of 40-60% equities and 30-50% bonds. I am simply suggesting an alternative is to “unbundle” the monthly income fund. This is especially true if you’re already holding a number of blue-chip dividend paying stocks for the long-run and you’re fortunate to have a fixed-income component such as a workplace pension or government pension.

      You are correct there are several high-fee actively managed mutual funds that outperform all ETFs in the same space but no investor can predict that performance in advance, so knowing that you’re keeping your fees lows in advance is still good practice. Thoughts Bernie?

      Thanks for your comment.

      1. Mark,

        As you stated in your article most Canadian monthly income funds are similar in their holdings whether they be mutual funds or ETFs. As funds in this space are similar in content it would be prudent to go with the lower fee fund, in this case ETFs. In my earlier comment I was referring more to funds in other sectors where active management can be an asset.

        For example in the Canadian small-Mid cap equity category a perpetual high performing mutual fund since inception in 2005 is “Sentry Small/Mid Cap Income Fund” (NCE721). The only two ETFs in this space that have been around for at least 5 years are “iShares S&P/TSX Completion Index ETF” (XMD) & “iShares S&P/TSX SmallCap Index ETF” (XCS). The Sentry mutual fund (MER 2.77%) has vastly outperformed XMD (MER 0.60%) and XCS (MER 0.60%) through all time frames. Results below (from Morningstar):

        NCE721: 1 Yr 30.24% 3 Yr 19.13% 5 Yr 24.78%
        XMD: 1 Yr 19.26% 3 Yr 5.14% 5 Yr 15.37%
        XCS: 1 Yr 23.20% 3 Yr -0.78% 5 Yr 12.51%

        There are other mutual funds in this space that outperformed XMD & XCS. This is only one example of a high fee fund that has consistently outperformed low fee index ETFs. In this instance one would have left a significant amount of money on the table if they went the ETF route.

        1. Thanks for clarifying Bernie…re: referring more to funds in other sectors where active management can be an asset. It certainly can be.

          I also appreciate those examples. Active management can certainly work out. I’m a fan of, as you probably already know, owning dividend paying stocks directly. No funds (at least anymore) for me although there are some gems out there. I suspect small- to mid-cap mutual funds have the most potential upside.

  10. One thing to consider, is that if you can usually buy these monthly income funds without paying any trading fees. Yet each time you buy more units of an etf or an individual share, you will have to pay a trading fee. This may not amount to that much if investor trades through a discount brokerage, but if she/he deals with a full service brokerage, the trading fees could be high or they will charge ~1% of portfolio fee.

    By the way, I use TD Monthly to accumulate dividends and interest from other investments. It has performed better than the averages in article – more like 6-8% pa.

  11. I have followed your blog for sometime and have come to respect it and, of course, you. I have had an on again/off again love affair with the TD Monthly Income fund. This year if one had invested in your TD e-funds portfolio rather than the TD Monthly Income, one would have made about 2.4 percent less. Personally, I don’t mind buying the TD folk a nice car as long as they are tossing me a small compact as well.

    1. Rockinon,

      Wow! How long did you wait until the TD e fund portfolio came out ahead in a time frame when compared to the TD Monthly Income Fund & then bloat about it?

      I checked and yes indeed, you are right as a blended TD Canadian Index – e (60%) / TD Canadian Bond Index – e (40%) beat the TD Monthly Income Fund – I (100%) in total return over 2014 YTD (to Oct 3rd). The e funds win out by 0.13%. TD Monthly Income Fund is the winner in all other CAGR time frames shown in Morningstar, ie: 1-day, 1-week, 1-month, 3-months, 1-year, 3-years, 5-years & 10 years. The widest margin was in the 3 & 5 year terms.

      Past performances are not indicative of future performances & you can’t expect any investment to outperform ALL THE TIME…but, come on, this managed fund clearly has clearly been the winner here. Some actively managed funds, like this one, are in that 20% of funds that outperform indexes most of the time despite the fee structure!

      1. Bernie:
        I believe you misunderstood. The TD Monthly Income fund outperformed the index-based portfolio in my investigation. The index-based portfolio did well, better than most portfolios I believe, but it did not best the TD Monthly Income fund.

        1. The history is impressive Rockinon. Certainly a star. Do you use other income-oriented products in your portfolio or do you consider this an all-in-one given the equity/bond split? Do you use any U.S. ETFs or funds in your portfolio? Just curious…Mark

          1. Mark:

            You are quite right. There is no guarantee that TDB622 will continue its winning allocation approach. In fact, before “the crash” the fund was wandering from its winning path. It took a much bigger hit than a similar RBC fund. That seemed to be a wake-up call for TDB622 and the fund has returned to the straight and narrow.

            I have approximately 15 percent of my portfolio in TDB622. Good mix of equities and a solid hit of bonds in a package that may show some resistance to falling value in a rising interest rate environment. I have a little less invested in the CIBC monthly income fund.

            As a retired fellow, I must take something out of my portfolio annually to live. CIB512 pays 72-cents per unit. This is way too high and if I was not retired I would be miffed. That said, as long as the market is climbing CIB512 manages to pay the big bucks while gaining a little in overall value, I’m happy. My income from CIB512 covers almost four months of my retirement income shortfall. And as the market is pulling back, my monthly income funds are resisting the fall more than a lot of my other investments.

            Still, I’m sure you are wondering why I bother with CIB512 if I suspect it is paying me back some of my own money in order to pay the inflated monthly dividend. I see the two mutual funds as almost known risks. I cannot imagine loosing more than about 20 percent of the value of these two funds in a severe correction. I hope it will be less.

            I have done very nicely since retiring in 2009 and until recently my concerns were all with income and growth. It seemed a no-brainer to me. Now, I am realizing what goes up also comes down and too much up and down volatility can be a real portfolio killer. I think we can learn from funds like the TD, the CIBC and the Royal Bank monthly income funds. They all use a textbook allocation approach that delivers equity growth, bond stability and good dividend yields wrapped up in a low to lowish volatility package. One could do much worse than trying to emulate these funds. (…something you are doing with your index ETF approach.)

            I have used a number of U.S. ETFs. I simply do not know the American market and find the ETFs give me exposure, dividends and a solid equity mix. I also own EWS and AUSE. I especially like EWS.


          2. You certainly could have done A LOT worse!

            You strike me as a very knowledgeable investor. I think TDB622 will continue to perform. 15% is pretty good, good for steady income and to weather market downturns with that 40% bond component.

            I am surprised you have both income funds though: TDB622 and CIB512.

            Given most of the top income funds in Canada and dividend ETFs tend to hold the same top-10 to top-15 holdings, I’ve decided to hold those stocks directly for passive income. Unless those companies significantly cut their dividends I have no intention of selling any of them for decades to come. Never say never though… 🙂

            I don’t much about EWS although I just found out it’s focused on Singapore. I’m a big fan of ETFs, I can see myself using them for decades to come for holdings in the U.S. and around the world. On that note, have you considering something like VXUS or VEU or VXC?

        2. Rockinon,

          My apologies for misunderstanding you! I jumped to conclusions & felt your comment was yet another predictable indexer comment about how low fees is the only way to go. Thanks for the backtesting tool! I haven’t seen it before. I’m bookmarking it & plan to use it!

          General comment,
          Low fees DO NOT guarantee better performance & there are many quality managed funds that outperform index funds…especially long term. Due diligence is a must!

    2. Thanks Rockinon, I appreciate the comment. The post was about alternatives, there are some decent monthly income products on the market; it wasn’t meant to imply folks should sell but rather provide them some perspective on what value they are getting for their fees.

      After a quick look, this is the bulk of the TD Monthly Income fund:
      40% FTSE TMX Canada Universe Bond Index
      50% S & P/TSX Sector Indices (Financials, Utilities, Telecommunication Services, Industrials, Consumer Staples, Consumer Discretionary, and the Oil and Gas Storage & Transportation sub industry)

      The MER on TD Monthly Income is about 1.50%.

      I think an investor could easily replace that product with two others:
      40% XBB (MER = 0.33%) + 60% ZDV (MER = 0.35%) or XEI (0.61%).

      You’re saving almost 1% in fees, that’s saving $1,000 for every $100,000 invested every year as you know.

      I did like your comment about the small car 😉

      1. Mark,

        I checked the performances both of your suggestions, 40% XBB / 60% ZDV & 40% XBB / 60% XEI and compared them against the TD fund. The MERs of the ETFs are lower but the TD Monthly Income Fund won out in performance again in all time frames except for the 1-day.

        TD Monthly Income Fund is a very well managed fund but if you want an even better performing fund and have at least $5,000 to invest I suggest the globally diversified Mawer Balanced Fund – A. It has consistently performed well since inception in 1988 with a low 0.96% MER. As it’s a mutual fund it has no trading fees to worry about. The long term average TR is about 8%. It holds up exceptionally well in down markets due to it’s diverse holdings including 30% bond content.

        1. The TD Monthly Income Fund is impressive…no doubt. There will always be a few funds that will outperform. Will it continue to outperform? Maybe? Who knows! 🙂 ETFs are more transparent and lower-cost so those are benefits in the investors favour – as you know.

          Bernie, that Mawer Balanced Fund – A is another very good product, a long-term return about 8% is great if you can get it. Probably a good all-in-one fund really and a good core component to the dividend stock holder.

      2. Mark:
        There is calculator posted by the TD folk that will let you back test the TD mutual funds and to compare any two of them. Here is a link:
        I have compared TDB622 (TD Monthly Income fund) to a lot of their other offering and not a one that I have examined has bested TDB622. For instance, compare TDB622 to TD Comfort Balanced Income portfolio. You may get comfort but you won’t make as much money by going the Comfort route. Mark, you might like to take this comment down. If too many folk discover this calculator and use it to learn how poorly many mutual funds perform, I fear the calculator will be removed from the Web.)

        1. Interesting…the backtesting tool. Thanks for sharing, didn’t know about that one.

          Nah, I’ll leave the comment. I’m sure TD has more online traffic than I do, for now 🙂

        2. It’s a shame that the calculator only compares TD funds. Until I find one that compares all funds I’ll continue to use Morningstar performance tables & spreadsheets to compare Mutual funds, ETFs & stocks.

      3. Sorry for taking so long to reply but I have grandkids and health issues. They all work to keep me away from the computer. I liked your suggestion and I once would have simply agreed with you. What has weakened my resolve has been watching the TD Monthly Income beating index-based portfolios time and time again.

        I did the math and if one opened one of your suggested portfolios on Oct. 28/2011, the earliest posted entry date for ZDV found on the Globe and Mail site, today you’d have $108,205.25. I’m assuming the Globe calculator does not factor in a DRIP. The TD mutual fund would have delivered $119,109 over the same period with no DRIP. If the TD monthly payments were rolled over using DRIP, you’d have $127,733.

        I believe an investor is getting very good value for their MER expense with the TD fund. And I am wondering why I continue to run my own portfolio.

        1. No problem with the delay Rockinon, great to hear back from you.

          True enough, the history for ZDV is rather short and weak and I would expect the same thing from the G&M calculator. That said, TD monthly income is a stud and it’s hard to argue with the results. I suspect it’s one of the best of the bunch for those wanting steady income and a balanced approach between risk (equities) and security (bonds).

  12. There is too much emphasis on the fees. It’s the after fee yield that is important. And that fee would include trading costs.

    If you were , for example, putting aside $500 a month, you could put that into a Monthly Income Fund and not have any trading costs. If you bout ETF units, even if with a discount broker, that would cost $120/yr. As a percentage, that is 2% of your annual savings. A lot more if not entitled to the low trading fee.

    Personally, I only use the TD Monthly as a no fee way of reinvesting income within our registered accounts. Don’t let it get to more than say $20k per account before investing it in other ways.

    1. I think fees are important, but yes, great returns after fees are a great thing and the TD Monthly Income Fund seems to be a star.

      Hard to say if the trend will continue but the track-record is impressive.

      What products are you considering when you say this?
      “Don’t let it get to more than say $20k per account before investing it in other ways.” ETFs? Stocks directly? A mix of stocks and bonds?


      1. Our RRIFS and taxable accounts are mainly in individual stocks and bonds. Very little in ETFs and just the one mutual fund (TDMI) and it only as a place to temporarily hold registered income. But TDMI has performed well, so I am never in a hurry to sell and re-invest – just wait until I rebalance and maybe add to dividend stocks or buy some Fixed Income, IF I can find anything suitable.

        1. This is the route I’m going as well. Have individual stocks in taxable accounts and few ETFs, but a couple for extra diversification. The TDMI has been a stellar performer. If future success is based on past-performance look no further – a great product. Thanks for sharing.

  13. Rockinon,

    Regarding your concerns with volatility, performance, yield, inflation and having to draw down on your portfolio have you considered dividend growth investing?

    1. Excuse the slow response but I didn’t realize there was a comment requiring a reply. I once owned some dividend growth funds, admittedly this was some years ago. They didn’t pay enough nor grow enough. (I came to equate growth fund with volatile fund.) Recently I heard from a fellow who told me to check out the TD Dividend Growth fund and he was right — I was pleasantly surprised. It has done well in recent years. Although, with the recent crash in oil prices, the last time I checked the TD Monthly Income was performing better than Div. Growth.

  14. Numerous items I disagree with in the article; good to see folks explore the issues in the comments. Basically, if you dislike bank monthly income funds, all their other funds should be illegal.

    1. Thanks for your comment Naheed but I’m not sure I understand. I don’t necessarily dislike big bank monthly income funds, I just think there are some good alternatives to them. Can you elaborate?

    1. Absolutely. You don’t have to reinvest distributions from ETFs. You can simply let the cash roll in, and spend as you wish. There is no charge for this.

  15. I use one of the monthly funds to reinvest distributions from our overall portfolio. What I found, was that the TD monthly income fund performed very well. In fact better than most balanced funds (those containg both equity and fixed income). The original article appeares fixated on the fees (and they are higher than etfs). But to do a proper comparison, total returns should be compared. The costs of acquiring and selling should also be considered, especially if a retiree would need to sell on a regular basis.

    1. I don’t think there is anything wrong with monthly income funds, but I think investors need to be mindful how such products are designed; there are some decent fees involved to manage this planned portfolio and as you say, then there are the costs of selling ETF units regularly in retirement.

  16. Graham: At the beginning of the year, I set up a number of faux portfolios using the software supplied by TD Waterhouse and available to the clients using WebBroker. Two of the portfolios were based on Couch Potato aggressive portfolios posted on the Web. One used TD e-funds and the other used Vanguard ETFs. I also set up one using a mix of two D-series TD mutual funds. The one fund is essentially the TD Monthly Income fund with a lower MER (hence the D-series rating) and the other is a TD US Monthly Income fund with D-series pricing — gotta have that exposure to the States. Two and a half months later the portfolio using D-funds is outperforming the posted portfolios. At the end of the year I’ll see which portfolio delivers the best growth, or least loss, and accompanied by the most cash yield. (As of today, the clear winner of all my portfolios is my own. A messy affair almost completely lacking bonds. The only bonds I hold are the ones inside the monthly income funds that I hold. I withdrew more than twenty-two thousand in cash at the first of the year. I’m retired and need the money to pay my bills. Today my portfolio is only down about a thousand dollars from where it was before I made my withdrawals. I wouldn’t advise anyone to follow my lead and build as messy a portfolio as I have in retirement but I have been lucky.)

    I’m with you. Higher fees are to be questioned but the money left on the table at the end of the day is the true deciding factor. Some of the monthly income funds are worth a look.

    1. Thanks for sharing your study.

      At the end of the day, the best retirement income plan is a) the one you can follow and b) the one that meets your investing objectives. If monthly income funds are working for you, great, keep using them – however my post was more about alternatives to funds charging north of 1% and how you could (meaning don’t have to) debundle these funds to build your own.

      I think owning ETFs like XTR, XEI and ZMI plus a bond fund, will, over time, keep more income your pocket via lower fees. That would be my guess but I suppose some regression testing would prove that, or me, wrong 🙂


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